<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 1997
REGISTRATION NO. 333-22013
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
LONG BEACH FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 6162 33-0739843
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NUMBER)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
------------------
1100 TOWN & COUNTRY ROAD, SUITE 900
ORANGE, CALIFORNIA 92868
(714) 541-5378
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------
M. JACK MAYESH
CHIEF EXECUTIVE OFFICER
LONG BEACH FINANCIAL CORPORATION
1100 TOWN & COUNTRY ROAD, SUITE 900
ORANGE, CALIFORNIA 92868
(714) 541-5378
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------
WITH COPIES TO:
ROBERT E. DEAN, ESQ. BRUCE R. HALLETT, ESQ.
GIBSON, DUNN & CRUTCHER LLP BROBECK, PHLEGER & HARRISON LLP
4 PARK PLAZA 4675 MACARTHUR COURT, SUITE 1000
IRVINE, CALIFORNIA 92614-8557 NEWPORT BEACH, CALIFORNIA 92660
(714) 451-3800 (714) 752-7535
------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
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 statement 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>
<S> <C> <C> <C> <C>
================================================================================================================
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------
Common Stock, par value $.001 per
share................................... 25,000,000 $12.00 $300,000,000 $90,910
================================================================================================================
</TABLE>
(1) Includes shares subject to the Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 based on an estimate of the maximum offering price.
------------------
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 SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
THE 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
BECOMES 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 APRIL 15, 1997
PROSPECTUS [LBFC LOGO]
21,750,000 SHARES
LONG BEACH FINANCIAL CORPORATION
COMMON STOCK
------------------------
All of the shares of Common Stock, $.001 par value per share (the "Common
Stock"), of Long Beach Financial Corporation, a Delaware corporation ("LBFC"),
offered hereby are being sold by the sole stockholder of LBFC (the "Selling
Stockholder" or "Old Long Beach"), which prior to the Reorganization (as defined
below) operated LBFC's broker-sourced mortgage loan business. LBFC will not
receive any proceeds from the sale of shares by the Selling Stockholder.
Subsequent to this offering, the Selling Stockholder will own 13.0% of the
outstanding Common Stock. If the Underwriters' over-allotment option is
exercised in full, the Selling Stockholder will own no shares of LBFC. See
"Beneficial Ownership of Securities and Selling Stockholder."
Prior to this offering, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price per
share of Common Stock will be between $10.00 and $12.00. See "Underwriting" for
a discussion of the factors considered in determining the initial public
offering price. The Common Stock has been approved for listing on the Nasdaq
National Market under the symbol "LBFC."
SEE "RISK FACTORS" ON PAGES 8 THROUGH 16 FOR MATERIAL RISKS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK.
------------------------
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.
<TABLE>
<CAPTION>
=========================================================================================================
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSIONS(1) STOCKHOLDER(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 Selling Stockholder estimated to be
$850,000.
(3) The Selling Stockholder has granted the Underwriters a 30-day option to
purchase from the Selling Stockholder up to 3,250,000 additional shares of
Common Stock at the Price to Public less the Underwriting Discounts and
Commissions, solely to cover over-allotments, if any. If the Underwriters
exercise the option in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Selling Stockholder will be
$ , $ , and $ , respectively. See "Underwriting."
The shares of 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 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 , 1997.
------------------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is , 1997
LOGO
<PAGE> 3
[ARTWORK]
The Prospectus delivered to investors contains a map of the United States
of America that cannot be reproduced in an electronic filing. The map indicates
(i) by the placement of a star, the Southern California location of the LBFC
headquarters, (ii) by shading, that loans are originated and offices are located
in the states of Arizona, California, Colorado, Florida, Georgia, Hawaii, Idaho,
Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maryland, Massachusetts,
Michigan, Minnesota, Missouri, New Jersey, New Mexico, New York, Nevada, North
Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Tennessee,
Texas, Utah and Washington, (iii) by shading and the placement of dots, that
loans are originated but no offices are located in the states of Alabama,
Connecticut, Delaware, Maine, Mississippi, Montana, New Hampshire, Rhode Island,
Vermont, West Virginia, Wisconsin, and Wyoming, and (iv) by shading, that no
loans are originated and no offices are located in the states of Alaska,
Arkansas, Nebraska, North Dakota, South Dakota and Virginia.
<TABLE>
<CAPTION>
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
-------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loan Originations and Purchases................... $565,547 $592,542 $1,058,122
States in which Loans were Originated............. 27 35 43
Loan Origination Offices.......................... 24 45 63
States with Loan Origination Offices.............. 10 22 32
Account Executives................................ 79 64 120
Approved Independent Brokers...................... 4,004 5,043 7,463
</TABLE>
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES
OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
------------------------
<PAGE> 4
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 or of
outstanding options under the Company's 1997 Stock Incentive Plan. Unless the
context otherwise requires, (i) the information contained in this Prospectus
gives effect to the Reorganization described elsewhere herein, which will be
consummated prior to the completion of this Offering, (ii) all references to the
"Company" herein shall be deemed to include LBFC and its wholly-owned subsidiary
after giving effect to the Reorganization, the operations of the broker-sourced
mortgage lending division of Old Long Beach prior to the Reorganization and the
prior operations of the broker-sourced mortgage lending division of Long Beach
Bank, F.S.B., and (iii) all references to "Old Long Beach" herein shall be
deemed to include prior to the Reorganization all of the operations of the
Selling Stockholder (which included the operations of the Company) and after the
Reorganization shall be deemed to include all continuing operations that are not
being transferred to the Company. See "Reorganization."
Certain statements contained in this Prospectus that are not related to
historical results are forward-looking statements. These forward-looking
statements involve risks and uncertainties and actual results may differ
materially from those projected or implied in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, those discussed under "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business."
Further, certain forward-looking statements are based upon assumptions as to
future events that may not prove to be accurate.
THE COMPANY
The Company is a specialty finance company engaged in the business of
originating, purchasing and selling sub-prime residential mortgage loans secured
by one-to-four family residences. The Company originates loans primarily through
independent mortgage brokers (the "broker-sourced business"). Prior to the
Reorganization, the Company's business has been conducted as a division of Old
Long Beach. The Company's primary operating strategy is to generate positive
cash flow by selling for cash, at a premium, substantially all originated and
purchased loans to institutional purchasers several times a quarter. The Company
does not currently, nor does it have current plans to, sell loans through
securitizations and therefore retains no residual interests, or the related
risks, in the loans sold (except risks associated with servicing rights, which
the Company normally retains, and certain repurchase risks associated with
representations and warranties). As a result, the Company has less risk than is
typically inherent in a mortgage lender's business and has historically had a
source of cash flow to fund lending and growth, reducing the need for other
sources of financing. See "Business -- Financing and Sale of Loans." The
sub-prime mortgage lending industry is subject to certain risks, including risks
related to the significant growth in the number of sub-prime lenders in recent
years (see "Risk Factors -- Risk of Competition"), risks related to certain
potential new competitors (see "Risk Factors -- Risk of Competition from
Government-Sponsored Entities"), and risks related to the industry's focus on
credit impaired borrowers (see "Risk Factors -- Focus on Credit Impaired
Borrowers May Result in Increased Delinquency Rates, Foreclosures and Losses").
Substantially all loans originated or purchased by the Company are secured by a
first priority mortgage on the subject property. In 1996, less than .03% of the
principal balance of the loans originated and purchased were secured by second
priority mortgages. The Company's core borrower base consists of individuals who
do not qualify for traditional "A" credit because their credit history, income
or other factors cause them not to conform to standard agency lending criteria.
Approximately 69% of the principal balance of the loans originated by the
Company in 1996 were to borrowers with a Company risk classification of "A-" or
"B+," while the remainder were to borrowers with a Company risk classification
of "B," "B-," "C" or "C-." Approximately 2.31% of the total principal amount of
loans originated or purchased by the Company in 1996 were to borrowers with a
Company risk classification of "C-," which includes borrowers with numerous
derogatory credit items up to and including a bankruptcy in the most recent
twelve month period. See "Business -- Underwriting."
3
<PAGE> 5
The Company has relationships with approximately 7,500 independent approved
mortgage brokers located in 43 states. During 1996, approximately 5,000 of these
brokers submitted loan packages to the Company and the Company funded loans from
approximately 2,800 brokers. The Company's large independent broker network
provides comprehensive geographic coverage for the Company's products and
reflects the Company's strategy of using a diverse group of small brokers to
avoid becoming dependent on a few primary producers. During the year ended
December 31, 1996, the Company's single largest producing independent broker was
responsible for less than 1% of the principal balance of the Company's
originations. The Company maintains a close working relationship with brokers
through its team of 120 account executives located in 63 offices in 32 states.
The Company believes that its primary strengths are (i) its established
position in the sub-prime mortgage lending industry, (ii) the extensive
experience of its management, as well as many members of its staff, in the
sub-prime lending industry, (iii) its use of regional processing teams linked to
the home office by a computer network to expedite loan origination and
production, (iv) the thoroughness of the training received by its personnel, (v)
its use of technology to efficiently maximize work flow and (vi) the efficiency
of its operations as a result of its high volume of loans and consistency in
applying underwriting standards. See "Business -- General."
The Company began originating sub-prime mortgage loans in Southern
California in 1988 as a division of Long Beach Bank, F.S.B. and started to
expand its business outside of California on a limited basis in 1992. In 1994,
the Company began to focus on expansion outside of California. To facilitate
this expansion and to permit the Company to provide competitive products and
pricing, in October 1994 Long Beach Bank, F.S.B. ceased operations and the
Company commenced operations as a mortgage company. Since that time, the Company
has experienced significant growth in loan originations and purchases, with
approximately $1.1 billion of originations and purchases in 43 states during
calendar 1996 compared to $592.5 million in 35 states during calendar 1995 and
$565.5 million in 27 states during calendar 1994. Total originations and
purchases were $300.7 million during the fourth quarter of 1996, which
represents a $122.4 million increase from total originations and purchases
during the fourth quarter of 1995. This growth in originations and purchases has
resulted in the Company's earnings increasing to $9.4 million in 1996 compared
to earnings of $5.8 million and $22,000 in 1995 and 1994, respectively.
The Company sells substantially all of its originated and purchased loans
several times a quarter to institutional purchasers for cash, historically at a
premium over the principal balance of the loans. Prior to originating or
purchasing loans, the Company obtains a purchase commitment from an
institutional purchaser. The Company delivers loans and receives payments for
the loans shortly after funding. This strategy, as opposed to securitizations,
in which a residual interest in future payments on the loans is retained,
provides certain benefits. The Company receives cash revenue, rather than
recognizing non-cash revenue attributable to residual interests, as is the case
in securitizations. The Company thereby avoids the risk present in
securitizations of having to adjust revenue in future periods to reflect a lower
realization on residual interests because actual prepayments or defaults
exceeded levels assumed at the time of securitization. By selling its originated
and purchased loans, the Company also reduces its exposure to default risk
(other than certain first payment defaults) and the prepayment risk normally
inherent in a mortgage lender's business. The Company may also be required to
repurchase or substitute loans in the event of a breach of representations and
warranties, including any fraud or any misrepresentation made during the
mortgage loan origination process, and retains the risk of having to adjust
noncash revenues attributable to the realization of the retained servicing
rights. Management believes that the cash received in loan sales provides the
Company greater flexibility and operating leverage than a traditional portfolio
lender, which holds the loans it originates, by allowing the Company to generate
income through interest on loans held for sale and gain on loans sold. Loan
sales have been an important factor in generating the Company's historic
earnings and creating consistent positive cash flow to fund operations. See
"Business -- Financing and Sale of Loans."
The Servicing Division of Old Long Beach (the "Sub-Servicer") serviced
substantially all of the loans originated by the Company while it operated as a
division of Old Long Beach. The Sub-Servicer and the Company are entering into a
contract pursuant to which the Sub-Servicer will sub-service loans originated or
purchased by the Company following the Reorganization. Sub-servicing activities
include collecting and
4
<PAGE> 6
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 Sub-Servicer has
nine years of experience in the sub-prime mortgage loan servicing industry, with
a servicing portfolio of approximately $3.5 billion of sub-prime mortgage loans
at December 31, 1996. Since the servicing procedures of the Sub-Servicer were
developed while the Company was part of Old Long Beach and are coordinated with
the Company's origination practices, management believes that the Sub-Servicer
will be able to provide faster and more effective servicing of the Company's
loans than another independent servicer. See "Business -- Servicing."
The Company actively originated loans during 1996 in 112 of the
approximately 300 metropolitan statistical areas ("MSAs") in the United States
having populations in excess of 100,000, as compared to loan originations in 54
of these MSAs during 1995. The Company seeks to expand its broker-sourced loan
business through increased penetration in its existing markets and expansion
into new geographic markets. In addition, although the Company currently
primarily conducts a broker-sourced business, the Company intends to develop a
direct-sourced loan origination business (i.e., where the lender deals directly
with the borrower and does not involve an independent broker). Direct lending
will provide the Company with an additional distribution channel for its
products and the ability to retain the origination fees for the loans it funds.
The Company plans to commence its direct-sourced lending operations in 1997 and
estimates it will expend approximately $1.0 million in 1997 for this purpose.
The Company's senior management is also experienced in direct-sourced loan
originations as several of the senior executives were involved in creating the
direct-sourced lending operations of Old Long Beach prior to the Reorganization.
No assurance can be given that the Company will be able to commence
direct-sourced loan origination operations as planned or that such operations
will be successful. See "Business -- Loan Origination and
Purchasing -- Direct-Sourced Loan Operations."
To facilitate the public sale of Old Long Beach's broker-sourced business,
Old Long Beach is reorganizing its business operations (the "Reorganization") by
transferring to LBFC the assets and personnel related to Old Long Beach's
broker-sourced mortgage lending and loan sales operations and approximately $40
million in cash in exchange for 25,000,000 shares of Common Stock, 21,750,000 of
which are being sold pursuant to this Offering (25,000,000 if the Underwriters'
over-allotment option is exercised in full). The Company intends to use the $40
million contributed to it from Old Long Beach for working capital purposes and
to pay fees and expenses related to the Reorganization, estimated to be
approximately $1.5 million. The costs of the Offering are being paid by Old Long
Beach. The assets being transferred to LBFC do not include any funded loans or
funded loan servicing rights. LBFC will have no interest in Old Long Beach's
direct-sourced mortgage lending or servicing operations, which are being
retained by Old Long Beach after the Reorganization. In the Reorganization, LBFC
is acquiring the right to the "Long Beach Mortgage Company" name and the
benefits related to the name, which will be used after the Reorganization by a
wholly-owned subsidiary of LBFC ("New Long Beach") that will conduct the
broker-sourced business. The Company is not assuming any of the liabilities of
Old Long Beach arising from Old Long Beach's lending or loan servicing
activities prior to the Reorganization other than certain liabilities relating
to the assets or personnel being transferred. Old Long Beach and the Company
will be free to compete against each other after the completion of this
Offering. Old Long Beach and the Company are entering into an agreement not to
solicit or hire each other's employees for a specified period following the
Reorganization. See "Reorganization."
The principal executive offices of the Company are located at 1100 Town &
Country Road, Suite 900, Orange, California 92868, and its telephone number is
(714) 541-5378.
5
<PAGE> 7
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Selling
Stockholder(1)............................. 21,750,000 shares
Common Stock to be Outstanding after the
Offering(2)................................ 25,000,000 shares
Nasdaq National Market symbol................ LBFC
Risk Factors................................. See "Risk Factors" for a discussion of
certain material factors that should be
considered in connection with an investment
in the Common Stock offered hereby.
</TABLE>
- ---------------
(1) Prior to completion of this Offering, the Selling Stockholder (i.e., Old
Long Beach), as the sole stockholder of LBFC, will own 25,000,000 shares of
Common Stock. All of the 3,250,000 shares being retained by the Selling
Stockholder are subject to the Underwriters' over-allotment option. If the
over-allotment option is exercised in full, the Selling Stockholder will not
own any shares of Common Stock. See "Beneficial Ownership of Securities and
Selling Stockholder."
(2) Excludes 3,000,000 shares of Common Stock reserved for issuance under the
1997 Stock Incentive Plan. In connection with the Offering, options are
being granted at the public offering price to key officers and employees of
the Company. See "Management -- 1997 Stock Incentive Plan."
6
<PAGE> 8
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA AND RATIOS)
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 Operation"
included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
PRO FORMA
1994 1995 1996 1996(1)
------- ------- ------- ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Revenues:
Gain on sales of loans..................................... $21,668 $31,691 $50,699 $ 49,465
Loan servicing and other fees.............................. -- -- -- 1,529(2)
Interest income............................................ 2,510 2,494 3,275 3,275
------- ------- ------- ----------
Total revenues......................................... 24,178 34,185 53,974 54,269
Expenses:
Compensation and employee benefits......................... 15,496 13,564 22,299 23,086
Rent and other occupancy costs............................. 2,565 3,258 4,188 4,188
Office supplies and courier service........................ 712 816 1,903 1,903
Depreciation............................................... 281 667 1,025 1,025
Legal and professional..................................... 1,443 1,082 1,828 1,828
Interest................................................... 1,814 2,312 2,814 3,140
Loan sub-servicing......................................... -- -- -- 1,990
Other...................................................... 1,831 2,525 3,945 3,945
------- ------- ------- ----------
Total expenses......................................... 24,142 24,224 38,002 41,105
------- ------- ------- ----------
Income before provision for income taxes..................... 36 9,961 15,972 13,164
Provision for income taxes................................... 14 4,169 6,580 5,424
------- ------- ------- ----------
Net income................................................... $ 22 $ 5,792 $ 9,392 $ 7,740
======= ======= ======= ==========
Pro forma earnings per share(3).............................. $ .31
==========
Pro forma weighted average number of shares outstanding(3)... 25,000,000
==========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
---------------------------
ACTUAL PRO FORMA(1)
------- -------------
<S> <C> <C>
STATEMENT OF FINANCIAL CONDITION DATA:
Cash.............................................................................. $ -- $40,000
Loans held for sale............................................................... 49,580 --
Deferred income taxes............................................................. 2,120 36,000
Total assets...................................................................... 79,750 78,215
Warehouse financing facility...................................................... 72,829 --
Total liabilities................................................................. 78,613 2,256
Stockholders' equity.............................................................. 1,137 75,959
</TABLE>
<TABLE>
<CAPTION>
AS OF OR FOR YEAR ENDED DECEMBER 31,
--------------------------------------
1994 1995 1996
-------- -------- ----------
<S> <C> <C> <C>
OPERATING DATA:
Loans originated and purchased.......................................... $565,547 $592,542 $1,058,122
Whole loan sales........................................................ 562,054 580,366 1,029,789
"A-" and "B+" loans as a percentage of total principal balance of
loans(4).............................................................. 44.6% 55.0% 69.2%
Average original loan principal balance................................. $ 116 $ 99 $ 105
31-60 day delinquencies as a percentage of total principal balance as of
period end(5)......................................................... 0.8% 1.5% 1.6%
61-90 day delinquencies as a percentage of total principal balance as of
period end(5)......................................................... 0.9 1.0 1.0
91 or more day delinquencies as a percentage of total principal balance
as of period end(5)................................................... 3.9 4.5 4.5
Total delinquencies as a percentage of total principal balance as of
period end(5)......................................................... 5.7 7.0 7.1
Total losses on loans as a percentage of average principal balance of
loans serviced(5)..................................................... 1.5 1.4 1.3
FINANCIAL RATIOS(4):
Weighted average interest rate on fixed rate loans...................... N/A 11.3% 10.5%
Weighted average interest rate on adjustable rate loans................. 8.6% 10.4 9.6
Weighted average interest rate on fixed/adjustable loans................ 9.5 11.3 10.0
Weighted average initial combined loan-to-value ratio................... 69.1 72.2 75.0
</TABLE>
- ---------------
(1) Gives pro forma effect to the Reorganization as if it had occurred as of
January 1, 1996 as to the Statement of Operations and December 31, 1996 as
to the Statement of Financial Condition Data. The pro forma results of
operations are not necessarily indicative of the future operations of the
Company. See "Unaudited Pro Forma Consolidated Financial Data."
(2) Net of amortization of capitalized mortgage servicing rights of $1.8
million.
(3) Historical earnings per share information for 1994, 1995 and 1996 was not
deemed meaningful.
(4) Calculated based on loans originated and purchased, net of loans rescinded
because the related lending transactions did not close. Such rescinded loans
aggregated approximately $1.0 million, $7.0 million and $3.0 million in
1994, 1995 and 1996, respectively.
(5) Calculated based on the total broker-sourced servicing portfolio of Old Long
Beach.
7
<PAGE> 9
RISK FACTORS
The following risk factors should be carefully considered before making an
investment in the Company. This Prospectus contains forward-looking statements
which involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth in the following risk
factors.
ECONOMIC SLOWDOWN AND DECLINE IN COLLATERAL VALUE MAY ADVERSELY AFFECT VOLUME OF
LOANS
Periods of economic slowdown may reduce the demand for mortgage loans as
people elect not to purchase new homes due to economic uncertainty and also may
adversely affect the financial condition of potential borrowers so that they do
not meet the Company's underwriting criteria. In addition, economic slowdowns
may cause a decline in real estate values. Any material decline in real estate
values will reduce the ability of borrowers to use home equity to support
borrowings by negatively affecting loan-to-value ratios of the home equity
collateral. To the extent that the loan-to-value ratios of prospective
borrowers' home equity collateral do not meet the Company's underwriting
criteria, the volume of loans originated by the Company could decline. A decline
in loan origination volumes could have a material adverse effect on the
Company's operations and financial condition.
FOCUS ON CREDIT IMPAIRED BORROWERS MAY RESULT IN INCREASED DELINQUENCY RATES,
FORECLOSURES AND LOSSES
The Company is a lender in the sub-prime mortgage banking industry, which
means that the Company focuses its marketing efforts on borrowers who may be
unable to obtain mortgage financing from conventional mortgage sources.
Approximately 2.31% of the total principal amount of loans originated or
purchased by the Company in 1996 were to borrowers with a Company risk
classification of "C-," which includes borrowers with numerous derogatory credit
items up to and including a bankruptcy in the most recent twelve month period.
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.
Delinquencies, foreclosures and losses generally increase during economic
slowdowns or recessions. Further, any material decline in real estate values
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. Any sustained period of increased
delinquencies, foreclosures or losses after the loans are sold could adversely
affect the pricing of the Company's future loan sales and the ability of the
Company to sell its loans in the future.
DILUTION RISK
The initial public offering price per share of Common Stock will exceed the
net tangible book value per share of Common Stock. Accordingly, the purchasers
of Common Stock will experience immediate and substantial dilution (in the
amount of $7.96 per share assuming an Offering price of $11.00) in the net
tangible book value of their equity investment in the Company. See "Dilution."
LOSS OF FUNDING SOURCES COULD ADVERSELY AFFECT RESULTS OF OPERATIONS
The Company will fund substantially all of the loans it originates or
purchases through borrowings under the $200 million secured revolving line of
credit (the "Warehouse Financing Facility"). These borrowings will be repaid
with the proceeds received by the Company from selling such loans. 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 prices
received in, the markets for the Company's loans, could have a material adverse
effect on the Company's results of operations and financial condition. In the
long term, to the extent that the Company is not successful in maintaining or
replacing the Warehouse Financing Facility, it would likely have to curtail its
loan production activities, 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" and
"Reorganization."
Prior to the Reorganization, the Company funded loans by borrowing under
Old Long Beach's revolving warehouse credit facility. Because this facility will
not be available to the Company after the completion of
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this Offering, the Company has obtained the Warehouse Financing Facility. See
"Business -- Financing and Sale of Loans -- Warehouse Financing Facility."
RELIANCE ON SECONDARY PURCHASERS OF LOANS COULD ADVERSELY AFFECT RESULTS OF
OPERATIONS
Gain on sales of loans generated by the Company's loan sales represents the
primary source of the Company's revenues and net income. Furthermore, the
Company will rely almost entirely on proceeds from loan sales to generate cash
for repayment of borrowings under the Warehouse Financing Facility. The Company
has historically sold substantially all of its loan originations in the
secondary market to a limited number of institutional purchasers. There can be
no assurance that such purchasers will continue to purchase loans or will be
willing to purchase loans on the terms under which such purchasers have
historically purchased the Company's loans. To the extent that the Company could
not successfully replace such loan purchasers or negotiate favorable terms for
such loan purchases, the Company's results of operations and financial condition
could be materially and adversely affected.
RISK OF COMPETITION FROM OLD LONG BEACH
Old Long Beach was the parent of the Company before the Reorganization, and
Old Long Beach is thus familiar with the methodology, practices and procedures
used by the Company to develop its broker-sourced mortgage loan business. Old
Long Beach could use this knowledge to build a broker-sourced mortgage loan
business which would compete directly against the Company. Because of Old Long
Beach's knowledge of the Company, a broker-sourced mortgage loan business
developed by Old Long Beach might be able to compete more effectively against
the Company than could a typical competitor in the sub-prime mortgage loan
industry. The agreements that Old Long Beach and the Company are entering into
in connection with the Reorganization do not restrict their future competition,
but do restrict their ability to hire each others' employees.
REQUIRED COMPLIANCE WITH DEPARTMENT OF JUSTICE SETTLEMENT AGREEMENT
In September 1996, Old Long Beach entered into a settlement agreement with
the U.S. Department of Justice (the "DOJ") which is binding upon the Company, as
a successor to Old Long Beach. Pursuant to the settlement agreement, the Company
is required to (i) document any price exceptions from the Company's rate sheet
on broker-sourced loans, (ii) periodically review the results of its
broker-sourced lending operations for its compliance with fair lending laws (but
in no event shall the Company be required to disclose any documents or
information therewith, including the identities of any brokers with whom it does
business), (iii) retain all loan application files submitted for mortgage loans
and all loan-rider documents and notices relevant to any pricing decisions until
September 1999 and report to the DOJ semi-annually on compliance with the
settlement agreement, and (iv) provide to brokers information about the
Company's fair-lending and pricing procedures and an opportunity to participate
in fair-lending training. In addition, if, as expected, the Company commences
direct-sourced mortgage lending, it will be required to provide certain training
courses for Company employees involved in direct-sourced mortgage loan pricing,
use its best efforts to place mortgage loan applicants in appropriate risk
classifications based on objective credit and risk-related criteria, and
implement a direct-sourced mortgage loan monitoring system of mortgage loan
prices. Any failure of the Company to comply with the requirements of the DOJ
Settlement Agreement could allow the DOJ to seek injunctive relief against the
Company. See "Business -- Department of Justice Settlement Agreement."
While the Company believes it is in compliance with the broker-sourced
provisions of the settlement agreement and also expects to be able to comply
with the direct-sourced provisions of the settlement agreement, there can be no
assurance that the DOJ will not take a contrary position in the future and seek
to compel compliance by the Company.
ELIMINATION OF LENDER PAYMENTS TO BROKERS COULD ADVERSELY AFFECT RESULTS OF
OPERATIONS
Lawsuits have been filed against several mortgage lenders, including Old
Long Beach, alleging that such lenders have made certain payments to independent
mortgage brokers in violation of RESPA. These lawsuits
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have generally been filed on behalf of a purported nationwide class of borrowers
alleging that payments made by a lender to a broker in addition to payments made
by the borrower to a broker are prohibited by RESPA and are therefore illegal.
If these cases are resolved against the lenders, it may cause an industry-wide
change in the way independent mortgage brokers are compensated. The Company's
broker compensation programs permit such payments. Although the Company believes
that its broker compensation programs comply with all applicable laws and are
consistent with long-standing industry practice and regulatory interpretations,
in the future new regulatory interpretations or judicial decisions may require
the Company to change its broker compensation practices. Such a change may have
a material adverse effect on the Company and the entire mortgage lending
industry. See "Business -- Legal Proceedings."
ELIMINATION OF DEDUCTIBILITY OF MORTGAGE INTEREST COULD ADVERSELY AFFECT RESULTS
OF OPERATIONS
Members of Congress and government officials 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 the kind of
loans offered by the Company.
RISK OF VARIATIONS IN QUARTERLY OPERATING RESULTS
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 costs of funds and the average interest rates of
originated or purchased loans, the inability of the Company to complete
significant loan sales transactions in a particular quarter, and problems
generally affecting the mortgage loan industry can result in significant
increases or decreases in the Company's revenues from quarter to quarter. A
delay in closing a particular loan sale transaction during a particular quarter
would postpone recognition of gain on sale of loans. In addition, unanticipated
delays in closing a particular loan sale transaction would also increase the
Company's exposure to interest rate fluctuations by lengthening the period
during which its variable rate borrowings under its Warehouse Financing Facility
are outstanding. If the Company were unable to sell a sufficient number of its
loans at a premium in a particular reporting period, the Company's revenues for
such period would decline, resulting in lower net income and possibly a net loss
for such period, which 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."
RISK OF COMPETITION
As an originator of mortgage loans, the Company faces intense competition,
primarily from mortgage banking companies, commercial banks, credit unions,
thrift institutions and finance companies. Many of these competitors are
substantially larger and have more capital and other resources than the Company
and may have lower costs of funds than the Company. Furthermore, the current
level of gains realized by the Company and its competitors on the sale of the
type of loans they originate and purchase is attracting and may continue to
attract additional competitors into the sub-prime mortgage market. Establishing
a broker-sourced loan business typically requires a substantially smaller
commitment of capital and personnel resources than a direct-sourced loan
business. This relatively low barrier to entry permits new competitors to enter
this market quickly, particularly existing direct-sourced lenders which can draw
upon existing branch networks and personnel in seeking to sell products through
independent brokers.
Increased competition could have the possible effects of (i) lowering gains
that may be realized on the Company's loan sales, (ii) reducing the volume of
the Company's loan originations and loan sales, (iii) increasing the demand for
the Company's experienced personnel and the potential that such personnel will
be recruited by the Company's competitors, and (iv) lowering the industry
standard for sub-prime underwriting guidelines (for example, by providing for
less stringent loan-to-value ratios) as competitors
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attempt to increase or maintain market share in the face of increased
competition. See "-- Economic Slowdown and Decline in Collateral Value May
Adversely Affect Volume of Loans" and "-- Focus on Credit Impaired Borrowers May
Result in Increased Delinquency Rates, Foreclosures and Losses" for a
description of the potential adverse effects to the Company of impaired
loan-to-value ratios.
Competition also may be affected by fluctuations in interest rates, general
economic conditions, and localized economic conditions. During periods of rising
interest rates, competitors that have "locked in" low borrowing costs may have a
competitive advantage. During periods of declining rates, competitors may
solicit the Company's customers to refinance their loans. During economic
slowdowns or recessions, the Company's borrowers may have new financial
difficulties and may be receptive to refinancing offers by the Company's
competitors. See "-- Focus on Credit Impaired Borrowers May Result in Increased
Delinquency Rates, Foreclosures and Losses."
There can be no assurance that the Company will be able to continue to
compete successfully in the markets it serves. Inability to compete successfully
would have a material adverse effect on the Company's results of operations and
financial condition.
RISK OF COMPETITION IN NEW MARKETS
As the Company expands into new geographic markets, it may face competition
from lenders with established positions in these locations. There can be no
assurance that the Company will be able to successfully compete with such
established lenders.
RISK OF COMPETITION FROM GOVERNMENT-SPONSORED ENTITIES
In the future, the Company may also face competition from, among others,
government-sponsored entities who may enter the sub-prime mortgage market.
Existing or new loan purchase programs may be expanded by the Federal National
Mortgage Association or the Government National Mortgage Association to include
sub-prime mortgages, particularly those in the "A-" category, which constitute a
significant portion of the Company's loan production.
NO HISTORY OF INDEPENDENT OPERATIONS
LBFC was formed in January 1997 and prior to the Reorganization its
mortgage lending operations have been conducted as a division of Old Long Beach.
The Company is developing certain systems and administrative capabilities
necessary to function as an independent entity. The Company and Old Long Beach
are entering into certain agreements pursuant to which certain administrative
functions will be provided by Old Long Beach for an interim period after the
Reorganization. The agreements have been developed in the context of a
parent/subsidiary relationship and therefore are not the result of arm's-length
negotiations between independent parties. Further, there can be no assurances
that the Company will be able to effectively function as an independent entity.
See "-- Risk of Contracted Services" and "Certain Relationships and Related
Transactions."
RISKS OF CONTRACTED SERVICES
The Company typically retains servicing rights upon the sale of loans
originated or purchased by the Company and agrees to certain servicing
performance criteria. If the Company does not meet such servicing performance
criteria, the loan purchaser may terminate the servicing rights of the Company.
The Company is entering into an agreement with the Sub-Servicer (a division of
Old Long Beach) pursuant to which the Sub-Servicer will sub-service loans
originated or purchased by the Company after the Reorganization. If the
Sub-Servicer fails to meet the servicing performance criteria set forth in the
relevant servicing agreements governing the loans, the Company's servicing
rights could be terminated. Any termination of servicing rights could have a
material adverse effect on the Company's results of operations and financial
condition.
In connection with the Reorganization, the Company and Old Long Beach are
entering into an administrative services agreement under which Old Long Beach
will continue to provide various services to
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the Company, including certain employee benefits administration, finance and
accounting technical support, information services and data processing
functions. The Company currently anticipates it will have the capability to
perform the functions covered by the administrative services agreement
internally within one year from the date of the Reorganization. Once the Company
develops the internal capability to perform each such function, the Company
intends to terminate the administrative services agreement with respect to that
function. Any failure by Old Long Beach 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 operations and financial
condition. See "Certain Relationships and Related Transactions."
IMPAIRMENT OF VALUE OF LOAN SERVICING RIGHTS; DECLINING INTEREST RATES
The Company records gain on sales of loans based in part on the fair value
of retained servicing rights related to such loans. The fair value of such
servicing rights are in turn based in part on projected loan prepayment and
credit loss rates. Higher than anticipated rates of loan prepayment or credit
loss may be caused by, among other factors, a material decline in the level of
interest rates and could require the Company to write down the value of such
servicing rights which could have a material adverse effect on the Company's
results of operations and financial condition.
DEPENDENCE UPON INDEPENDENT MORTGAGE BROKERS
The Company depends largely on independent mortgage brokers, and, to a
lesser extent, smaller mortgage companies and commercial banks, for its
originations and purchases of mortgage loans. Substantially all of the
independent mortgage brokers with whom the Company does business deal with
multiple loan originators for each prospective borrower. Such originators,
including the Company, compete for business based upon pricing, service, loan
fees and costs and other factors. The Company's competitors also seek to
establish relationships with such independent mortgage brokers, mortgage
companies and commercial banks, none of whom is obligated by contract or
otherwise to continue to do business with the Company. In addition, the Company
expects the volume of broker-sourced loans purchased by the Company to increase.
The Company's future operating and financial results may be more susceptible to
fluctuations in the volume and cost of its broker-sourced loans resulting from,
among other things, competition from other purchasers of such loans.
RISKS RELATED TO REPRESENTATIONS AND WARRANTIES IN LOAN SALES
The Company engages in bulk loan sales pursuant to agreements that
generally require the Company to repurchase or substitute loans in the event of
a breach of a representation or warranty made by the Company to the loan
purchaser, any misrepresentation during the mortgage loan origination process
or, in some cases, upon any fraud or first payment default on such mortgage
loans.
For loans the Company purchases from mortgage companies, banks and other
originators, the Company generally limits the potential remedies of the
institutions to which the Company later sells the loans to the potential
remedies the Company receives from the parties from whom the Company purchased
the loans. However, in some cases, the remedies available to a purchaser of
loans from the Company may be broader than those available to the Company
against the originators of such loans, and, even where this is not the case,
should a purchaser enforce its remedies against the Company, the Company may not
always be able to enforce its remedies against the related originators.
Any claims asserted against the Company in the future by one of its loan
purchasers may result in liabilities or legal expenses that could have a
material adverse effect on the Company's results of operations and financial
condition.
CONCENTRATION OF OPERATIONS IN CALIFORNIA
Approximately 37% of the dollar volume of loans originated or purchased by
the Company during 1996 were secured by properties located in California. No
other state contained properties securing more than 10% of the dollar volume of
loans originated or purchased by the Company during 1996. Although the Company
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has a nationwide independent broker network and a developing regional processing
center network, the Company is likely to continue to have a significant amount
of its loan originations and purchases in California for the foreseeable future,
primarily because California represents a significant portion of the national
mortgage marketplace. 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 experienced a
slowdown or recession in recent 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 will equal or exceed the value of the
mortgaged properties. Reduced collateral value will adversely affect the volume
of the Company's loans as well as the pricing of the Company's loans and the
Company's ability to sell its loans. See "-- Economic Slowdown and Decline in
Collateral Value May Adversely Affect Volume of Loans" and "-- Focus on Credit
Impaired Borrowers May Result in Increased Delinquency Rates, Foreclosures and
Losses."
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. Because the Company sells its loans on a forward
basis, it is not exposed to the risk of loan delinquencies and defaults (except
to the extent they affect servicing rights) unless the Company is required to
repurchase or substitute a loan due to a breach of a representation or warranty
in connection with a loan sale, or, under certain circumstances, due to fraud or
default on the first payment due after sale. However, any sustained period of
increased delinquencies or defaults could adversely affect the pricing of the
Company's loan sales and the ability of the Company to sell its loans. 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 involves expanding its broker-sourced loan
business through increased penetration into existing markets and expansion into
new markets and developing a direct-sourced loan origination business while
maintaining its customary premiums on sale, interest rate spreads and
underwriting criteria. Implementation of this strategy will depend in large part
on the Company's ability to (i) expand its independent mortgage broker network
and establish direct-sourced origination activities in markets with a sufficient
concentration of borrowers meeting the Company's underwriting criteria, (ii)
hire, train and retain skilled employees, and (iii) continue to expand in the
face of increasing competition from other mortgage lenders. There can be no
assurance that the Company will be able to implement these growth strategies, or
that such strategies will be effective. See "Business."
DEPENDENCE ON A LIMITED NUMBER OF KEY PERSONNEL
The Company's growth and development to date have been largely dependent
upon the services of M. Jack Mayesh, Edward Resendez, and Frank Curry, Chairman
of the Board and Chief Executive Officer, President and Executive Vice President
of the Company, respectively. The loss of Messrs. Mayesh's, Resendez's or
Curry's services for any reason could have a material adverse effect on the
Company. The Company is entering into employment agreements with Messrs. Mayesh,
Resendez and Curry at or before the consummation of this Offering. See
"Management -- Management Compensation and Employment Agreements."
INCOME TAX RISK RELATED TO DEFERRED TAX ASSET
As discussed below, the Internal Revenue Service ("IRS") could assert that
the "anti-churning" rules under Section 197 of the Internal Revenue Code of
1986, as amended (the "Code"), should be applied to disallow amortization
deductions with respect to any goodwill, going concern value or certain
intangibles transferred to the Company pursuant to the Reorganization, and to
further disallow all or a significant portion
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of LBFC's $36.0 million net deferred tax asset. Any adjustment to the net
deferred tax asset will be charged or credited to additional paid-in capital but
will not affect the Company's earnings.
As a result of the Offering, the tax basis of the assets transferred by Old
Long Beach to LBFC will be increased, in the hands of LBFC, to their fair market
value (determined by reference to the initial public offering price). Such tax
basis is generally expected to produce a tax benefit to LBFC in future years
through depreciation or amortization deductions or through decreased gain or
(subject to certain limitations) increased loss on a disposition of any LBFC
asset. However, the "anti-churning" rules under Section 197 of the Code, might
apply to disallow such amortization with respect to certain intangible assets of
LBFC. See "Reorganization -- Tax Consequences." LBFC will record a deferred tax
asset (with a corresponding credit to additional paid-in capital) for the tax
effect of the excess of the tax basis of LBFC assets following the Offering over
their net book value. Solely for financial accounting and reporting purposes,
such excess tax basis will exclude the tax basis of certain intangible assets to
take into account LBFC's assessment of the possible application of the
"anti-churning" rules under Section 197 of the Code. LBFC's best estimate of the
amount of this uncertainty is subject to revisions and resolution of the
uncertainty may not occur until such time as an audit of LBFC's tax return for
the period ended December 31, 1997, or any subsequent year in which amortization
deductions are claimed, is completed by the IRS. In accordance with Emerging
Issues Task Force Issue No. 94-10, Accounting by a Company for the Income Tax
Effects of Transactions among or with Its Shareholders under FASB Statement No.
109, any revisions to the deferred tax asset resulting from resolution of this
uncertainty will be offset by a corresponding charge or credit directly to
additional paid-in capital at the time such resolution occurs and will have no
impact on earnings. The Company believes that based on historical earnings
levels it is more likely than not 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, and there will be no impact on earnings.
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 asset, through a
charge to the income tax provision which will result in a reduction of earnings.
No assurances can be given that the anti-churning rules will not be applied to
disallow amortization with respect to all or a significant portion of LBFC's
deferred tax asset, that LBFC will generate sufficient taxable income to realize
the deferred tax asset through future deductions, or that changes in applicable
tax law (possibly on a retroactive basis) will not limit LBFC's ability to take
such deductions.
Based upon an assumed initial public offering price of $11.00 per share,
the pro forma excess of the tax basis of LBFC's net assets (determined for
financial accounting and reporting purposes as described above) over their pro
forma net book value at December 31, 1996 is approximately $230.0 million
resulting in a pro forma gross deferred tax asset of $92.0 million. Based upon
LBFC's preliminary assessments, a deferred tax liability of $56.0 million has
been provided for the potential that the IRS may disallow some portion of the
resulting deduction. The unaudited pro forma consolidated statement of financial
condition reflects a net deferred tax asset of $36.0 million. For income tax
purposes, LBFC intends to amortize over a 15-year period the intangible assets
acquired from Old Long Beach in the Reorganization. See "Reorganization -- Tax
Consequences."
IMPACT OF LAWS AND REGULATIONS AFFECTING LENDING OPERATIONS
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 and judicial and administrative decisions imposing requirements and
restrictions on a substantial portion of its operations. The Company's consumer
lending activities are subject to the Federal Truth-in-Lending Act and
Regulation Z (including the Home Ownership and Equity Protection Act of 1994),
the Federal Equal Credit Opportunity Act and Regulation B, as amended, the Fair
Credit Reporting Act of 1970, as amended, the Federal Real Estate Settlement
Procedures Act of 1974, as amended ("RESPA"), and Regulation X, the Fair Housing
Act, the Home Mortgage Disclosure Act and Regulation C and the Federal Debt
Collection Practices Act, 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 the Department of Housing and
Urban Development and
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state regulatory authorities with respect to originating, processing,
underwriting, selling and servicing mortgage loans.
These rules and regulations, among other things, impose licensing
obligations on the Company, establish eligibility criteria for mortgage loans,
prohibit discrimination, provide for inspections and appraisals of properties,
require credit reports on loan applicants, regulate assessment, collection,
foreclosure and claims handling, investment and interest payments on escrow
balances and payment features, mandate certain disclosures and notices to
borrowers and, in some cases, fix maximum interest rates, fees and mortgage loan
amounts. Failure to comply with these requirements can lead to loss of approved
status, termination or suspension of servicing contracts without compensation to
the servicer, demands for indemnifications or mortgage loan repurchases, certain
rights of rescission for borrowers, class action lawsuits and administrative
enforcement actions.
The Company is subject to licensing by state authorities. In addition, any
person who acquires more than 10% of the Company's stock will become subject to
certain state licensing regulations requiring such person periodically to file
certain financial and other information. If any person holding more than 10% of
the Company's stock refuses to adhere to such filing requirements, the Company's
existing licensing arrangements could be jeopardized. The loss of required
licenses could have a material adverse effect on the Company's results of
operation and financial condition.
Although the Company believes that it has systems and procedures to
facilitate compliance with these requirements and believes that it is in
compliance in all material respects with applicable local, state and federal
laws, rules and regulations, in the future more restrictive laws, rules and
regulations or the judicial interpretation of existing laws, rules and
regulations could make compliance more difficult or expensive. See
"Business -- Regulation."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock may experience fluctuations that are
unrelated to the operating performance of the Company. In particular, the price
of the Common Stock may be affected by general market price movements as well as
developments specifically related to the mortgage finance industry or the
financial services sector generally, such as interest rate movements, quarterly
variations or changes in financial estimates by securities analysts and a
significant reduction in the price of the stock of another participant in the
mortgage finance industry. In addition, the Company's operating income on a
quarterly basis is significantly dependent upon, among other things, the
successful completion of the Company's loan sales at a premium in the secondary
market for sub-prime mortgages. See "-- Risk of Variations in Quarterly
Operating Results." The inability of the Company to complete significant loan
sales transactions in a particular quarter may have a material adverse effect on
the Company's results of operations for that quarter and could, therefore,
negatively impact the price of the Common Stock.
ABSENCE OF A PUBLIC MARKET; DETERMINATION OF OFFERING PRICE
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined
through negotiations between the Selling Stockholder and representatives of the
Underwriters. See "Underwriting" for factors to be considered in determining the
initial public offering price. There can be no assurance that a regular trading
market for the Common Stock will develop after this Offering or, if developed,
that a public trading market can be sustained. The initial public offering price
will not necessarily reflect, and may be higher than, the market price of the
Common Stock after this Offering.
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."
RESTRICTIONS ON FUTURE SALES BY STOCKHOLDERS; EFFECT ON SHARE PRICE OF SHARES
AVAILABLE FOR FUTURE SALE
If the Underwriters' over-allotment option is not exercised in full, the
Selling Stockholder will be subject to certain lock-up restrictions with respect
to its ability to sell or otherwise dispose of any shares of Common Stock it
owns for a period of 180 days from the date of completion of this Offering
without the prior written consent of the Representative of the Underwriters and
the Company. When such lock-up restrictions lapse, such shares of Common Stock
may be sold in the public market or otherwise disposed of, subject to compliance
with applicable securities laws. Sales of a substantial number of shares of
Common Stock, or the perception that such sales could occur, could adversely
affect prevailing market prices for the Common Stock. See "Shares Eligible for
Future Sale." In addition, if the Underwriters' over-allotment option is not
exercised in full, a substantial competitor of the Company (the Selling
Stockholder) will hold up to 3,250,000 shares of the Company's Common Stock.
REORGANIZATION
DESCRIPTION OF REORGANIZATION
The Company's broker-sourced mortgage business was begun in 1988 by Long
Beach Savings and Loan Association (later known as Long Beach Bank, F.S.B.). In
order to gain greater operating flexibility and improve its ability to compete
against other financial services companies, in October 1994 Long Beach Bank,
F.S.B. ceased operations, voluntarily surrendered its federal thrift charter and
transferred the broker-sourced business, along with its direct-sourced business
and loan servicing operations, to Old Long Beach.
Prior to the Reorganization, Old Long Beach conducted its mortgage lending
business through four divisions -- the direct-sourced lending division, the
broker-sourced lending division, the loan sales division and the loan servicing
division. To facilitate the public sale of Old Long Beach's broker-sourced
mortgage lending business, Old Long Beach is reorganizing its business
operations by transferring to LBFC the assets (including independent broker
lists, trade name, office leases and furniture, fixtures and equipment) and
personnel related to Old Long Beach's broker-sourced mortgage lending and loan
sales operations and approximately $40 million in cash in exchange for
25,000,000 shares of Common Stock, 21,750,000 of which are being sold pursuant
to this Offering (25,000,000 if the Underwriters' over-allotment option is
exercised in full). The Company intends to use the $40 million contributed to it
from Old Long Beach for working capital purposes and to pay its expenses and
fees related to the Reorganization, estimated to be approximately $1.5 million.
The costs of the Offering are being paid by Old Long Beach. The assets being
transferred to LBFC include loans in process as of the time of the
Reorganization but do not include loans funded prior to the Reorganization or
servicing rights with respect to loans funded prior to the Reorganization. LBFC
will have no interest in Old Long Beach's direct-sourced mortgage lending or
loan servicing divisions, which are being retained by Old Long Beach after the
Reorganization. In the Reorganization, LBFC is acquiring the right to the "Long
Beach Mortgage Company" name and the benefits related to the name and Old Long
Beach will no longer use the name in its business. The Reorganization will occur
immediately prior to the consummation of the Offering.
After the Reorganization, LBFC's broker-sourced business will be conducted
by New Long Beach, a wholly owned subsidiary of LBFC, under the "Long Beach
Mortgage Company" name. The Company is not assuming any of the liabilities of
Old Long Beach arising from Old Long Beach's lending or loan servicing
activities prior to the Reorganization. See "Certain Relationships and Related
Transactions" for a description of certain contractual relationships being
entered into between Old Long Beach and LBFC in connection with the
Reorganization. However, as a successor to Old Long Beach, New Long Beach will
be bound by the terms of the settlement agreement between Old Long Beach and the
DOJ. See "Business -- Department of Justice Settlement Agreement."
16
<PAGE> 18
Set forth below are two charts which demonstrate the corporate structure
and operating divisions of Old Long Beach Holdings and its subsidiaries that
relate to their mortgage lending operations as they existed (i) prior to the
Reorganization and (ii) after the Reorganization and this Offering.
[CHART]
The Prospectus delivered to investors contains two organizational charts
that cannot be reproduced in an electronic filing. The first chart is entitled
"Pre-Reorganization" and indicates that "Old Long Beach Holdings" is the parent
of "Old Long Beach" (Long Beach Mortgage Company), which consists of the
Broker-Sourced Lending Division, the Loan Sales Division, the Direct-Sourced
Lending Division and the Loan Servicing Division. "Old Long Beach" (Long Beach
Mortgage Company) is the parent of New Long Beach (Ameriquest Mortgage
Corporation) immediately preceding the consummation of the Reorganization.
The second chart is entitled "Post-Reorganization and Public Offering"
and indicates that after the Offering, "Old Long Beach Holdings" will be the
parent of "Old Long Beach" (Ameriquest Mortgage Company), which will consist of
the Direct-Sourced Lending Division and the Loan Servicing Division. Long Beach
Financial Corporation will be a separate entity, and will be the parent of "New
Long Beach" (Long Beach Mortgage Company), which will consist of the
Broker-Sourced Lending Division and the Loan Sales Division.
[END CHART]
Prior to the Reorganization, the Company funded loans by borrowing under
Old Long Beach's revolving warehouse credit facility. Because this facility will
not be available to the Company after the completion of this Offering, the
Company has obtained the Warehouse Financing Facility. See
"Business -- Financing and Sale of Loans -- Warehouse Financing Facility."
Old Long Beach has entered into two forward loan sales contracts pursuant
to which it has committed to sell certain loans expected to be originated by the
broker-sourced lending division of Old Long Beach after April 1, 1997. In
connection with the Reorganization, Old Long Beach has agreed to assign such
forward loan sales contracts to the Company and has agreed to sell to the
Company the loans originated or purchased by the broker-sourced mortgage lending
division of Old Long Beach from April 1, 1997 to the date of the Reorganization
to assist the Company in fulfilling this commitment. Such loans will be
purchased by the Company under the same terms set forth in the sales contracts.
As part of the contribution agreement Old Long Beach and the Company are
entering into in connection with the Reorganization, Old Long Beach and the
corporate parent of Old Long Beach have agreed to indemnify the Company for
certain income tax liabilities. See "Certain Relationships and Related
Transactions -- Contribution Agreement."
Following the Reorganization, the Company will not initially have the
internal capability to support certain administrative services such as finance
and accounting technical support, some employee benefits administration
functions, data processing and information services because these services have
historically been provided by Old Long Beach. Old Long Beach is contracting to
continue to provide these services to the Company after the Reorganization until
the Company develops the capability internally. The Company anticipates that it
will be able to perform these services internally within one year after the
Reorganization. See "Certain Relationships and Related
Transactions -- Administrative Services Agreements."
Because the personnel that have historically conducted Old Long Beach's
secondary market sales activities will be employed by the Company after the
Reorganization, Old Long Beach initially will not have the expertise to conduct
sales of the loans that it originates after the Reorganization. The Company is
agreeing to provide secondary market sales services to Old Long Beach until Old
Long Beach develops the necessary level of expertise to conduct loan sales
itself. See "Certain Relationships and Related Transactions -- Administrative
Services Agreements."
17
<PAGE> 19
Following the Reorganization, the Sub-Servicer (a division of Old Long
Beach) will sub-service the loans originated or purchased by the Company. See
"Business -- Servicing" and "Certain Relationships and Related
Transactions -- Loan Sub-Servicing Agreement."
Old Long Beach currently owns 100% of the issued and outstanding capital
stock of LBFC and is selling 87.0% of the capital stock in this Offering. The
remaining 13.0% is subject to the Underwriters' over-allotment option. If the
over-allotment option is exercised in full, Old Long Beach will have no
ownership interest in the Company after this Offering.
Old Long Beach and the Company will be free to compete against each other
after the completion of this Offering, although each is agreeing not to solicit
or hire the employees of the other for five years following the Reorganization.
TAX CONSEQUENCES
In connection with the Reorganization, Old Long Beach will be obligated to
sell the shares of Common Stock offered hereby at the time it transfers to LBFC
the assets and personnel related to its broker-sourced mortgage lending and loan
sales operations. In the opinion of counsel to the Company, the transfer of the
assets and personnel by Old Long Beach to LBFC in exchange for 25,000,000 shares
of Common Stock will be treated for federal income tax purposes as a taxable
sale of assets. As a result, the tax basis (for income tax purposes) of the
assets transferred from Old Long Beach to LBFC in the Reorganization will be
increased, in the hands of LBFC, to their fair market value (determined by
reference to the initial public offering price). As discussed more fully below,
such tax basis is generally expected to produce a tax benefit to LBFC in future
tax years through depreciation or amortization deductions or through decreased
gain or (subject to certain limitations) increased loss on a disposition of any
LBFC asset.
In general, Section 197 of the Code 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 Code, 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 asset at any time on or after July 25, 1991, and on
or before August 10, 1993.
LBFC believes that the anti-churning rules should not apply to any
intangible assets (whether goodwill, going concern value or otherwise)
transferred from Old Long Beach to LBFC in the Reorganization. If LBFC is
correct in this belief, based upon an assumed initial public offering price of
$11.00 per share, the pro forma excess of the tax basis of LBFC's net assets
over their pro forma net book value at December 31, 1996, would be approximately
$230.0 million, resulting in a pro forma gross deferred tax asset of
approximately $92.0 million.
Because the IRS could assert that the anti-churning rules apply to the
Reorganization, LBFC 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. LBFC
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 LBFC can reasonably
ascertain useful lives ("Amortizable Intangibles"). Based in part upon such
valuation, LBFC will record 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, LBFC may be prevented from realizing all or a
portion of the future tax benefits reflected by the net deferred tax asset. In
accordance with Emerging Issues Task Force Issue No. 94-10, Accounting by a
Company for the Income Tax Effects of Transactions among or with Its
Shareholders under FASB Statement No. 109, any adjustment to the net deferred
tax asset will be charged or credited to additional paid-in capital and will
have no impact on earnings. For income tax purposes, LBFC intends to amortize
over a fifteen-year period the intangible assets acquired from Old Long Beach in
the Reorganization. The Company believes that based on historical earnings
levels it is more likely than not 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
18
<PAGE> 20
realizes the benefits associated with the deferred tax asset, there will be a
corresponding reduction in income taxes payable by the Company, and there will
be no impact on earnings. 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 asset, through a charge to the income tax provision which will result in a
reduction of earnings.
DIVIDENDS
LBFC has not declared or paid any dividends in the past and does not
anticipate declaring or paying any cash dividends in the foreseeable future.
DILUTION
The pro forma net tangible book value of the Company's Common Stock as of
December 31, 1996, was $76.0 million, or $3.04 per share. Pro forma net tangible
book value per share has been determined by dividing the pro forma tangible net
worth of the Company (total assets less intangible assets and total liabilities)
after giving effect to the Reorganization by 25,000,000 shares outstanding and
without taking into account any changes in such pro forma net tangible book
value after December 31, 1996. Assuming an initial public offering price of
$11.00 per share, new stockholders will experience immediate dilution of $7.96
per share. Dilution to new stockholders is determined by subtracting the pro
forma net tangible book value per share after this Offering from the initial
public offering price per share. The following table illustrates this dilution.
<TABLE>
<S> <C> <C>
Initial public offering price per share.................................... $11.00
Pro forma net tangible book value per share before Offering..... $3.04(1)
Increase per share attributable to sale of Common Stock......... --
-----
Pro forma net tangible book value per share after Offering................. 3.04(1)
------
Dilution per share to new investors........................................ $ 7.96
======
</TABLE>
- ---------------
(1) Includes $1.44 per share attributable to the deferred income tax asset.
See "Reorganization" and "Unaudited Pro Forma Consolidated Financial Data."
19
<PAGE> 21
CAPITALIZATION
The following table sets forth the actual capitalization of Long Beach
Mortgage Company Broker-Sourced Loan Division as of December 31, 1996 and the
pro forma capitalization to reflect the Reorganization and the sale of shares by
the Selling Stockholder. See "Reorganization." This table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Financial Statements and Notes thereto
included elsewhere herein.
<TABLE>
<CAPTION>
ACTUAL PRO FORMA(1)(2)
-------- ---------------
(IN THOUSANDS)
<S> <C> <C>
DEBT:
Short-term borrowings due under warehouse financing facility.... $ 72,829 $ --
-------- --------
STOCKHOLDERS' EQUITY:
Divisional equity............................................... 1,137 --
Preferred Stock, $.001 par value, 25,000,000 shares authorized,
no shares outstanding actual and pro forma................... -- --
Common Stock, $.001 par value, 150,000,000 shares authorized, 1
share issued and outstanding (actual), 25,000,000 shares
issued and outstanding (pro forma)(3)........................ -- 25
Additional Paid-in Capital...................................... -- 75,934
Retained Earnings............................................... -- --
-------- --------
Total Stockholders' Equity.............................. 1,137 75,959
-------- --------
Total Capitalization.................................... $ 1,137 $ 75,959
======== ========
</TABLE>
- ---------------
(1) See "Unaudited Pro Forma Consolidated Financial Data."
(2) See "Reorganization."
(3) Excludes 3,000,000 shares of Common Stock reserved for issuance under the
1997 Stock Incentive Plan. See "Management -- 1997 Stock Incentive Plan."
20
<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
The following table sets forth selected consolidated financial data as of
the period ended or for the periods presented. The selected consolidated
financial data of the Company presented for the years ended December 31, 1994,
1995 and 1996 and as of December 31, 1995 and 1996 are derived from financial
statements of the Company audited by Deloitte & Touche LLP, independent
auditors. The selected consolidated financial data of the Company presented for
the years ended December 31, 1992 and 1993 and as of December 31, 1992, 1993 and
1994 are derived from unaudited financial statements of the Company. In the
opinion of the Company, such unaudited financial statements reflect all
adjustments, consisting only of normal recurring accruals, necessary for a fair
presentation of the results of such periods. The selected consolidated financial
data should be read in conjunction with, and is qualified in its entirety by,
the Financial Statements of the Company and related Notes thereto that appear
elsewhere in this Prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------
PRO FORMA
1992 1993 1994 1995 1996 1996(1)
------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Gain on sales of loans...................... $33,107 $23,675 $21,668 $31,691 $50,699 $ 49,465
Loan servicing and other fees............... -- -- -- -- -- 1,529(2)
Interest income............................. 9,016 3,493 2,510 2,494 3,275 3,275
------- ------- ------- ------- ------- ----------
Total revenues....................... 42,123 27,168 24,178 34,185 53,974 54,269
Expenses:
Selling, general and administrative......... 13,498 12,823 22,328 21,912 35,188 37,965
Interest.................................... 5,558 2,453 1,814 2,312 2,814 3,140
------- ------- ------- ------- ------- ----------
Total expenses....................... 19,056 15,276 24,142 24,224 38,002 41,105
------- ------- ------- ------- ------- ----------
Income before provision for income taxes...... 23,067 11,892 36 9,961 15,972 13,164
Provision for income taxes.................... 12,182 6,280 14 4,169 6,580 5,424
------- ------- ------- ------- ------- ----------
Net income.................................... $10,885 $ 5,612 $ 22 $ 5,792 $ 9,392 $ 7,740
======= ======= ======= ======= ======= ==========
Pro forma earnings per share(3)............... $ .31
==========
Pro forma weighted average number of shares
outstanding(3).............................. 25,000,000
==========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
--------------------------------------------------------------------
PRO FORMA
1992 1993 1994 1995 1996 1996(1)
------- ------- ------- ------- ------- ----------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION DATA:
Cash.......................................... $ -- $ -- $ -- $ -- $ -- $ 40,000
Loans held for sale........................... 19,678 9,950 10,364 21,342 49,580 --
Deferred income taxes......................... -- -- -- 882 2,120 36,000
Total assets.................................. 20,525 10,887 12,529 24,778 79,750 78,215
Warehouse financing facility.................. -- -- 11,483 20,613 72,829 --
Total liabilities............................. 20,765 11,014 13,391 23,046 78,613 2,256
Stockholders' equity (deficit)................ (240) (127) (862) 1,732 1,137 75,959
</TABLE>
- ---------------
(1) Gives pro forma effect to the Reorganization as if it had occurred as of
January 1, 1996 as to the Statement of Operations Data and December 31, 1996
as to the Statement of Financial Condition Data. The pro forma results of
operations are not necessarily indicative of the future operations of the
Company. See "Unaudited Pro Forma Consolidated Financial Data."
(2) Net of amortization of capitalized mortgage servicing rights of $1.8
million.
(3) Historical earnings per share information for 1992 through 1996 was not
deemed meaningful.
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company is a specialty finance company engaged in the business of
originating, purchasing and selling sub-prime residential mortgage loans secured
by one-to-four family residences. The Company's core borrower base consists of
individuals who do not qualify for traditional "A" credit because their credit
history, income or other factors cause them not to conform to standard agency
lending criteria. The Company originates loans through independent mortgage
brokers and, to a lesser extent, purchases loans from smaller mortgage companies
and commercial banks. Substantially all of the Company's loan originations and
purchases are sold in the secondary market through loan sales in which the
Company disposes of its entire economic interest in the loans for cash, except
for the related servicing rights which it retains in most cases. See "Business."
The following table shows the Company's loan originations and purchases and
loan sales for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
-------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Loan originations and purchases................... $565,547 $592,542 $1,058,122
Loan sales........................................ 562,054 580,366 1,029,789
</TABLE>
Revenue is derived primarily from gain on sales of loans and interest
income from loans held for sale. 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. Loan sales premium is affected by,
among other things, the interest rate and/or margin of the loans sold. Revenues
increased to $54.0 million in 1996 compared to $34.2 million and $24.2 million
in 1995 and 1994, respectively.
Expenses are incurred for, among other things, compensation and employee
benefits, rent and other occupancy costs, office supplies and courier service,
depreciation, legal and professional services, and interest. Compensation and
employee benefits, which in 1996, 1995 and 1994 accounted for 58.7%, 56.0% and
64.2% of total expenses, respectively, is tied in part to the loan origination
volume because the Company's sales force is compensated on a commission basis.
Expenses increased to $38.0 million in 1996 compared to $24.2 million and $24.1
million in 1995 and 1994, respectively. Of the expenses incurred in 1996, 1995
and 1994, $8.9 million, $7.0 million and $9.7 million, respectively, consisted
of expenses incurred by Old Long Beach which were allocated to the Company.
These allocated expenses included executive compensation of parent company
corporate officers and legal and professional expenses.
The Company's net income increased to $9.4 million in 1996 compared to $5.8
million and $22,000 in 1995 and 1994, respectively.
BASIS OF FINANCIAL PRESENTATION
Prior to the Reorganization, the Company operated as a division of Old Long
Beach. As a result, the Company had no separate legal status or existence
through December 31, 1996. In the normal course of business, the Company had
various transactions with other divisions of Old Long Beach that are material in
amount. The financial statements of the Company have been prepared in part from
records maintained by Old Long Beach. The historical financial statements of the
Company may not necessarily be indicative of the conditions that would have
existed if the Company had operated as an independent entity.
The financial statements of the Company reflect the assets, liabilities,
revenues and expenses that were directly related to the continuing operations of
the Company as they were operated by Old Long Beach. Old Long Beach's historical
cost basis of the assets and liabilities has been carried over to the Company.
The
22
<PAGE> 24
financial statements reflect key assumptions regarding the allocation of certain
revenue and expense items and certain balance sheet accounts, many of which
could be material. In particular, in cases involving assets, liabilities,
revenues and expenses not specifically identifiable to any particular division
of Old Long Beach, certain allocations were made to reflect the operations of
the Company. These allocations were based on a variety of factors which
management believes provide a reliable basis for the financial statements.
As a result of the Reorganization and Offering, LBFC will record a gross
deferred tax asset of $92.0 million. Further, based upon LBFC's preliminary
assessments, a deferred tax liability of $56.0 million will be provided for the
potential that the IRS may disallow some portion of the resulting deduction,
resulting in a net deferred tax asset of $36.0 million. LBFC may be prevented
from realizing all or a portion of the future income tax benefits reflected by
the net deferred tax asset if the IRS challenges the value of the Amortizable
Intangibles. The Company believes that based on historical earnings levels it is
more likely than not 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, and there will be no impact on earnings. 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 asset, through a charge to the income tax
provision which will result in a reduction of earnings. See "Income Tax Risk
Related to Deferred Tax Asset" and "Reorganization -- Tax Consequences."
RESULTS OF OPERATIONS
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
The Company had substantial growth in 1996 as a result of increased loan
originations and purchases in both existing and new markets. Total revenues
increased $19.8 million or 57.9% to $54.0 million in 1996 from $34.2 million in
1995. During the same period, the Company's total expenses increased $13.8
million or 56.9% to $38.0 million in 1996 compared to $24.2 million in 1995. As
a result, net income increased $3.6 million or 62.2% to $9.4 million in 1996
from $5.8 million in 1995.
Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
-------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Gain on sales of loans........................................... $31,691 $50,699
Interest income.................................................. 2,494 3,275
------- -------
Total revenues......................................... $34,185 $53,974
======= =======
</TABLE>
The increase in revenues was due primarily to an increase of $465.6 million
or 78.6% in loan originations and purchases to approximately $1.1 billion in
1996 compared to $592.5 million in 1995, which resulted in increased loan sales.
The increase in loan originations and purchases was due to both increased
production in existing markets and expansion into new markets.
Gain on sales of loans increased $19.0 million or 60.0% to $50.7 million in
1996 from $31.7 million in 1995. The increase was due primarily to the 78.6%
increase in loan originations and purchases during 1996. Total loans of
approximately $1.0 billion were sold in 1996 with a weighted average gain on
sale of 4.92%. During 1995, total loans of $580.4 million were sold with a
weighted average gain on sale of 5.46%. The decline in weighted average gain on
sale was attributable to fixed rate loans, which typically yield a lower average
gain on sale than adjustable rate loans, constituting 37.1% of the loans sold in
1996 compared to 13.3% of the loans sold in 1995.
Interest income increased $0.8 million or 31.3% to $3.3 million in 1996
from $2.5 million in 1995. This increase was due to a higher balance of loans
held for sale during 1996 as a result of the increase in loan
23
<PAGE> 25
originations and purchases during the year. The Company's average balance of
loans held for sale increased $12.3 million or 61.1% to $32.6 million in 1996
from $20.2 million in 1995.
Expenses. The following table sets forth the components of the Company's
expenses for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
Compensation and employee benefits............................... $13,564 $22,299
Rent and other occupancy costs................................... 3,258 4,188
Office supplies and courier service.............................. 816 1,903
Depreciation..................................................... 667 1,025
Legal and professional........................................... 1,082 1,828
Interest......................................................... 2,312 2,814
Other............................................................ 2,525 3,945
------- -------
$24,224 $38,002
======= =======
</TABLE>
Total expenses increased $13.8 million or 56.9% to $38.0 million in 1996
from $24.2 million in 1995, due in large part to increased compensation and
other personnel costs related to the 78.6% increase in loan originations and
purchases during 1996.
Compensation and employee benefits expense increased $8.7 million or 64.4%
to $22.3 million in 1996 from $13.6 million in 1995. The primary reason for the
increase was due to an increase in the number of employees from 175 at December
31, 1995 to 338 at December 31, 1996. The secondary reason for the increase was
due to increases in commissions paid to employees in 1996. Both of such
increases were due to an increase in loan volume from $592.5 million in 1995 to
approximately $1.1 billion in 1996.
Rent and other occupancy costs increased $0.9 million or 28.5% to $4.2
million in 1996 from $3.3 million in 1995. This was due to the establishment of
18 new loan origination offices and two regional processing centers and the
relocation of the corporate headquarters to a larger facility during 1996.
Office supplies and courier service expense increased $1.1 million or
133.2% to $1.9 million in 1996 from $0.8 million in 1995. The increase was due
to the expansion of the Company's loan origination office network and increased
loan originations during 1996.
Depreciation increased $0.4 million or 53.7% to $1.0 million in 1996 from
$0.7 million in 1995. The increase was attributable to additional computer and
office equipment necessary to support the Company's expanded work force.
Legal and professional expenses increased $0.7 million or 68.9% to $1.8
million in 1996 from $1.1 million in 1995. This was due primarily to the higher
level of legal and professional services required to complete the DOJ settlement
in September 1996. See "Business -- Department of Justice Settlement Agreement."
Interest expense increased $0.5 million or 21.7% to $2.8 million in 1996
from $2.3 million in 1995. The increase was due to greater short-term borrowings
in 1996 to fund the increased loan originations and purchases.
Other expenses increased $1.4 million or 56.2% to $3.9 million in 1996 from
$2.5 million in 1995. This was due in large part to the incurrence of $1.1
million of DOJ settlement costs in 1996 compared to $0.3 million of settlement
costs in 1995, as well as to a $0.4 million increase in marketing expenses
attributable to an expansion of the Company's marketing program.
24
<PAGE> 26
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
In 1995 the Company substantially improved its operating results by
increasing premiums on its loan sales and reducing expenses after a workforce
reduction. In addition, 1995 marked the first full year utilizing three new core
operating computer systems as well as the first full year operating as a
mortgage company rather than a federally-chartered thrift. As a mortgage
company, the Company was able to offer certain loan products that it could not
offer as a thrift. Total revenues increased $10.0 million or 41.4% to $34.2
million in 1995 from $24.2 million in 1994. During the same period, the
Company's total expenses increased $0.1 million or 0.3% to $24.2 million in 1995
from $24.1 million in 1994. As a result, net income increased to $5.8 million in
1995 from $22,000 in 1994.
Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Gain on sales of loans........................................... $21,668 $31,691
Interest income.................................................. 2,510 2,494
------- -------
$24,178 $34,185
======= =======
</TABLE>
The increase in revenues was due primarily to an 46.3% increase in gain on
sales of loans. Loan originations and purchases increased $27.0 million or 4.8%
to $592.5 million in 1995 from $565.5 million in 1994.
Gain on sales of loans increased $10.0 million or 46.3% to $31.7 million in
1995 from $21.7 million in 1994. This was due primarily to (i) a 41.5% increase
in weighted average gain on sale to 5.46% in 1995 from 3.86% in 1994 and (ii)
$4.1 million of gain recognized during 1995 due to the Company's adoption of
Statement of Financial Accounting Standards (SFAS) No. 122, "Accounting for
Mortgage Servicing Rights" as of January 1, 1995. The Company improved the
weighted average gain on sale by selling loans in 1995 to large institutional
purchasers who were willing to pay higher premiums than the Company's past
purchasers. These institutional buyers were willing to pay higher premiums
because their strategy of securitizing the loans and keeping the residual
interest supported a higher cost structure than that of the whole loan
purchasers to whom the Company had previously sold loans. SFAS No. 122 requires
the Company, upon the sale of servicing retained mortgages, to capitalize the
cost associated with the right to service loans based on their relative fair
values. As a result, the Company will recognize more revenue when a loan is sold
and less revenue over the period that such loan is serviced.
Interest income remained unchanged during 1995 compared to 1994, because a
reduction in the time period between the funding of loans and the delivery of
the loans to the whole loan purchasers was offset by an increase in the
differential between the interest rate on borrowings under Old Long Beach's
revolving warehouse credit facility and the interest rates of loans held for
sale. In 1995, the Company typically delivered loans to purchasers nine times
during each quarter compared to three times a quarter in 1994.
25
<PAGE> 27
Expenses. The following table sets forth the components of the Company's
expenses for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1994 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Compensation and employee benefits............................... $15,496 $13,564
Rent and other occupancy costs................................... 2,565 3,258
Office supplies and courier service.............................. 712 816
Depreciation..................................................... 281 667
Legal and professional........................................... 1,443 1,082
Interest......................................................... 1,814 2,312
Other............................................................ 1,831 2,525
------- -------
$24,142 $24,224
======= =======
</TABLE>
Total expenses increased $0.1 million or 0.3% to $24.2 million in 1995 from
$24.1 million in 1994. This was due in large part to increases in rent,
depreciation and interest expense, offset in part by decreases in compensation
and legal and professional services.
Compensation and employee benefit expense decreased $1.9 million or 12.5%
to $13.6 million in 1995 from $15.5 million in 1994. The primary reason for the
decrease was an elimination of several positions that were no longer required
after October 1994 when the Company ceased to operate as a division of a thrift.
The secondary reason for the decrease was a reduction in the Company's
non-production work force in January 1995 due to the implementation of the
Company's new computerized systems which resulted in substantially improved
processing efficiency. Such reduction was partially offset by an increase in the
Company's sales force.
Rent and other occupancy costs increased $0.7 million or 27.0% to $3.3
million in 1995 from $2.6 million in 1994. The increase was due to the
establishment of 21 new loan origination offices and the first regional
processing center during 1995.
Office supplies and courier service expense increased $0.1 million or 14.6%
to $0.8 million in 1995 from $0.7 million in 1994. The increase was due to the
expansion of the Company's loan origination office network and increased loan
originations.
Depreciation increased $0.4 million or 137.4% to $0.7 million in 1995 from
$0.3 million in 1994. This was due to additional computer equipment to support
the new loan origination system and the expanded loan origination office
network.
Legal and professional expenses decreased $0.4 million or 25.0% to $1.1
million in 1995 from $1.4 million in 1994. The decrease was due primarily to the
legal expenses incurred in 1994 in connection with the transition from a
federally-chartered thrift to a mortgage company.
Interest expense increased $0.5 million or 27.5% to $2.3 million in 1995
from $1.8 million in 1994. This was due to the fact that interest rates on
borrowings to fund loans were higher after October 1994 than before. Prior to
that time, the Company operated as a division of Long Beach Bank, F.S.B., and
funded loans through the bank's deposits, but after converting to a mortgage
company the Company funded loans through borrowings under Old Long Beach's
revolving warehouse credit facility.
Other expenses increased $0.7 million or 37.9% to $2.5 million in 1995 from
$1.8 million in 1994. The increase was due primarily to a $0.3 million accrual
in 1995 with respect to the DOJ settlement and a $0.2 million increase in
marketing expenses.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically generated positive cash flow. The Company's
sources of cash flow include loan sales at a premium, net interest income and
borrowings. The Company enters into forward loan sales
26
<PAGE> 28
contracts under which it commits to deliver loans to be originated or purchased
by the Company at a future date. The Company sells loans at a premium several
times a quarter pursuant to such contracts. The Company's uses of cash include
the funding of loan originations and purchases, payment of interest expenses,
repayment of its borrowings, operating and administrative expenses, income taxes
and capital expenditures. Capital expenditures totaled $1.2 million, $0.7
million and $1.7 million for the years ended December 31, 1996, 1995 and 1994,
respectively.
The Company funds its business through cash reserves and a revolving
warehouse credit facility under which it borrows money to finance the
origination and purchase of loans. The Company repays borrowings with the
proceeds of its loan sales. Prior to the Reorganization, the Company funded
loans by borrowing under Old Long Beach's revolving warehouse credit facility.
The Company has in place a $200 million Warehouse Financing Facility provided by
a syndicate of banks led by Texas Commerce Bank National Association. Borrowings
under the Warehouse Financing Facility for a particular loan may remain
outstanding for no more than 120 days, except for an aggregate amount not to
exceed $10 million, which may remain outstanding for up to 180 days. Borrowings
under the Warehouse Financing Facility are permitted up to 98% of the principal
balance of the originated and purchased loans and bear interest at rates ranging
from 1.375% to 1.625% over the 30-day reserve-adjusted London Inter Bank Offered
Rate ("LIBOR"), depending on the level of loan documentation the Company has
delivered to the agent for the syndicate of banks providing credit under the
Warehouse Financing Facility. The Warehouse Financing Facility also includes a
$60 million subline for loans not covered by a forward purchase commitment, a
$15 million subline for principal and interest advances and a $10 million
subline for other servicing advances made primarily to securityholders in
connection with securitizations by purchasers of the Company's loans in which
the Company serves as the master servicer, and a $5 million subline which may be
used to finance mortgage loans owned by the Company that are in the process of
collection or resale to investors. The sublines bear interest at rates ranging
from 1.875% to 2.0% over the 30-day reserve-adjusted LIBOR. The Warehouse
Financing Facility will expire on March 31, 1999, unless earlier terminated or
extended in accordance with its terms. The Warehouse Financing Facility contains
a number of financial covenants including: (i) New Long Beach maintain tangible
net worth equal to at least $25 million, plus 25% of cumulative positive net
earnings, (ii) delinquencies on New Long Beach's mortgage servicing portfolio
not exceed 12% and (iii) the ratio of total liabilities to adjusted tangible net
worth not exceed 9:1. The Warehouse Financing Facility also contains other
affirmative, negative and financial covenants typical of similar credit
facilities.
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 the
secondary market 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. During 1996,
1995 and 1994, the Company used cash in the approximate amounts of $1.1 billion,
$592.5 million and $565.5 million, respectively, for new loan originations and
purchases. During the same periods, the Company received cash proceeds from the
sale of loans of $1.0 billion, $580.4 million and $562.1 million, respectively,
representing the principal balance of loans sold. The Company received cash
proceeds from the premiums on such sale of loans of $48.7 million, $31.3 million
and $25.2 million, respectively, for 1996, 1995 and 1994. A large portion of the
Company's loan production in any month is funded during the last several
business days of that month. In 1996, changes in investor document inspection
procedures caused the Company to recognize a greater amount of cash proceeds in
the first half of the month following loan funding by the Company. Under the
prior investor procedures, the Company would typically receive the cash sale
proceeds in the month the loan was funded. The impact of this change, when
measured at month-end or year-end, was a reduction in the proceeds from sale of
loans and a corresponding increase in the amounts outstanding under the
warehouse
27
<PAGE> 29
financing facility. In addition, at December 31, 1996 the Company held a
receivable for $25.1 million resulting from a loan sale on December 31, 1996 for
which the cash sale proceeds were not received until January 1997.
The Company believes that cash flow from operations, including the net
proceeds from loan sales, and the borrowings under the Warehouse Financing
Facility will be sufficient to fund cash needs and capital expenditures for the
next 12 months.
The Company intends to use the $40 million contributed to it from Old Long
Beach for working capital purposes and to pay its expenses and fees related to
the Reorganization, estimated to be approximately $1.5 million. The costs of the
Offering are being paid by Old Long Beach.
ACCOUNTING CONSIDERATIONS
Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
as amended by SFAS No. 127, was issued by the Financial Accounting Standards
Board in June 1996. SFAS No. 125 provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
This statement also provides consistent standards for distinguishing transfers
of financial assets that are sales from transfers that are secured borrowings.
It requires that liabilities and derivatives incurred or obtained by transferors
as part of a transfer of financial assets be initially measured at fair value.
SFAS No. 125 also requires that servicing assets be measured by allocating the
carrying amount between the assets sold and retained interests based on their
relative fair values at the date of transfer. Additionally, this statement
requires that the servicing assets and liabilities be subsequently measured by
(a) amortization in proportion to and over the period of estimated net servicing
income and (b) assessment for asset impairment or increased obligation based on
their fair values. As required by the statement, the Company has adopted the new
requirements effective January 1, 1997. Upon implementation, the statement did
not have material impact on the financial statements of the Company.
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, "Earnings Per Share" ("SFAS 128") which is effective for financial
statements issued for periods ending after December 15, 1997. It replaces the
presentation of primary earnings per share with a presentation of basic earnings
per share. It also requires the presentation of diluted earnings per share for
entities with complex capital structures. Diluted earnings per share takes into
account the potential dilution that could occur if securities or other contracts
to issue common stock, such as options, were exercised or converted into common
stock. The Company does not believe that SFAS 128 will have a material impact on
its financial statements.
28
<PAGE> 30
BUSINESS
GENERAL
The Company is a specialty finance company engaged in the business of
originating, purchasing and selling sub-prime residential mortgage loans secured
by one-to-four family residences. The Company's primary operating strategy is to
generate positive cash flow by selling for cash, at a premium, substantially all
originated and purchased loans to institutional purchasers several times a
quarter. The Company does not currently, nor does it have current plans to, sell
loans through securitizations and therefore retains no residual interests, or
the related risks, in the loans sold (except risks associated with servicing
rights, which the Company normally retains, and certain repurchase risks
associated with representations and warranties). As a result, the Company has
less risk than is typically inherent in a mortgage lender's business and has
historically had a source of cash flow to fund lending and growth, reducing the
need for other sources of financing. See "-- Financing and Sale of Loans."
Substantially all loans originated or purchased by the Company are secured by a
first priority mortgage on the subject property. In 1996, less than .03% of the
principal balance of the loans originated and purchased were secured by second
priority mortgages. The Company's core borrower base consists of individuals who
do not qualify for traditional "A" credit because their credit history, income
verification or other factors cause them not to conform to standard agency
lending criteria. Approximately 69% of the principal balance of the loans
originated by the Company in 1996 were to borrowers with a Company risk
classification of "A-" or "B+," while the remainder were to borrowers with a
Company risk classification of "B," "B-," "C" or "C-." Approximately 2.31% of
the total principal amount of loans originated or purchased by the Company in
1996 were to borrowers with a Company risk classification of "C-," which
includes borrowers with numerous derogatory credit items up to and including a
bankruptcy in the most recent twelve month period. See "-- Underwriting."
The Company has relationships with approximately 7,500 independent approved
mortgage brokers located in 43 states. During 1996, approximately 5,000 of these
brokers submitted loan packages to the Company and the Company funded loans from
approximately 2,800 brokers. The Company's large independent broker network
provides comprehensive geographic coverage for the Company's products and
reflects the Company's strategy of using a large and diverse group of small
brokers to avoid becoming dependent on a few primary producers. During the year
ended December 31, 1996, the Company's single largest producing independent
broker was responsible for less than 1% of the principal balance of the
Company's originations. The Company maintains a close working relationship with
brokers through its sales force of 120 account executives located in 63 offices
in 32 states. The Company delivers a high level of customer service to brokers
by (i) locating its account executives and, to an increasing extent, its loan
processing teams, geographically close to the brokers, (ii) actively assisting
the brokers in identifying the appropriate product for the borrowers, (iii)
applying lending criteria in a consistent manner, (iv) promptly processing loan
applications and (v) providing other assistance to brokers to complete loan
transactions. A high level of customer service, together with each account
executive's and loan processing team's knowledge of the local market and the
Company's products, is a key part of the Company's origination strategy.
The Company (as a division of Long Beach Bank, F.S.B.) began originating
sub-prime mortgage loans in Southern California in 1988 and started to expand
its business outside of California on a limited basis in 1992. In 1994, the
Company began to focus on expansion outside of California. To facilitate this
expansion and to permit the Company to provide competitive products and pricing,
in October 1994 Long Beach Bank, F.S.B. ceased operations and the Company
commenced operations as a mortgage company. Since that time, the Company has
experienced significant growth in loan originations and purchases, with
approximately $1.1 billion of originations and purchases in 43 states during
calendar 1996 compared to $592.5 million in 35 states during calendar 1995 and
$565.5 million in 27 states during calendar 1994. Total originations and
purchases were $300.7 million during the fourth quarter of 1996, which
represents a $122.4 million increase from total originations and purchases
during the fourth quarter of 1995. This growth in originations and purchases has
resulted in the Company's earnings increasing to $9.4 million in 1996 compared
to earnings of $5.8 million and $22,000 in 1995 and 1994, respectively.
The Company sells substantially all of its originated and purchased loans
several times a quarter to institutional purchasers for cash, historically at a
premium over the principal balance of the loans. Prior to
29
<PAGE> 31
originating or purchasing loans, the Company obtains a purchase commitment from
an institutional purchaser. The Company delivers loans and receives payments for
the loans shortly after funding. This strategy, as opposed to securitizations,
in which a residual interest in future payments on the loans is retained,
provides certain benefits. The Company receives cash revenue, rather than
recognizing non-cash revenue attributable to residual interests, as is the case
in securitizations. The Company thereby avoids the risk present in
securitizations of having to adjust revenue in future periods to reflect a lower
realization on residual interests because actual prepayments or defaults
exceeded levels assumed at the time of securitization. By selling its originated
and purchased loans, the Company also reduces its exposure to default risk
(other than certain first payment defaults) and prepayment risk normally
inherent in a mortgage lender's business. The Company may also be required to
repurchase or substitute loans in the event of a breach of representations and
warranties, including any fraud or any misrepresentation during the mortgage
loan origination process, and retains the risk of having to adjust noncash
revenue attributable to the realization of the retained servicing rights.
Management believes that the cash received in loan sales provides the Company
greater flexibility and operating leverage than a traditional portfolio lender,
which holds the loans it originates, by allowing the Company to generate income
through interest on loans held for sale and gain on loans sold. Loan sales have
been an important factor in generating the Company's historic earnings and
creating consistent positive cash flow to fund operations.
Substantially all of the loans originated by the Company while it operated
as a division of Old Long Beach were serviced by the Sub-Servicer. The
Sub-Servicer and the Company are entering into a contract pursuant to which the
Sub-Servicer will sub-service loans originated or purchased by the Company
following 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 Sub-Servicer has
nine years of experience in the sub-prime mortgage loan servicing industry, with
a servicing portfolio of approximately $3.5 billion of sub-prime mortgage loans
at December 31, 1996. Since the servicing procedures of the Sub-Servicer were
developed while the Company was part of Old Long Beach and are coordinated with
the Company's origination practices, management believes that the Sub-Servicer
will be able to provide faster and more effective servicing of the Company's
loans than another independent servicer. See "-- Servicing."
The Company believes that its primary strengths are the following:
- Established Position in the Sub-Prime Mortgage Lending Industry. The
Company was one of the original lenders in the sub-prime mortgage lending
industry and its volume of loans originated or purchased has been
consistently strong even during past down-turns in the local and regional
economies in which it operates. Management believes that the Company is
recognized by independent brokers, institutional loan purchasers, issuers
of asset-backed securities and rating agencies as being able to
effectively originate and sell loans on a consistent basis.
- Experienced Personnel With Performance-Based Compensation. The Company's
management, as well as many members of its staff, have worked in the
sub-prime lending industry for many years. Messrs. Jack Mayesh, Edward
Resendez and Frank Curry, the Company's Chief Executive Officer,
President and Executive Vice President, respectively, have 45 years of
sub-prime industry experience collectively and have worked together at
the Company for nine years. The Company's compensation structure is
designed to incentivize its personnel to work toward maximizing overall
Company performance. The Company intends to use stock options to
incentivize key employees as well as senior management after this
Offering.
- Regional Processing Teams. The Company's markets are serviced by 15
regional processing teams. Each team is a self-contained mortgage banking
team linked to the home office through a computer network that, in most
cases, can conduct all loan origination and production functions in its
region within guidelines established by the home office. This concept of
regional processing teams, which the Company believes is unique in the
industry, enables the Company to more effectively anticipate and respond
to broker and borrower needs in each region and avoids origination and
production bottlenecks
30
<PAGE> 32
that can occur in a system where these functions are centralized at the
home office. In addition, management believes that these teams enable the
Company to move more rapidly into newly identified markets.
- Thoroughly Trained Personnel. Before commencing regular operations, each
new employee of the Company receives training through the Company's
three-part training program which includes computer-based training,
classroom training and extensive on-the-job training. In many cases, this
training includes cross-training regarding other functions to enhance
coordination between personnel. The Company believes that its training
program improves efficiency and the quality of the loans it produces.
- Extensive Technological Capability. The Company utilizes a nationwide
communication system and computer network in all aspects of operations
from origination through funding, which enables it to, among other
things, maximize work flow by efficiently originating, underwriting and
closing loans. In addition, these systems link Company personnel in the
field to the home office and enable senior management to monitor all
regional functions on a real time basis.
- Efficiency of Operations. The Company operates efficiently due to its
high volume of loans (which produce economies of scale) and consistency
in applying underwriting standards, which reduces non-qualifying
submissions from brokers, thereby increasing the Company's funding to
submission ratio. The Company believes its infrastructure is adequate to
support anticipated growth.
The Company seeks to profitably expand its broker-sourced loan business
through increased penetration in its existing markets and expansion into new
geographic markets. Elements in achieving these objectives include the
following: (i) expanding the account executive network to reach new brokers;
(ii) developing and implementing a centralized telemarketing campaign and
increasing coordination between the Company's centralized marketing efforts and
the account executives in the field; (iii) developing and implementing
electronic broker support systems (including electronic loan application
submission and risk classification through the Company's wide-area network); and
(iv) expanding the automation of the underwriting process in order to increase
the number of loan applications processed by each underwriter in a given day.
Although the Company currently conducts primarily a broker-sourced
business, the Company intends to develop a fully integrated mortgage banking
business. An important step in this expansion is the planned commencement during
1997 of direct-sourced loan origination activities, which will provide the
Company with an additional distribution channel for its products. See "-- Loan
Origination and Purchasing -- Direct-Sourced Loan Operations."
LOAN ORIGINATION AND PURCHASING
The Company originates loans through Company-approved independent mortgage
brokers and, to a lesser extent, purchases loans from other mortgage banking
companies. The following table shows certain combined data regarding the
Company's loan originations and purchases for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1994 1995 1996
-------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Aggregate Principal Balance....................... $565,547 $592,542 $1,058,122
Number of Loans................................... 4,883 6,008 10,041
Average Principal Balance per Loan................ $ 116 $ 99 $ 105
Combined Weighted Average Loan-to-Value(1)(2)..... 69.1% 72.2% 75.0%
Weighted Average Fixed Interest Rate(1)(3)........ N/A 11.3 10.5
Weighted Average Adjustable Interest Rate(1)...... 8.6% 10.4 9.6
Weighted Average Fixed/Adjustable Interest
Rate(1)......................................... 9.5 11.3 10.0
Loans on Single Unit Properties(1)................ $535,872 $551,871 $1,004,398
Loans on Two to Four Unit Properties(1)........... 28,204 34,106 50,488
"A-" and "B+" Loans as a Percentage of Total
Loans(1)(4)..................................... 44.6% 55.0% 69.2%
</TABLE>
(Footnotes continued on following page)
31
<PAGE> 33
- ---------------
(1) Calculated based on loans originated and purchased, net of loans rescinded
because the related lending transactions did not close. Such rescinded loans
aggregated approximately $1.0 million, $7.0 million and $3.0 million in
1994, 1995 and 1996, respectively.
(2) Determined by dividing the amount of the loan by the lesser of the purchase
price or the appraised value of the mortgaged property at origination.
(3) The Company did not offer fixed rate loans during 1994.
(4) Based on original principal balance.
Substantially all loans originated or purchased by the Company are secured
by a first priority mortgage on the subject property. In 1996, less than .03% of
the principal balance of the loans originated and purchased were secured by
second priority mortgages.
Geographic Markets
The approximately 7,500 approved independent mortgage brokers with whom the
Company has relationships are located in 43 states. During 1996, approximately
5,000 of these brokers submitted loan packages to the Company and the Company
funded loans from approximately 2,800 brokers. The following table shows
geographic distribution of (i) the aggregate principal balance of loan
originations and purchases for the periods shown, and (ii) Company-approved
independent mortgage brokers for the year ended December 31, 1996:
<TABLE>
<CAPTION>
LOAN ORIGINATIONS
AND PURCHASES INDEPENDENT MORTGAGE
YEAR ENDED DECEMBER 31, LOAN BROKERS
------------------------- --------------------
1994 1995 1996 DECEMBER 31, 1996
----- ----- ----- --------------------
<S> <C> <C> <C> <C>
STATES(1)(2):
California........................... 70.4% 43.1% 37.1% 51.1%
Colorado............................. 2.1 2.9 7.3 4.3
Illinois............................. 1.4 8.7 6.2 4.3
Utah................................. 4.3 6.6 5.1 1.4
Oregon............................... 2.7 4.0 4.3 1.8
Texas................................ 0.0 1.5 3.8 5.4
Washington........................... 8.2 5.3 3.7 3.8
Michigan............................. 0.2 3.9 3.7 1.5
Florida.............................. 0.1 1.5 3.5 4.7
All other States(3).................. 10.6 22.5 25.3 21.7
----- ----- ----- -----
Total........................ 100.0% 100.0% 100.0% 100.0%
===== ===== ===== =====
</TABLE>
- ---------------
(1) States are listed in order of percentage of loan originations and purchases
for the year ended December 31, 1996.
(2) Calculated based on loans originated and purchased, net of loans rescinded
because the related lending transactions did not close.
(3) For the year ended December 31, 1996, loan originations and purchases in
each other state were less than 2.6% of total originations and purchases for
the year.
The Company currently actively originates loans in 112 of the approximately
300 MSAs in the United States having populations in excess of 100,000, as
compared to loan originations in 54 of these MSAs in 1995. Another 12 MSAs have
been identified as expansion opportunities in 1997 and the Company plans to add
approximately 120 new account executives during the year in order to more
effectively enter these new markets as well as further penetrate the Company's
existing markets.
The Company's geographic markets are divided into 15 regions, with a
completely self-contained mortgage banking team assigned to each region. Each
team is headed up by a regional manager and includes dedicated account
executives, underwriters, appraisers and other production personnel so that the
team can originate and produce loans in that region. This concept of regional
processing teams, which the Company believes is unique in the industry, enables
the Company to more effectively anticipate and respond to broker and borrower
needs in each region. Management believes that the concept also appeals to
independent brokers who may be reluctant to deal with a larger, more remote
lender. Each regional team is connected to senior
32
<PAGE> 34
management by a computer link that enables senior management to monitor all
regional functions on a real time basis.
When a regional processing team is first established to serve a particular
region, the team is physically located at the Company's headquarters. Once the
Company determines that the level of current and projected business from a
region warrants creation of a regional processing center for that region, the
Company will establish a processing center in or near the region and relocate
the relevant regional processing team to the new center. Currently 11 of the 15
regional processing teams are located at the Company's headquarters in Orange,
California. One team is located in the Woodland Hills, California, processing
center, which was opened in 1995, two more teams are located in the Company's
Rolling Meadows, Illinois, center and a fourth team is located in San Diego,
California. The Rolling Meadows and San Diego centers were established in 1996.
The Company expects to relocate four more regional teams to new processing
centers during the first quarter of 1997 in Walnut Creek, California, Hingham,
Massachusetts (which will house two regional teams), and Fort Lauderdale,
Florida.
Products and Marketing
The Company offers both fixed rate and adjustable rate loans, as well as
loans with an interest rate that is initially fixed for a period of time after
which the interest rate converts to an adjustable rate. The Company's borrowers,
who use the loans primarily to consolidate other debt or purchase homes, fall
into six sub-prime risk classifications (see "-- Underwriting") and the
Company's products are available at different interest rates and with different
origination and application points and fees depending on the particular
borrower's risk classification. Substantially all loans originated or purchased
by the Company are secured by first priority mortgages on the subject property.
In 1996, less than .03% of the principal balance of the loans originated and
purchased were secured by second priority mortgages. The Company's core loan
products provide for loan amounts of up to $500,000 with a loan-to-value ratio
of up to 85%, although loans of this type originated in 1996 had an average loan
amount of approximately $103,600 and an average loan-to-value ratio of 74.1%.
Core product loans represented approximately 91.2% of the principal balance of
the loans originated or purchased by the Company in 1996. The Company recently
introduced a "jumbo" product providing for loans of up to $1,000,000 with lower
loan-to-value ratios than the core products, and also offers products that
permit a loan-to-value ratio of up to 90% for selected borrowers with a risk
classification of "A-" or "B+." The Company frequently reviews its products and
pricing for competitiveness and introduces new products to meet the needs of its
borrowers.
The Company's primary means of marketing its products is direct contact
between its account executives and the independent mortgage brokers. Each
account executive is responsible for maintaining and expanding existing broker
relationships within the executive's assigned territory through personal contact
and promotional materials. Each account executive is typically responsible for
approximately five key brokers and is expected to have daily contact with each
of these brokers. In addition, each account executive is responsible for up to
50 additional brokers with whom the executive will have frequent, although
typically not daily, contact. Each account executive also works to develop new
broker relationships through "cold calls" and following up on inquiries made by
brokers to a toll-free number.
The Company believes that the key element in developing, maintaining and
expanding its independent mortgage broker relationships is to provide the
highest possible level of product knowledge and customer service to its brokers.
Each account executive receives comprehensive training prior to being assigned
to a territory. In most cases, training includes experience in the loan
production department so that the account executive will be familiar with all
phases of loan origination and production. This training enables the account
executive to quickly review a loan application in order to identify the
borrower's probable risk classification and then assist the broker in
identifying the appropriate product for the borrower, thereby enhancing the
likelihood that the loan will be approved at the rate and on the terms
anticipated by the borrower. After a loan package is submitted to the Company,
the account executive provides assistance to the broker throughout the process
to complete the loan transaction. Account executives are compensated based on
the number and the dollar volume of loans funded.
33
<PAGE> 35
The marketing department designs and produces all of the Company's
marketing materials in-house. Marketing materials are delivered through the
account executives as well as through regional and national advertising outlets,
daily faxing, fax-on-demand, direct mail and the Company's recently established
interactive internet website. The Company has a presence at and is a sponsor of
substantially all national industry conventions and trade shows, as well as
substantially all state and regional industry conventions and trade shows in
states where the Company has an operating location. The Company conducts free
seminars at each of its operating locations designed to target new and existing
independent brokers.
Technology
The Company utilizes computer technology to maximize the efficiency and
volume of its loan originations. Most of the account executives are linked to
the Company's computer systems by a wide area network. Through this network, an
account executive receives daily status reports regarding pending loans so that
he or she can direct efforts to those cases that require attention to complete
the processing. Certain account executives, who are not on the network, receive
the same data by daily fax communication. The Company recently established an
internet website through which independent brokers can access information about
the Company and its products. Brokers also can use the website to submit
requests for loan prequalification. The website address is
http://www.lbmcwholesale.com.
The Company makes extensive use of computer technology in its underwriting
process. Each loan application file is computerized so that it can be accessed
immediately by the appropriate persons, thereby eliminating delay that would
otherwise be caused by not having physical access to the file. The system also
reduces the time required for an underwriter to make certain essential
calculations by enabling the underwriter to input specified raw data after which
the computer will automatically make such calculations.
The Company regularly reviews its computer capabilities to better utilize
and expand those capabilities. The Company is developing a system to enable its
account executives to use electronic risk classifying and loan application
technology to expedite the origination process. This system is expected to be
operational sometime during the second half of 1997. The Company is also working
to expand the automation of its underwriting process to increase the number of
loan applications processed by each underwriter in a given day.
The Company is currently dependent on Old Long Beach for many of these
computer systems. See "Risk Factors -- Risks of Contracted Services" and
"Certain Relationships and Related Transactions."
Correspondent Loan Purchasing
The Company augments its loan production by purchasing loans on a
correspondent basis from smaller mortgage companies and commercial banks after
such loans have been funded by the originator. The Company typically purchases
the servicing rights to the loans as well. The Company believes that purchasing
loans from such originators is attractive because the Company is able to acquire
a pool of loans in a single transaction on a cost-efficient basis. The cost
efficiency is due to the Company not having to incur origination and processing
costs with respect to the loans it purchases from an established originator such
as a bank or smaller mortgage company.
When it first begins buying loans from an originator, the Company works
closely with the originator's personnel to familiarize them with the process
necessary to produce loans that the Company is willing to purchase. This ensures
that the Company will be able to include these loans in its loan sales. In the
initial phase with a new originator, the Company processes the loan applications
as if they were the Company's own originations and then the loans are funded by
the originator. Once the Company is comfortable that the originator has
developed the capability to originate and process loans that comply with the
Company's guidelines and standards, the Company's active involvement in the
processing of the originator's loans ceases, although the Company reviews loans
submitted by the originator prior to accepting them in order to confirm that
each complies with the Company's underwriting guidelines and documentation
standards. It is at this point that the Company begins to recognize the cost
efficiency of purchasing loans.
When the Company purchases loans, it receives representations and
warranties and first payment default and fraud protections from the originators
that are similar to those that the Company provides to its loan purchasers. See
"-- Financing and Sale of Loans -- Loan Sales."
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<PAGE> 36
The loan purchase program accounted for approximately 3% of the Company's
total loan volume by principal amount during 1996. The Company intends to expand
the loan purchase program in 1997, although it is expected that loan purchases
during the year will constitute less than 10% of the Company's loan volume for
1997. Expansion is expected to be accomplished through better integration of the
loan purchasing process into the Company's regional processing team structure.
Direct-Sourced Loan Operations
Although the Company currently originates primarily broker-sourced loans,
the Company intends to develop a fully integrated mortgage banking business. An
important step in this expansion is the planned commencement during 1997 of
direct-sourced loan origination activities. Direct-sourced lending will provide
the Company with an additional distribution channel for its products and the
ability to retain the origination fees for the loans it funds. The Company
expects that the gain on future sales of direct-sourced loans will be greater
than the gain on sales of broker-sourced loans because, unlike in the case of
broker-sourced originations, a third party does not share in the fees and points
paid by the borrower.
The Company expects that its direct-sourced loan operations will offer the
same products as those of the broker-sourced operations and will be sourced
primarily through technology-based marketing, relying to a great extent on
telemarketing rather than a network of sales offices. This will enable the
Company to commence these operations more rapidly and with less overhead than a
direct-sourced loan business that operates through a sales office network. The
Company's senior management is also experienced in direct-sourced loan
originations, since several of the senior executives were involved in creating
the direct-sourced lending operations of Old Long Beach prior to the
Reorganization. In addition, the Company expects to fill a portion of the
staffing needs of the direct-sourced loan operations with experienced personnel
currently working in the broker-sourced loan operations. The Company estimates
that it will expend approximately $1.0 million in 1997 in connection with its
commencement of direct-sourced loan operations.
The direct-sourced loan operations will compete directly with several well
established financial services companies, including Old Long Beach. No assurance
can be given that the Company will be able to commence direct-sourced loan
origination operations as planned or that such operations will be successful.
UNDERWRITING
The Company trains its underwriters and account executives to evaluate each
loan application and supporting documentation (a "loan package") against the
Company's underwriting guidelines. The Company utilizes experienced underwriters
who have been comprehensively trained. The Company's underwriters are required
to have had either one or more years of sub-prime underwriting experience with a
consumer finance company or other sub-prime lender or one or more years of
experience with the Company in other aspects of the sub-prime mortgage finance
industry before becoming part of the Company's underwriting department. Upon
joining the underwriting department, each underwriter is educated regarding the
Company's underwriting guidelines and trained to implement the Company's
underwriting procedures. The Company believes that its training program enables
its underwriters to quickly review and evaluate loan packages while
understanding and adhering to the Company's underwriting guidelines.
The Company's underwriting guidelines are primarily intended to evaluate
the value and adequacy of the mortgaged property as collateral and are also
intended to consider the borrower's credit standing and repayment ability. Loan
applications meeting the Company's guidelines for its core products may be
approved by a senior underwriter who is required to have a minimum of five years
experience in the sub-prime mortgage industry. On a case-by-case basis and only
with the approval of two or more senior lending officers, each of whom is
required to have a minimum of seven years experience in the sub-prime mortgage
industry, the Company may determine that, based upon compensating factors, a
prospective borrower not strictly qualifying under the Company's underwriting
guidelines warrants an underwriting exception. For example, a borrower may have
a negative credit history as a result of an isolated catastrophic incident such
as a death in the borrower's family, a temporary lapse in employment, unexpected
medical expenses or emergency travel (such as for an illness of an immediate
family member). In such cases, the Company's senior lending officers may
recognize that the negative credit history
35
<PAGE> 37
resulting from such isolated incidents is an aberration, rather than an accurate
representation of the borrower's creditworthiness, and thus may consider such
events to be compensating factors. Other compensating factors may include, but
are not limited to, low loan-to-value ratios, low debt-to-income ratios, prior
good credit history, capacity to repay the requested loan, stable employment
history and time in residence at the borrower's current address. The Company
risk classification of "C-" includes borrowers with numerous derogatory credit
items up to and including a bankruptcy in the most recent twelve month period.
See "-- Underwriting Criteria." The Company, however, will not provide an
underwriting exception for a borrower who will remain in bankruptcy after the
closing of the requested loan. In the year ended December 31, 1996, not more
than fifteen percent of the principal balance of the loans originated by the
Company qualified based on compensating factors.
All of the loans originated by the Company are based on loan packages
submitted through mortgage brokers directly or through Company account
executives or are purchased from Company-approved originators. Loan packages
submitted through mortgage brokers, which are required to include in each case
relevant credit, property and underwriting information, are compiled by the
submitting mortgage brokers and submitted to the Company for approval and
funding. The mortgage brokers receive a portion of the loan origination fee
charged to the borrower at the time the loan is funded.
Each prospective borrower is required to complete an application which
includes information with respect to the borrower's liabilities, income, credit
history and employment history, as well as certain other personal information.
After the loan package is received by the Company and entered into the Company's
computerized underwriting system, the underwriters on the appropriate regional
processing team or the underwriting department of the originator of a purchased
loan typically review and verify the prospective borrower's sources of income,
calculate the amount of income from all sources indicated on the loan
application, review the credit history of the prospective borrower, calculate
the debt-to-income ratio to determine the prospective borrower's ability to
repay the loan, and review the mortgaged property for compliance with Company
guidelines. The prospective borrower must generally provide to the Company or
the originator of a purchased loan a letter explaining all late payments on
mortgage debt and, generally, consumer debt. The Company or the originator of a
purchased loan also obtains a credit report on each prospective borrower from an
established credit reporting company. The report typically contains information
relating to such matters as credit history with local and national merchants and
lenders, installment debt payments and any record of default, bankruptcy,
repossession, suits or judgments. Self-employed individuals are generally
required to submit their two most recent federal income tax returns. As part of
its quality control system, the Company reverifies information with respect to
any of the foregoing matters that has been provided by the mortgage brokers
prior to funding a loan and periodically audits files based on a random sample
of closed loans. In the course of its pre-funding audit, the Company reverifies
the income of each borrower or, for a self-employed individual, reviews the
income documentation obtained pursuant to the Company's guidelines. The Company
generally also verifies the source of funds for the downpayment. In addition,
the Company reviews loan packages submitted by originators prior to accepting
them in order to confirm that each complies with the Company's underwriting
guidelines and documentation standards.
The Company strives to process each loan application as quickly as possible
in accordance with the Company's underwriting criteria. Accordingly, most loan
applications receive decisions within 24 to 48 hours of receipt and are funded,
on average, within 25 calendar days of submission. The Company also utilizes
four different income documentation programs which impose less rigorous
documentation standards than those described above, namely, the full income
documentation program (pursuant to which a prospective borrower's income is
evaluated based on tax returns, W-2 forms and pay stubs), the limited income
documentation program (pursuant to which a prospective borrower's income is
evaluated based on bank statements and profit and loss statements), the stated
income program (pursuant to which a prospective borrower's employment, rather
than income, is verified) and the no ratio loan program (pursuant to which a
prospective borrower's credit history and collateral values, rather than income
or employment, are verified).
The Company believes its underwriting procedure complies with applicable
federal and state laws and regulations. The Company requires (i) an appraisal of
the mortgaged property which conforms to agency
36
<PAGE> 38
standards and (ii) a review of such appraisal, which review may be conducted by
a Company-trained underwriter, a Company staff appraiser or a Company-approved
independent appraiser and, depending upon the original principal balance and
loan-to-value ratio of the mortgaged property, may include a drive-by review
appraisal of the mortgaged property.
Mortgaged properties that are to secure mortgage loans underwritten by the
Company are appraised by qualified independent appraisers who are approved by
the Company's internal chief appraiser. In most cases, properties in
below-average condition and with below-average marketability (including
properties requiring major deferred maintenance) are not acceptable as security
for the Company's mortgage loans. Each appraisal includes a market data analysis
based on recent sales of comparable homes in the area and, where deemed
appropriate, replacement cost analysis based on the current cost of constructing
a similar home. Every independent appraisal is reviewed by a Company-trained
underwriter, a Company staff appraiser or a Company-approved independent
appraiser before the loan is funded.
With respect to the borrower's credit standing and repayment ability, the
Company's guidelines are less stringent than the standards generally acceptable
to the Federal National Mortgage Association ("FNMA") and the Federal Home Loan
Mortgage Corporation ("FHLMC"). Borrowers who qualify under the Company's
guidelines generally have payment histories and debt ratios which would not
satisfy FNMA and FHLMC underwriting guidelines and may have a record of major
derogatory credit items such as outstanding judgments or prior bankruptcies. The
Company's guidelines establish the maximum permitted loan-to-value ratio for
each loan type based upon these and other risk factors.
The Company requires all mortgage loans to be covered by title insurance
and to be secured by liens on real property. The Company also requires fire and
extended coverage casualty insurance to be maintained on the secured property in
an amount at least equal to the principal balance of the related loan. Flood
insurance is also required for all properties located in a defined flood zone.
If the borrower fails to provide fire and extended coverage insurance (and flood
insurance if required) prior to closing of the borrower's loan or if the
borrower's coverage is subsequently canceled or not renewed at any time during
the loan period and the borrower fails to obtain new coverage, the Company,
through an outside insurance vendor who monitors whether insurance is
maintained, will provide coverage on the borrower's behalf under policies
insuring the Company's interest in the collateral (a "forced placement" of
insurance). The amount and type of insurance and the circumstances under which
the Company can force place insurance are subject to state and federal
regulations with which the Company believes it is in compliance.
Upon completion of the underwriting process, the closing of the loan is
scheduled with a Company-approved closing attorney or agent. The closing
attorney or agent is responsible for completing the loan closing transaction in
accordance with applicable law and the Company's operating procedures. The
closing attorney or agent is typically selected by the mortgage broker through
which the Company originated the loan. The Company audits the selected closing
attorney or agent to ensure such attorney or agent is a fully licensed and
experienced professional from an established firm or company. In addition, the
Company requires that the closing attorneys and agents it utilizes maintain
insurance against the errors and omissions of such closing attorneys and agents.
Underwriting Criteria
The Company has established classifications with respect to the credit
profiles of loans based on certain of the prospective borrower's characteristics
to grade the likelihood that the borrower will satisfy the repayment condition
of the mortgage loan. Each prospective borrower currently is placed into one of
six letter ratings ("A-", "B+", "B", "B-", "C" and "C-"). Ratings are based upon
a number of factors including the prospective borrower's credit history, the
value of the property, the loan-to-value ratio and loan amount, the occupancy
status of the mortgaged property and the borrower's debt ratio. In general, high
credit risk mortgage loans are graded in categories which permit higher debt
ratios and more (or more recent) major derogatory credit items such as
outstanding judgments or prior bankruptcies; to counteract such risk, the
Company imposes lower maximum loan-to-value ratios and maximum loan amounts for
loans graded in such categories. Terms of loans made by the Company, as well as
the maximum loan-to-value ratio and debt service-to-income coverage vary
depending upon the classification of the borrower.
37
<PAGE> 39
The general criteria currently used by the Company in classifying
prospective borrowers of its core loan products who have provided the basic
documentation described above are summarized in the chart below:
<TABLE>
<CAPTION>
UNDERWRITING
CRITERIA/RISK
CLASSIFICATION "A-" RISK "B+" RISK "B" RISK "B-" RISK "C" RISK "C-" RISK
- ------------- ----------------- ----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
LOAN-TO-VALUE
RATIO...... 85% for purchases 80% for purchases 80% for purchases 75% for purchases 75% for purchases 70% for purchases
or refinancings or refinancings or refinancings or refinancings or refinancings and 65% for
of single family of single family of single family of properties of properties refinancings of
residences which residences which residences which which are owner which are owner properties which
are owner are owner are owner occupied; 65% for occupied; 60% for are owner
occupied; 75% for occupied; 75% for occupied; 75% for any non-owner any non-owner occupied; 50%
purchases or purchases or purchases or occupied occupied ratio is
refinancings of 2 refinancings of 2 refinancings of 2 properties or properties or considered on a
to 4 unit to 4 unit to 4 unit second homes second homes case-by-case
dwellings and dwellings and dwellings and basis on any
condominiums; 70% condominiums; 70% condominiums; 70% non-owner
for non-owner for non-owner for non-owner occupied
occupied single occupied single occupied single properties or
family family family second homes
residences, residences, residences,
planned unit planned unit planned unit
developments or developments or developments and
condominiums; 65% condominiums; 65% condominiums; 65%
for non-owner for non-owner for non-owner
occupied 2 to 4 occupied 2 to 4 occupied 2 to 4
unit dwellings or unit dwellings or unit dwellings or
second homes second homes second homes
MAXIMUM DEBT
RATIO...... 47%(1) 50%(1) 50%(1) 55% 55%; 55% to 60% 55%; 55% to 60%
considered on a considered on a
case-by-case case-by-case
basis basis
CONSUMER
CREDIT..... With certain With certain With certain Derogatory credit Other derogatory Other derogatory
exceptions, no exceptions, no exceptions, no items are less credit items are credit items are
payments more payments more payments more than 50% of total considered on a considered on a
than 30 days late than 60 days late than 60 days late items on credit case-by-case case-by-case
in the past 12 in the past 12 in the past 12 report(3); no basis; no basis; not
months(2); months(2); months(2); bankruptcies in bankruptcies in currently in
derogatory credit derogatory credit derogatory credit the last 24 the last 12 bankruptcy
items are less items are less items are less months months
than 25% of total than 35% of total than 50% of total
items on credit items on credit items on credit
report(3); no report(3); no report(3); no
bankruptcies in bankruptcies in bankruptcies in
the last 36 the last 36 the last 24
months months months
MORTGAGE
CREDIT(4)... Maximum of 1 30- Maximum of 2 30- Maximum of 4 30- Maximum of 1 60- Maximum of 2 60- Maximum of 2 60-
day late payment day late payments day late payments day late payment day late payments day late payments
in the past 12 in the past 12 in the past 12 in the past 12 and 1 90-day late and 1 90-day late
months; no months; no months; no months; maximum payment or 3 60- payment or 3 60-
notices of notices of notices of of a 30 day day late payments day late payments
default or default or default or delinquency at and no 90-day and no 90-day
foreclosures in foreclosures in foreclosures in the time of late payments in late payments in
the last 36 the last 36 the last 24 application/ the last 12 the last 12
months months months funding; no months; maximum months; may have
notices of of a 60 day notices of
default or delinquency at default or
foreclosures in the time of foreclosures in
the last 24 funding; no the last 24
months notices of months on a
default or case-by-case
foreclosures in basis
the last 12
months
</TABLE>
- ---------------
(1) Debt ratios may be increased if the loan-to-value ratio is decreased under
certain circumstances.
(2) For "A-" risk classifications, 60-day late payments in the last 12 months
are permitted but may not (i) represent more than 25% of the items reported
on a credit report during that period unless approved by a Company officer
or wholesale credit manager or (ii) exceed three items. For "B+" risk
classifications 60-day and 90-day late payments in the last 12 months are
permitted but may not (i) represent more than 35% of the items reported on a
credit report during that period unless approved by a Company officer or
wholesale credit manager or (ii) exceed four items. For "B" and "B-" risk
classifications 60-day and 90-day late payments in the last 12 months are
permitted but may not (i) represent more than 50% of items reported on a
credit report during that period unless approved by a Company officer or
wholesale credit manager or (ii) exceed five items.
(3) Non-mortgage and consumer-related credit, collections or judgments may be
disregarded on a case-by-case basis. Thirty day credit may be disregarded is
not included in the percentage of derogatory credit items.
(4) Consecutive rolling consumer and mortgage 30-day delinquencies up to six
months reported on a credit report may be counted as one late payment.
38
<PAGE> 40
The Company's core loan products represented approximately 91.2% of the
loans originated and purchased by the Company in 1996. In addition to its core
loan products, the Company recently introduced a "jumbo" product providing for
loans of up to $1,000,000 with lower loan-to-value ratios than the core
products, and also offers products that permit a loan-to-value ratio of up to
90% for selected borrowers with a risk classification of "A-" or "B+."
The following table sets forth certain information with respect to the
Company's loan purchases and originations by product and risk classification,
along with weighted average interest rates and margins, for the periods shown.
The table has been compiled based on loans originated and purchased, net of
loans rescinded because the related lending transactions did not close. Such
rescinded loans aggregated approximately $1.0 million, $7.0 million and $3.0
million in 1994, 1995 and 1996, respectively.
<TABLE>
<CAPTION>
1994 1995 1996
-------------------------------------------- -------------------------------------------- --------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE WEIGHTED
PRODUCT/RISK % OF INTEREST AVERAGE % OF INTEREST AVERAGE
CLASSIFICATIONS VOLUME TOTAL RATE(1) MARGIN(2) VOLUME TOTAL RATE(1) MARGIN(2) VOLUME
- ------------------ ------------ ------ -------- --------- ------------ ------ -------- --------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
FIXED RATE:
A-............... $ 38,896,090 49.86% 10.95% $ 231,791,811
B+............... 18,576,798 23.81 11.25 53,183,511
B................ 6,365,227 8.16 11.23 36,257,423
B-............... Product Not Offered 4,358,785 5.59 11.74 28,698,749
C................ 9,597,677 12.30 12.46 39,593,871
C-............... 219,450 0.28 12.83 1,820,230
------------ ------ ----- --------------
Totals......... $ 78,014,027 100.00% 11.28% $ 391,345,595
ADJUSTABLE RATE:
A-............... $181,389,102 32.78% 8.04% 5.35% $207,152,082 43.11% 9.70% 5.80% $ 293,519,071
B+............... 63,797,497 11.53 8.06 5.30 42,810,928 8.91 10.13 5.84 67,306,298
B................ 37,766,717 6.81 8.68 5.67 42,050,074 8.75 10.50 6.29 51,769,516
B-............... 105,467,270 19.06 8.48 5.56 63,323,882 13.18 10.64 6.29 45,080,472
C................ 122,937,538 22.22 9.13 5.89 100,768,358 20.97 11.28 6.58 86,777,574
C-............... 42,041,084 7.60 10.02 6.22 24,378,019 5.08 12.33 6.87 22,001,379
------------ ------ ----- ---- ------------ ------ ----- ---- --------------
Totals......... $553,399,208 100.00% 8.56% 5.60% $480,483,343 100.00% 10.40% 6.13% $ 566,454,310
FIXED/ADJUSTABLE
RATE:
A-............... $ 5,717,490 53.55% 9.15% 4.90% $ 11,803,892 42.96% 10.61% 5.24% $ 70,948,782
B+............... 598,375 5.60 9.19 4.88 2,853,825 10.39 10.78 5.35 13,462,405
B................ 734,880 6.88 9.85 5.20 2,877,870 10.47 11.17 5.18 6,648,603
B-............... 1,503,425 14.09 9.73 4.96 3,921,375 14.27 11.57 5.58 1,987,247
C................ 1,721,500 16.12 10.42 5.77 4,826,445 17.56 12.53 5.74 3,521,179
C-............... 401,200 3.76 10.36 6.14 1,195,467 4.35 13.37 6.10 518,050
------------ ------ ----- ---- ------------ ------ ----- ---- --------------
Totals......... $ 10,676,870 100.00% 9.53% 5.11% $ 27,478,874 100.00% 11.28% 5.42% $ 97,086,266
ALL PRODUCTS
A-............... $187,106,592 33.17% $257,852,064 44.01% $ 596,259,664
B+............... 64,395,872 11.42 64,241,551 10.96 133,952,214
B................ 38,501,597 6.83 51,293,171 8.75 94,675,542
B-............... 106,970,695 18.96 71,604,042 12.22 75,766,468
C................ 124,659,038 22.10 115,192,480 19.66 129,892,624
C-............... 42,442,284 7.52 25,792,936 4.40 24,339,659
------------ ------ ------------ ------ --------------
Totals......... $564,076,078 100.00% $585,976,244 100.00% $1,054,886,171
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
PRODUCT/RISK % OF INTEREST AVERAGE
CLASSIFICATIONS TOTAL RATE(1) MARGIN(2)
- ------------------ ------ -------- ---------
<S> <<C> <C> <C>
FIXED RATE:
A-............... 59.23% 10.20%
B+............... 13.59 10.43
B................ 9.26 10.76
B-............... 7.33 10.97
C................ 10.12 11.66
C-............... 0.47 11.36
------ -----
Totals......... 100.00% 10.49%
ADJUSTABLE RATE:
A-............... 51.82% 8.98% 6.09%
B+............... 11.88 9.30 6.15
B................ 9.14 9.90 6.39
B-............... 7.96 10.00 6.49
C................ 15.32 10.73 6.64
C-............... 3.88 11.89 6.85
------ ----- ----
Totals......... 100.00% 9.57% 6.27%
FIXED/ADJUSTABLE
RATE:
A-............... 73.08% 9.84% 5.58%
B+............... 13.86 10.30 6.00
B................ 6.85 10.46 6.17
B-............... 2.05 10.72 6.41
C................ 3.63 11.19 6.77
C-............... 0.53 11.11 6.87
------ ----- ----
Totals......... 100.00% 10.02% 5.75%
ALL PRODUCTS
A-............... 56.52%
B+............... 12.70
B................ 8.98
B-............... 7.18
C................ 12.31
C-............... 2.31
------
Totals......... 100.00%
</TABLE>
- ---------------
(1) Each Fixed Rate loan bears interest at a fixed rate set on its date of
funding and lasting through the term of the loan. Loans bearing interest at
the Adjustable Rate adjust every six months to a new rate through the term
of the loan. The Weighted Average Interest Rate for loans bearing interest
at an Adjustable Rate is the weighted average of the rates of such loans
during the initial six month period. Loans bearing interest at the
Fixed/Adjustable Rate bear interest at a fixed rate for an initial period
commencing on the date of funding (e.g., two years, five years or ten years)
and thereafter adjust to new rates every six months for the remaining term
of the loans. The Weighted Average Interest Rate for loans bearing interest
at a Fixed/Adjustable Rate is the weighted average of the rates of such
loans during the initial period.
(2) The Margin for a loan is a fixed amount set for the life of the loan, which
when added to the Index (as described below) determines the interest rate on
the loan (subject to interest rate floors, ceilings and caps). The Index
used by the Company is the six-month London Inter Bank Offered Rate, as
published each Monday in The Wall Street Journal. Fixed Rate loans have no
Margin because such loans are not tied to an index.
39
<PAGE> 41
FINANCING AND SALE OF LOANS
Warehouse Financing Facility
The Company will finance its origination and purchase of loans primarily
with the proceeds of borrowings under its $200 million mortgage Warehouse
Financing Facility (which has been obtained in connection with the
Reorganization). The Warehouse Financing Facility is provided by a syndicate of
banks led by Texas Commerce Bank National Association. Borrowings under the
Warehouse Financing Facility for a particular loan may remain outstanding for no
more than 120 days, except for an aggregate amount not to exceed $10 million,
which may remain outstanding for up to 180 days. Borrowings under the Warehouse
Financing Facility are permitted up to 98% of the principal balance of the
originated and purchased loans and bear interest at rates ranging from 1.375% to
1.625% over the 30-day reserve-adjusted LIBOR (i.e., the London Inter Bank
Offered Rate), depending on the level of loan documentation the Company has
delivered to the agent for the syndicate of banks providing credit under the
Warehouse Financing Facility. The Warehouse Financing Facility also includes a
$60 million subline for loans not covered by a forward purchase commitment, a
$15 million subline for principal and interest advances and a $10 million
subline for other servicing advances made primarily to securityholders in
connection with securitizations by purchasers of the Company's loans in which
the Company serves as the master servicer, and a $5 million subline which may be
used to finance mortgage loans owned by the Company that are in the process of
collection or resale to investors. The sublines bear interest at rates ranging
from 1.875% to 2.0% over the 30-day reserve-adjusted LIBOR. The Warehouse
Financing Facility will expire on March 31, 1999, unless earlier terminated or
extended in accordance with its terms. The Warehouse Financing Facility contains
a number of financial covenants including: (i) New Long Beach maintain tangible
net worth equal to at least $25 million, plus 25% of cumulative positive net
earnings, (ii) delinquencies on New Long Beach's mortgage servicing portfolio
not exceed 12% and (iii) the ratio of total liabilities to adjusted tangible net
worth not exceed 9:1. The Warehouse Financing Facility also contains other
affirmative, negative and financial covenants typical of similar credit
facilities.
Loan Sales
The Company follows a strategy of selling for cash substantially all of its
loan originations and purchases (while retaining the related servicing rights in
most cases) in the secondary market through loan sales in which the Company
disposes of its entire economic interest in the loans (other than the servicing
rights) for a cash price that represents a premium over the principal balance of
the loans sold. The Company sold $562.1 million, $580.4 million and
approximately $1.0 billion of loans through loan sales during 1994, 1995 and
1996, respectively. The Company did not sell any loans directly through
securitizations during these periods; however, substantially all of the loans
sold during these periods were ultimately securitized by the purchasers thereof.
Loans generally are sold to institutional purchasers. Upon the consummation
of loan sales, the Company receives a "premium," representing a cash payment in
excess of the par value of the loans (par value representing the unpaid
principal balance of the loan). Premiums on loan sales represented 90.3% of the
Company's total revenues in 1996. The Company maximizes its premium on loan sale
revenue by closely monitoring institutional purchasers' requirements and
focusing on originating or purchasing the types of loans that meet those
requirements and for which institutional purchasers tend to pay higher rates.
During 1996, the Company sold loans to eight institutional purchasers. The
Company's loan purchasers typically resell the loans through securitizations.
The Company makes loan sales by obtaining commitments from its whole loan
purchasers 30 to 90 days in advance of funding the loans to be purchased. The
Company's loan sales program utilizes a competitive bidding process typically
involving four to nine potential purchasers (including Wall Street firms,
financial institutions and conduits, along with banks and other institutional
purchasers) who in most cases have purchased loans from the Company in the past.
The Company typically does not have a forward sales commitment with any investor
that extends beyond one quarter. The successful bidder is committed to a minimum
quantity of loans at a determined price, and is generally granted the option to
purchase more than the minimum quantity at a negotiated price. A successful
bidder is not obligated to purchase loans other than those to which its bid
applies. The Company continuously monitors its loan production and purchasing
against its unfilled purchase commitments to identify potential shortfalls or
overages in loans available for delivery. As loans are funded, the Company
packages them and delivers them to the purchaser on a periodic basis.
40
<PAGE> 42
Loan sales are made on a non-recourse basis pursuant to a purchase
agreement containing customary representations and warranties by the Company
regarding the underwriting criteria and the origination process. The Company,
therefore, may be required to repurchase or substitute loans in the event of a
breach of its representations and warranties. In addition, the Company sometimes
commits to repurchase or substitute a loan if a payment default occurs within
the first month following the date the loan is funded, unless other arrangements
are made between the Company and the purchaser. The Company is also required in
some cases to repurchase or substitute a loan if the loan documentation is
alleged to contain fraudulent misrepresentations made by the borrower.
Securitization
The Company has not sold loans directly through securitizations for several
years and while it currently does not plan to securitize loans, it will review
its loan sale strategy from time to time and may decide to sell loans directly
through securitizations in the future if management determines that such sales
are more beneficial. Because the Company's loan purchasers usually purchase
those loans for resale in securitizations and the Company typically assists with
such securitizations, management is experienced with the securitization process
and market. In addition, rating agencies and bond insurers have evaluated and
are familiar with the Company's procedures and underwriting guidelines in
connection with such securitizations.
Typically in a securitization, the issuer aggregates mortgages into a real
estate mortgage investment conduit trust. The regular interests or the senior
tranches of the trust are investment grade and are sold. While the issuer
generally retains the residual interests in the trust, it immediately sells the
regular interests and generally uses the proceeds to repay borrowings that were
used to fund or purchase the loans in the securitized pool. 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 for such interests. The residual interests represent the
subordinated right to receive cash flows from the pool of securitized loans
after payment of the required amounts to the holders of the regular interests
and the costs associated with the securitization. The issuer recognizes non-cash
revenue relating to the residual interest at the time of the securitization.
SERVICING
The Company typically sells all of its originated and purchased loans for
cash and does not retain residual interests in the performance of portfolios
after they are sold (other than servicing rights, which the Company normally
retains). After the consummation of this Offering, the Company will retain no
servicing rights which relate to loans funded prior to the Reorganization.
While the performance of the servicing portfolio will not directly impact
the Company's performance, any material change in the performance of the
portfolio could affect the pricing of the Company's future loan sales and the
ability of the Company to sell its loans in the future.
The following table shows certain combined data regarding the performance
of the broker-sourced servicing portfolio of Old Long Beach.
<TABLE>
<CAPTION>
AS OF OR FOR YEAR
ENDED DECEMBER 31,
----------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
31-60 day delinquencies as a percentage of total principal
balance as of period end(1)................................. 0.8 % 1.5 % 1.6 %
61-90 day delinquencies as a percentage of total principal
balance as of period end(1)................................. 0.9 1.0 1.0
91 or more day delinquencies as a percentage of total
principal balance as of period end(1)....................... 3.9 4.5 4.5
Total delinquencies as a percentage of total principal balance
as of period end(1)......................................... 5.7 7.0 7.1
Total losses on loans as a percentage of principal balance of
average loans serviced(1)................................... 1.5 1.4 1.3
</TABLE>
- ---------------
(1) Calculated based on the total broker-sourced servicing portfolio of Old Long
Beach.
41
<PAGE> 43
Because the Company will not have internal servicing capabilities
immediately after the Reorganization, the loans originated by the Company will
continue to be serviced by the Sub-Servicer, a division of Old Long Beach, the
Company's parent company prior to the completion of this Offering.
The Sub-Servicer began servicing sub-prime mortgage loans in 1988 and had a
servicing portfolio of approximately $3.5 billion of sub-prime mortgage loans at
December 31, 1996. Management of the Company believes that the Sub-Servicer's
success is due to the sub-prime experience of the Sub-Servicer's management, the
individualized attention the Sub-Servicer's loan counselors pay to borrowers and
the streamlined collection procedures the Sub-Servicer has implemented. With
nine years of experience in the sub-prime mortgage loan servicing industry, the
Sub-Servicer is one of the oldest established sub-prime mortgage loan servicers
in the industry. The Sub-Servicer's loan counselors place emphasis on giving
personal attention to borrowers and routinely contact borrowers following the
funding of loans to confirm loan terms and due dates. Finally, the
Sub-Servicer's use of computer technology has streamlined its collection
procedures as well as the procedures governing the timing of the notice of
intent to foreclose for certain high risk borrowers. This computerization has
improved the efficiency of the Sub-Servicer's collections and the possibility of
collection of certain high risk debt. In addition, the Sub-Servicer's servicing
procedures were developed while the Company was part of Old Long Beach and are
coordinated with the Company's origination practices. Because of these factors,
management believes that the Sub-Servicer is able to provide faster and more
effective servicing of the Company's loans than could another independent
servicer.
The Company is entering into a three-year agreement with the Sub-Servicer
under which the Sub-Servicer will sub-service loans originated or purchased by
the Company. Sub-servicing will be provided by the Sub-Servicer at an
agreed-upon rate and with default terms comparable to industry standards. The
agreement contains other customary terms and conditions and either party has the
right to terminate the agreement at any time effective after 18 months upon six
months' prior written notice to the other party. In the event of a termination,
either party may request that the loans that were sub-serviced by the
Sub-Servicer be transferred to the Company or its designee for servicing,
subject to obtaining any required consents to such transfer. The Company may
conduct its own servicing operations or select an alternate servicer following
termination or expiration of the agreement with the Sub-Servicer. See "Certain
Relationships and Related Transactions -- Loan Sub-Servicing Agreement."
REGULATION
New Long Beach's consumer lending activities are subject to the Federal
Truth-in-Lending Act ("TILA") and Regulation Z (including the Home Ownership and
Equity Protection Act of 1994), the Equal Credit Opportunity Act of 1974, as
amended ("ECOA") and Regulation B, the Fair Credit Reporting Act of 1970, as
amended, the Real Estate Settlement Procedures Act of 1974, as amended ("RESPA")
and Regulation X, the Home Mortgage Disclosure Act ("HMDA") and Regulation C,
the Federal Debt Collection Practices Act and the Fair Housing Act, as well as
other federal and state statutes and regulations affecting New Long Beach's
activities. Failure to comply with these requirements can lead to loss of
approved status, termination or suspension of servicing contracts without
compensation to the servicer, demands for indemnification or mortgage loan
repurchases, certain rights of rescission for mortgage loans, class action
lawsuits and administrative enforcements actions.
New Long Beach is subject to the rules and regulations of, and examinations
by, the Department of Housing and Urban Development, the Federal Housing
Administration and other federal and state regulatory authorities with respect
to originating, underwriting, funding, acquiring, selling and servicing mortgage
loans. In addition, there are other federal and state statutes and regulations
affecting such activities. These rules and regulations, among other things,
impose licensing obligations on New Long Beach, establish eligibility criteria
for loans, prohibit discrimination, provide for inspection and appraisals of
properties, require credit reports on prospective borrowers, regulate payment
features and, in some cases, fix maximum interest rates, fees and loan amounts.
New Long Beach is required to submit annual audited financial statements to
various governmental regulatory agencies that require the maintenance of
specified net worth levels.
42
<PAGE> 44
New Long Beach is a FNMA approved seller/servicer and is subject to the
supervision of FNMA. In addition, New Long Beach's operations are subject to
supervision by state authorities (typically state banking or consumer credit
authorities), many of which generally require that New Long Beach be licensed to
conduct its business. This normally requires state examinations and reporting
requirements on an annual basis.
The TILA requires a written statement showing an annual percentage rate of
finance charges and requires that other information be presented to debtors when
consumer credit contracts are executed. RESPA requires written disclosure
concerning settlement fees and charges, mortgage servicing transfer practices
and escrow or impound account practices. It also prohibits the payment or
receipt of kickbacks or referral fees in connection with the performance of
settlement services. The Fair Credit Reporting Act requires certain disclosures
to applicants concerning information that is used as a basis for denial of
credit. HMDA requires collection and reporting of statistical data concerning
the loan transaction. ECOA prohibits discrimination against applicants with
respect to any aspect of a credit transaction on the basis of sex, marital
status, race, color, religion, national origin, age, derivation of income from
public assistance programs, or the good faith exercise of a right under the
Federal Consumer Credit Protection Act. The Fair Housing Act prohibits
discrimination in mortgage lending on the basis of race, color, religion, sex,
handicap, familial status or national origin.
The interest rates which New Long Beach may charge on its loans are subject
to state usury laws, which specify the maximum rate which may be charged to
consumers. In addition, both federal and state truth-in-lending regulations
require that New Long Beach disclose to its borrowers prior to execution of the
loans all material terms and conditions of the financing, including the payment
schedule and total obligation under the loans. New Long Beach believes that it
is in compliance in all material respects with such regulations.
As a condition to funding of its loans, New Long Beach 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 fire and extended coverage insurance (and flood
insurance if required) prior to closing of the borrower's loan or if the
borrower's coverage is subsequently canceled or not renewed at any time during
the loan period and the borrower fails to obtain new coverage, New Long Beach,
through an outside insurance vendor who monitors whether insurance is
maintained, will provide coverage on the borrower's behalf under policies
insuring New Long Beach's interest in the collateral. Such practice is commonly
referred to as a "forced placement" of insurance. The insurance which can be
required and insurance which is forced 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 in connection with insurance
requirements and the 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 New Long Beach may assess in connection
with such insurance.
Failure to comply with any of the foregoing federal and state laws and
regulations could result in the imposition of civil and criminal penalties on
New Long Beach, class action lawsuits and administrative enforcement actions.
DEPARTMENT OF JUSTICE SETTLEMENT AGREEMENT
In September 1996, Old Long Beach entered into a settlement agreement with
the U.S. Department of Justice (the "DOJ") arising out of a DOJ investigation
and complaint which alleged that Long Beach Bank, F.S.B. during the period from
January 1991 through June 1994 charged certain African-American, Hispanic,
female and older borrowers more than younger, white male borrowers in violation
of fair lending laws. Old Long Beach denied all allegations in the complaint and
all claims of discrimination. Old Long Beach also disputed the validity of the
statistical analysis relied upon by the DOJ as the principal basis for its
claims and further maintained that the DOJ theories of liability regarding
broker-sourced lending were legally unsupportable. Nonetheless, to avoid costly,
protracted litigation, Old Long Beach agreed to establish a $3 million fund to
reimburse up to 1,200 borrowers identified by the DOJ as the maximum number of
individuals who may have been affected by the alleged fair lending violations.
Old Long Beach asserted that the better solution to the issues
43
<PAGE> 45
raised by the DOJ was an intensive national effort in consumer education and
industry-wide initiatives directed at employee and broker education and
training. For this reason, Old Long Beach also agreed to contribute an
additional $1 million (payable over 3 years) to fund consumer education programs
in conjunction with civil rights groups. Old Long Beach has established all
funds required by the settlement agreement.
Pursuant to the settlement agreement, the Company, as a successor to Old
Long Beach, is required to (i) document any price exceptions from the Company's
rate sheet on broker-sourced loans, (ii) periodically review the results of its
broker-sourced lending operations for its compliance with fair lending laws (but
in no event shall the Company be required to disclose any documents or
information therewith, including the identities of any brokers with whom it does
business), (iii) retain all loan application files submitted for mortgage loans
and all loan-rider documents and notices relevant to any pricing decisions until
September 1999 and report to the DOJ semi-annually on compliance with the
settlement agreement, and (iv) provide to brokers information about the
Company's fair-lending and pricing procedures and an opportunity to participate
in fair-lending training. Any failure of the Company to comply with the
requirements of the DOJ Settlement Agreement could allow the DOJ to seek
injunctive relief against the Company.
In addition, if, as expected, the Company commences direct-sourced mortgage
lending, it will be required to provide certain training courses for Company
employees involved in direct-sourced mortgage loan pricing, use its best efforts
to place mortgage loan applicants in appropriate risk classifications based on
objective credit and risk-related criteria, and implement a direct-sourced
mortgage loan monitoring system of mortgage loan prices.
ENVIRONMENTAL MATTERS
In the course of its business, the Company has acquired, and may acquire in
the future, properties securing loans that are in default. It is possible 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.
EMPLOYEES
As of February 28, 1997, the Company had a total of 343 employees, two of
whom were part-time employees and 341 of whom were full-time employees. The
Company has 147 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 1100 Town & County
Road, Orange, California 92868, where Old Long Beach leases approximately 23,000
square feet of office space used by the Company. The Old Long Beach lease
expires on May 14, 2001, and Old Long Beach has an option to renew the lease for
five years. The current annual rent on such space is approximately $412,700. The
lease provides for certain scheduled increases in annual rent. The Company is
currently negotiating a separate lease for such office space which it
anticipates will contain terms substantially similar to the Old Long Beach
lease.
The Company also leases or subleases space for five regional processing
centers and approximately 60 account executive offices. The regional processing
centers range in size from 2,388 to 6,160 square feet and the account executive
offices are between approximately 150 and 1,500 square feet. The Company
believes that these spaces are being leased at market rates.
In connection with the Reorganization, the Company plans to lease
approximately 9,000 additional square feet of office space for its corporate
headquarters. The Company believes its facilities are both suitable
44
<PAGE> 46
and adequate for the current business activities conducted at its regional
centers and at its existing sales offices. As part of the Company's geographic
expansion, the Company anticipates leasing additional office space in the
future.
LEGAL PROCEEDINGS
When the Company operated as a division of Old Long Beach, it was involved
in various lawsuits incidental to its business, none of which had a material
adverse effect on the Company. In the Reorganization the Company is not assuming
any liabilities that may arise out of any lending or loan servicing activities
of Old Long Beach prior to the Reorganization, nor is the Company indemnifying
Old Long Beach against any such liabilities. As such, the Company is not
involved currently in any litigation. See "Reorganization."
Old Long Beach is the defendant in a lawsuit filed in November 1996 in the
United States District Court for the District of Massachusetts, which alleges
that Old Long Beach made certain payments to mortgage brokers in violation of
the Federal Real Estate Settlement Procedures Act of 1974, as amended ("RESPA").
RESPA requires written disclosure concerning settlement fees and charges,
mortgage servicing transfer practices and escrow or impound account practices.
It also prohibits the payment or receipt of kickbacks or referral fees in
connection with the performance of settlement services. The plaintiff has
requested that the case be treated as a nationwide class action, but no court
has ruled on that request. Old Long Beach intends to defend vigorously against
this action, and in January 1997 filed its answer to the complaint denying all
allegations of illegal or improper activities. Old Long Beach believes that its
mortgage broker compensation programs comply with all applicable laws and are
consistent with long-standing industry practice and regulatory interpretations.
The Company is not a party to the Old Long Beach lawsuit and none of the loans
underlying the claim are being transferred to the Company.
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<PAGE> 47
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
Old Long Beach is reorganizing its business operations (i.e., the
Reorganization) by transferring certain assets (including independent broker
lists, trade name, office leases, furniture, leasehold improvements and
equipment) and personnel related to the broker-sourced mortgage lending and loan
sales operations of Old Long Beach and approximately $40 million in cash to the
Company. The assets being transferred to the Company include loans in process as
of the time of the Reorganization but do not include loans funded prior to the
Reorganization or servicing rights with respect to loans funded prior to the
Reorganization.
The following unaudited pro forma consolidated financial data have been
prepared based on the Company's historical audited consolidated financial
statements for the year ended December 31, 1996. The unaudited pro forma
consolidated financial data give effect to the necessary adjustments to
illustrate the estimated effects of the Reorganization and the Offering as if
each had occurred as of January 1, 1996 as to the statement of operations and
December 31, 1996 as to the statement of financial condition. The unaudited pro
forma consolidated financial data are for illustrative purposes only and do not
purport to represent what the results of operations or financial position of the
Company would have actually been if the Reorganization had occurred on such date
or to project the results of operations or financial position of the Company for
any future date or period. The unaudited pro forma consolidated financial data
should be read together with the Financial Statements of the Company and related
Notes included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
-----------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
------- ----------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE
DATA)
<S> <C> <C> <C>
STATEMENT OF FINANCIAL CONDITION (UNAUDITED):
Cash................................................. $ -- $ 40,000(1) $40,000
Loans held for sale.................................. 49,580 (49,580)(2) --
Receivable from sales of loans....................... 25,103 (25,103)(2) --
Premises and equipment, net.......................... 2,033 -- 2,033
Deferred income taxes................................ 2,120 (2,120)(2) 36,000
36,000(3)
Prepaid expenses and other assets.................... 914 (732)(2) 182
------- --------- -------
Total assets............................... $79,750 $ (1,535) $78,215
======= ========= =======
Liabilities:
Warehouse financing facility......................... $72,829 $ (72,829)(2) $ --
Accounts payable and accrued liabilities............. 5,784 (5,028)(2) 2,256
1,500(8)
------- --------- -------
Total liabilities.......................... 78,613 (76,357) 2,256
Stockholders' equity................................. 1,137 40,000(1) 75,959
322(2)
36,000(3)
(1,500)(8)
------- --------- -------
Total liabilities and stockholders'
equity................................... $79,750 $ (1,535) $78,215
======= ========= =======
</TABLE>
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<PAGE> 48
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
----------------------------------------
ACTUAL ADJUSTMENTS PRO FORMA
------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND
SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS (UNAUDITED):
Revenue:
Gain on sales of loans............................. $50,699 $ (1,234)(4) $ 49,465
Loan servicing and other fees...................... -- 1,529(5) 1,529
Interest income.................................... 3,275 -- 3,275(10)
------- ------- ----------
Total revenues................................ 53,974 295 54,269
Expenses:
Compensation and employee benefits................. 22,299 600(5) 23,086
187(6)
Rent and other occupancy costs..................... 4,188 -- 4,188
Office supplies and courier service................ 1,903 -- 1,903
Depreciation....................................... 1,025 -- 1,025
Legal and professional............................. 1,828 -- 1,828
Interest........................................... 2,814 326(7) 3,140
Loan sub-servicing................................. -- 1,990(5) 1,990
Other.............................................. 3,945 -- 3,945
------- ------- ----------
Total expenses................................ 38,002 3,103 41,105
------- ------- ----------
Income before provision for income taxes.............. 15,972 (2,808) 13,164
Provision for income taxes............................ 6,580 (1,156)(9) 5,424
------- ------- ----------
Net income............................................ $ 9,392 $ (1,652) $ 7,740
======= ======= ==========
Pro forma earnings per share.......................... $ .31
==========
Pro forma weighted average number of shares
outstanding........................................ 25,000,000
==========
</TABLE>
- ---------------
(1) Reflects the cash proceeds received by the Company from Old Long Beach
pursuant to the Reorganization. See "Reorganization."
(2) Reflects the elimination of the receivable from the sales of loans, loans
held for sale, certain prepaid expenses and other assets, deferred income
taxes, Old Long Beach's revolving warehouse financing facility, certain
accounts payable and accrued liabilities which are to be retained by Old
Long Beach pursuant to the Reorganization. See "Reorganization."
Liabilities assumed by the Company represent capital lease obligations and
accrued vacation liability.
(3) Reflects the inclusion of the deferred income taxes pursuant to the
Reorganization (see "Reorganization").
(4) Gain on sale of loans has been decreased to reflect the elimination of the
gain on sale of loans originated prior to January 1, 1996 (the effective
date of the Reorganization for the pro forma statement of operations).
(5) Reflects the inclusion of loan servicing fees, net of the amortization of
mortgage servicing rights of $1.8 million, and loan sub-servicing costs
related to loans originated during the period. Pursuant to the Loan
Sub-Servicing Agreement, the Company retains the loan servicing fees and
mortgage servicing rights related to loans it originates and incurs
sub-servicing costs of 45 basis points per annum, paid monthly, on the
declining principal balance of each loan serviced. Other fees and
compensation expense have been increased to reflect the administrative
services agreement pursuant to which the Company will perform all functions
necessary on behalf of Old Long Beach to sell the mortgage loans originated
by Old Long Beach.
(6) Reflects additional compensation expense for the new Chief Financial
Officer and General Counsel in excess of the historical expense allocated
to the Company.
(7) Reflects an adjustment to interest expense pursuant to the terms of the
Company's Warehouse Financing Facility. The Warehouse Financing Facility
bears interest at a rate based on London Interbank Offered Rate ("LIBOR")
for U.S. dollar deposits which is 1/8% less than the interest rate on Old
Long Beach's revolving warehouse financing facility. The pro forma
amortization of debt issuance costs for the Warehouse Financing Facility is
$662,000 which is $417,000 greater than the historical amortization
expense. Interest expense also reflects the inclusion of interest charges
related to the financing of servicing-related advances to loan purchasers.
(8) Reflects accrued liabilities related to the Reorganization.
(9) Reflects the tax impact of the reduction in earnings related to the pro
forma adjustments to earnings before taxes as discussed above.
(10) The Company expects to invest substantially all of the $40 million of cash
proceeds (after utilization of $1.5 million for Reorganization costs) from
the Reorganization. The pro forma consolidated statement of operations does
not reflect potential interest income from the expected investment.
47
<PAGE> 49
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position with the Company
of the persons who serve as directors and executive officers of the Company.
Officers of the Company are elected by the Board of Directors of the Company and
serve at the discretion of the Board.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
- ----------------------------------- --- ------------------------------------------------
<S> <C> <C>
M. Jack Mayesh..................... 55 Chairman of the Board and Chief Executive
Officer
Edward Resendez.................... 40 President, Director
Frank J. Curry..................... 35 Executive Vice President
James H. Leonetti ................. 37 Senior Vice President, Chief Financial Officer
James J. Sullivan ................. 39 Senior Vice President, General Counsel,
Secretary
David S. Engelman.................. 59 Director
C. Stephen Mansfield............... 57 Director
</TABLE>
The Company intends to add at least one additional non-management director
to the Board of Directors within 60 days after the completion of this Offering.
M. Jack Mayesh has served as Chief Executive Officer and Chairman of the
Board of LBFC since January 1997. Prior to the Reorganization, he served as
President of Old Long Beach since its formation in October 1994. Mr. Mayesh was
employed by Long Beach Savings and Loan Association (later known as Long Beach
Bank, F.S.B.) ("Long Beach Bank") in a variety of positions between 1983 and
1994, including serving as President between 1993 and 1994 and as Executive Vice
President, with responsibility for liability management and secondary market
loan sales activities, from 1986 to 1993.
Edward Resendez has served as President and a director of LBFC since
January 1997. He served as President of the broker-sourced mortgage loan
division of Old Long Beach between August 1995 and January 1997. From January
1995 through August 1995, Mr. Resendez served as First Vice President of the
broker-sourced mortgage loan division of Old Long Beach, where he oversaw
residential lending and production. From October 1994 through January 1995, he
served as First Vice President of the broker-sourced and direct-sourced mortgage
loan divisions of Old Long Beach, where he oversaw residential lending and
production, and held the same position for Long Beach Bank from November 1993
through October 1994. From 1987 through 1993, Mr. Resendez served as Vice
President of Long Beach Bank, with a variety of managerial responsibilities in
the broker-sourced and direct-sourced mortgage loan divisions, including loan
production, risk management, internal auditing and regulatory compliance.
Frank J. Curry has served as Executive Vice President of LBFC since January
1997. He served as Executive Vice President of the broker-sourced mortgage loan
division of Old Long Beach between October 1994 and January 1997, with
responsibility for production and processing, and held the same position with
Long Beach Bank from 1993 to October 1994. Mr. Curry was employed by Long Beach
Bank in a variety of other positions between 1988 and 1993, including serving as
a Regional Vice President in charge of expansion of the broker-sourced mortgage
loan division from 1992 to 1993, as a regional manager of broker-sourced
mortgage loan activities from 1990 to 1992, and as a sales manager responsible
for broker-sourced mortgage loan production from 1988 to 1990.
James H. Leonetti, C.P.A., has served as Senior Vice President and Chief
Financial Officer of LBFC since March 1997. From 1989 to March 1997, Mr.
Leonetti was employed by California Federal Bank, where he most recently served
as Senior Vice President and Controller, with a variety of responsibilities,
including functioning as Chief Financial Officer for the bank's consumer finance
and real estate subsidiaries, directing the corporate accounting functions and
related activities of the bank. From 1984 to 1989, Mr. Leonetti served as Vice
President and Assistant Controller of FarWest Financial Corp., where he managed
accounting functions.
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<PAGE> 50
James J. Sullivan, C.P.A., J.D., has served as Senior Vice President,
General Counsel and Secretary of LBFC since March 1997. From July 1991 to March
1997, Mr. Sullivan served as Vice President and Legal Counsel of American
Savings Bank, F.A., with a variety of responsibilities, including serving as the
lead corporate attorney for the bank and its subsidiaries, the attorney in
charge of the bank's finance division, and the lead transactional attorney for
the bank's loan servicing division. From 1985 to July 1991, Mr. Sullivan was
employed as an associate at the law firm of Gibson, Dunn & Crutcher LLP, where
his practice focused on mergers and acquisitions, public and private financings,
asset-based lending, general Securities and Exchange Commission compliance work,
and bank regulatory advice.
David S. Engelman has served as director of LBFC since March 1997. He also
serves as a director of MGIC Investment Corporation. Mr. Engelman served as
Chairman, Chief Executive Officer and President of UnionFed Financial
Corporation from 1991 until March 1997, and held the same positions at its
subsidiary, Union Federal Bank, until the Office of Thrift Supervision appointed
a receiver for the bank in August 1996. From 1989 to 1991, Mr. Engelman was a
consultant to Portland General Corporation, a diversified public utility holding
company, with responsibility for the management and liquidation of real estate
assets.
C. Stephen Mansfield has served as a director of LBFC since January 1997.
Mr. Mansfield also serves as a director of Noel Joanna, Inc. and Marine National
Bank. Mr. Mansfield was a partner with Deloitte & Touche and its predecessors
from 1977 until he retired as a senior partner in 1990. Mr. Mansfield is a
director of Old Long Beach and a director of the sole stockholder of Old Long
Beach but will resign from such boards upon completion of this Offering.
THE BOARD OF DIRECTORS
The Board of Directors currently has four members and is divided into three
classes. Class I Directors will serve until the annual meeting of stockholders
in 1998 and thereafter for terms of three years until their successors have been
elected and qualified. Class II Directors will serve until the annual meeting of
stockholders in 1999 and thereafter for terms of three years until their
successors have been elected and qualified. Class III Directors will serve until
the annual meeting of stockholders in 2000 and thereafter for terms of three
years until their successors have been elected and qualified. Edward Resendez is
a Class I Director; M. Jack Mayesh and David S. Engelman are Class II Directors;
and C. Stephen Mansfield is a Class III Director.
COMMITTEES OF THE BOARD OF DIRECTORS
Audit Committee
The Board of Directors will establish an audit committee (the "Audit
Committee"). The Audit Committee, among other things, will make recommendations
to the Board of Directors 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 will be C. Stephen Mansfield (Chairman), David S. Engelman and at
least one other independent director.
Compensation Committee
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, including stock based
compensation under the Company's 1997 Stock Incentive Plan, of directors,
officers and other employees of the Company and make recommendations to the
Board of Directors. The members of the Compensation Committee will be David S.
Engelman (Chairman), C. Stephen Mansfield and at least one other independent
director.
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<PAGE> 51
NON-EMPLOYEE DIRECTORS COMPENSATION
The Company intends to pay its non-employee directors an annual retainer of
$25,000 and a fee of $1,000 for each board or committee meeting attended ($500
for committee meetings on a Board meeting date). Each chairman of a committee of
the Board of Directors also will receive an annual retainer of $3,000. All
directors will be reimbursed for expenses incurred to attend meetings of the
Board of Directors or committees thereof. In addition, each non-employee
director will receive an option to purchase 25,000 shares of the Company's
Common Stock at an exercise price per share equal to the Company's initial
offering price, under the terms and conditions of the Company's stock incentive
plan. (See "-- 1997 Stock Incentive Plan"). The Company anticipates that each
non-employee director will also receive additional option grants on an annual
basis under the Company's stock incentive plan.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth information concerning the compensation paid
by Old Long Beach for services rendered during 1996 to Old Long Beach by the
Company's Chief Executive Officer and its four other most highly compensated
executive officers.
<TABLE>
<CAPTION>
NAME SALARY BONUS
----------------------------------------------- -------- --------
<S> <C> <C>
M. Jack Mayesh................................. $250,000 $250,000
Edward Resendez................................ 200,000 200,000
Frank J. Curry................................. 150,000 150,000
James H. Leonetti(1)........................... -- --
James J. Sullivan(1)........................... -- --
</TABLE>
- ---------------
(1) Messrs. Leonetti and Sullivan were first employed by the Company in 1997.
Following the Reorganization, the Company will pay compensation to its
Chief Executive Officer and its four other most highly compensated executive
officers pursuant to the terms of their respective employment agreements
described below.
MANAGEMENT COMPENSATION AND EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of its
executive officers for a specified term. The employment agreements for Messrs.
Mayesh, Resendez and Curry provide for an annual salary of $200,000 per year
plus an annual bonus of up to 100% of base salary. The employment agreement for
Mr. Leonetti provides for an annual salary of $175,000 per year plus an annual
bonus of up to 75% of base salary, and the employment agreement for Mr. Sullivan
provides for an annual salary of $160,000 per year plus an annual bonus of up to
50% of base salary. Salaries paid to executives are subject to increase as
recommended by the Compensation Committee of the Board of Directors of the
Company. Each of the Company's executive officers is also entitled to specified
benefits and reimbursement of expenses. Under the employment agreements, each
executive officer is entitled to severance and other payments following
termination of his employment in certain circumstances, including termination by
the Company without cause and termination by such officer for good reason
(including the material reduction or material adverse modification of authority
or duties, any material breach by the Company of the employment agreement, or
any requirement to move such officer's principal place of employment outside of
Orange County, California). Under such circumstances, the officer is entitled to
receive monthly severance payments from the Company for twelve months following
termination, with monthly payments equal to the officer's monthly base salary
plus bonus, plus the acceleration of vesting of all initial option grants for
Messrs. Mayesh, Resendez and Curry and options vesting during such twelve months
for Messrs. Leonetti and Sullivan. The agreements require each officer to devote
his best efforts to the interests and business of the Company and contain
proprietary information provisions and nonsolicitation provisions for specified
periods following termination of employment. Each of Messrs. Mayesh, Resendez
and Curry will receive an option to purchase 500,000 shares of the Company's
Common Stock, and each of Messrs. Leonetti and Sullivan will receive an option
to purchase 100,000 shares of the Company's Common Stock. Such options will be
at an exercise price equal to the initial Offering price of the Common Stock and
will vest 20% per year over five years.
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<PAGE> 52
1997 STOCK INCENTIVE PLAN
LBFC has established the 1997 Stock Incentive Plan (the "Plan") to enable
directors, executive officers, independent contractors and other key employees
of LBFC to participate in the ownership of LBFC. The Plan covers 3,000,000
shares of Common Stock. Concurrently with the pricing of the Common Stock
offered hereby, LBFC will grant options to acquire an aggregate of 2,200,000
shares of Common Stock to approximately 30 officers and key employees. These
options expire on the earlier of ten years from the date of grant or thirty days
after a holder's termination of service.
Purpose and Eligibility
The Plan is intended to promote the interests of LBFC and its stockholders
by using investment interests in LBFC to attract, retain and motivate its
management and other persons, to encourage and reward their contributions to the
performance of LBFC and to align their interests with the interests of LBFC's
stockholders. The persons eligible to receive an Award under the Plan include
directors, officers, employees, consultants, and advisors of LBFC and its
affiliated entities.
Administration, Amendment and Termination
The administering body for the Plan is the Compensation Committee. As long
as LBFC has a class of equity securities registered under Section 12 of the
Securities Exchange Act of 1934, as amended ("Exchange Act"), the Compensation
Committee will be composed solely of "non-employee directors" within the meaning
of Rule 16b-3 under the Exchange Act. The administering body will have the power
to construe the Plan and the rights of recipients of Awards granted thereunder.
The administering body will also have the power to (i) discontinue, suspend or
amend the Plan in any manner (subject to certain limited exceptions, including
increases in the number of shares available that may be the subject of Awards
under the Plan and stockholder approval of other amendments that would
materially increase the benefits accruing to participants) and (ii) modify,
extend, renew or exchange outstanding Awards. The Plan, as amended from time to
time shall, in the discretion of the Compensation Committee, apply to and govern
Awards granted under the Plan prior to the date of such amendment, provided that
the consent of an Award holder is required if such amendment would alter,
terminate, impair or adversely affect an Award. Awards may be granted under the
Plan until the tenth anniversary of the adoption of the Plan by LBFC's Board of
Directors.
Securities Subject to the Plan
The Plan provides for the grant ("Award") of stock options (including
incentive stock options or nonqualified stock options), stock appreciation
rights, stock payments, dividend equivalents, stock bonuses, stock sales,
phantom stock and other stock-based benefits. Stock options granted under the
Plan may be incentive stock options ("ISOs") intended to qualify under the
provisions of Section 422 of the Internal Revenue Code ("Code") or non-qualified
stock options that do not so qualify. The maximum number of shares of Common
Stock that may be the subject of Awards granted under the Plan may not exceed
3,000,000 shares in the aggregate, subject to adjustments for stock splits or
other adjustments as discussed below. The shares available under the Plan may
either be authorized and unissued shares or shares reacquired by LBFC through
open market purchases or otherwise. If any Award granted under the Plan expires,
terminates or is forfeited before the exercise thereof or the payment in full
thereof, the shares covered by the unexercised or unpaid portion will become
available for new grants under the Plan.
If (i) the outstanding shares of Common Stock of LBFC are increased,
decreased or exchanged for a different number or kind of shares or other
securities, or if additional shares or new or different shares or other
securities are distributed in respect of such shares of Common Stock (or any
stock or securities received with respect to such Common Stock), through merger,
consolidation, sale or exchange of all or substantially all of the properties of
LBFC, reorganization, recapitalization, reclassification, stock dividend, stock
split, reverse stock split, spin-off or other distribution with respect to such
shares of Common Stock (or any stock or securities received with respect to such
Common Stock) or (ii) the value of the outstanding shares of Common Stock of
LBFC is reduced by reason of an extraordinary cash dividend, an appropriate and
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<PAGE> 53
proportionate adjustment may be made in (1) the maximum number and kind of
shares subject to the Plan, (2) the number and kind of shares or other
securities subject to then outstanding Awards, and/or (3) the price for each
share or other unit of any other securities subject to then outstanding Awards.
Any adjustments under the Plan will be made by the Compensation Committee, whose
determination as to any adjustment will be final, binding and conclusive.
As of the effective time and date of any change in control of LBFC, the
Plan and any then outstanding Awards (whether or not vested) shall automatically
terminate unless (i) provision is made in writing in connection with such
transaction for the continuance of the Plan and for the assumption of such
Awards, or for the substitution for such Awards of new awards covering the
securities of a successor entity or an affiliate thereof with appropriate
adjustments as to the number and kind of securities and exercise prices, in
which event the Plan and such outstanding Awards shall continue or be replaced,
as the case may be, in the manner and under the terms so provided; or (ii) the
Board otherwise shall provide for the cancellation of Awards and their automatic
conversion into the right to receive the securities, cash or other consideration
that a holder of the shares underlying such Awards would have been entitled to
receive upon consummation of such change in control had such shares been issued
and outstanding immediately prior to the effective date and time of the change
in control (net of the appropriate option exercise prices). If, pursuant to the
foregoing provisions of the Plan, the Plan and the Awards shall terminate by
reason of the occurrence of a change in control without provision for any of the
action(s) described in clause (i) or (ii) above, then any recipient holding
outstanding Awards shall have the right, at such time immediately prior to the
consummation of the change in control as the Board shall designate, to exercise
the recipient's Awards to the full extent not theretofore exercised, including
any installments which have not yet become vested.
Terms and Conditions of Awards Under the Plan
The Compensation Committee will select the recipients of Awards granted
under the Plan and will determine the dates, amounts, exercise prices, vesting
periods and other relevant terms of the Awards. The maximum number of shares of
Common Stock with respect to which an Award or Awards may be granted to any
eligible person in any one year shall not exceed 1,000,000 shares, subject to
antidilution adjustment as provided in the Plan.
Award Pricing. The pricing of Awards, including the exercise price for
stock options granted under the Plan, shall be determined by the Compensation
Committee as of the date the Award is granted, provided that the exercise price
shall be no less than 100% of the fair market value (as determined under the
Plan) of the underlying shares as of such date.
Award Vesting. Awards granted under the Plan vest and become exercisable
as determined by the Compensation Committee in its discretion. Awards granted
under the Plan may be exercised at any time after they vest and before the
expiration date determined by the Compensation Committee, provided that no Award
may be exercised more than ten years after its grant (five years after grant in
the case of any Award intended to qualify as incentive stock options under the
Code and granted to certain holders of significant amounts of LBFC's outstanding
Common Stock). Furthermore, in the absence of a specific agreement to the
contrary, options will generally expire and become unexercisable immediately
upon termination of the recipient's employment with LBFC for cause, 30 days in
the case of termination without cause, or six months after the termination of
the recipient's employment with LBFC by reason of death, permanent disability or
normal retirement. The Compensation Committee may accelerate the vesting of any
options and may also extend the period following termination of employment with
LBFC during which options may vest and/or be exercised (subject to a maximum
ten-year term from date of grant).
Award Payments. The exercise price for Awards may be paid in cash or in
any other consideration the Compensation Committee deems acceptable, including
securities of LBFC surrendered by the Award holder or withheld from the shares
otherwise deliverable upon exercise. LBFC may extend or arrange for the
extension of credit to any Award holder to finance the Award holder's purchase
of shares upon exercise of the holder's Award on terms approved by the
Compensation Committee, subject to restrictions under applicable laws and
regulations, or allow exercise in a broker's transaction in which the exercise
price will not be received
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<PAGE> 54
until after exercise and subsequent sale of the underlying Common Stock.
Consideration received by LBFC upon exercise of Awards granted under the Plan
will be used for general working capital purposes.
Limited Transferability of Awards. Awards are generally not transferable
by the recipient during the life of the recipient.
Awards Documentation. Awards granted under the Plan will be evidenced by
an agreement duly executed on behalf of LBFC and by the recipient or a
confirming memorandum issued by LBFC to the recipient, setting forth such terms
and conditions applicable to the Award. The adoption of the Plan shall not
affect any other stock option, incentive or other compensation plans in effect
for LBFC, and the Plan shall not preclude LBFC from establishing any other forms
of incentive or other compensation for employees, directors, advisors or
consultants of LBFC, whether or not approved by stockholders.
Rights With Respect to Common Stock. No recipient of an Award under the
Plan and no beneficiary or other person claiming under or through such
individual will have any right, title or interest in or to any shares of Common
Stock subject to any Award or any rights as a stockholder unless and until such
Award is duly exercised pursuant to the terms of the Plan and the exercise of
such Award results in the issuance of shares of Common Stock to the recipient.
Plan Provisions Regarding Section 162(m) the Internal Revenue Code. In
general, Section 162(m) of the Code imposes a $1,000,000 limit on the amount of
compensation that may be deducted by LBFC in any tax year with respect to the
Chief Executive Officer of LBFC and its other four most highly compensated
employees, including any compensation relating to an Award under the Plan. To
prevent compensation relating to an Award under the Plan from being subject to
the $1,000,000 limit of Code Section 162(m), the Plan provides that no one
eligible person shall be granted any Awards with respect to more than 1,000,000
shares of Common Stock in any one calendar year if such grant would otherwise be
subject to Code Section 162(m). Furthermore, if Code Section 162(m) would
otherwise apply and if the amount of compensation an eligible person would
receive under an Award is not based solely on an increase in the value of the
underlying common stock of LBFC after the date of grant or award, the
Compensation Committee can condition the grant, vesting, or exercisability of
such an Award on the attainment of a preestablished objective performance goal.
For this purpose, a preestablished objective performance goal may include one or
more of the following performance criteria: (a) cash flow, (b) earnings per
share (including earnings before interest, taxes, and amortization), (c) return
on equity, (d) total stockholder return, (e) return on capital, (f) return on
assets or net assets, (g) income or net income, (h) operating income or net
operating income, (i) operating margin, (j) return on operating revenue, and (k)
any other similar performance criteria.
DEFERRED COMPENSATION PLAN
The Company has established a Deferred Compensation Plan (the "Deferred
Plan") to provide certain key employees of the Company enhanced deferred
compensation benefits, which are designed to attract and retain outstanding
individuals in key positions within the Company.
Administration
The Deferred Plan will be administered by the Compensation Committee. The
Compensation Committee will have the authority to delegate those administrative
tasks the Compensation Committee determines are in the best interest of the
Deferred Plan, participants or the Company. Amendment or termination of the
Deferred Plan shall be and remain a function of the Board of Directors of the
Company.
Eligibility
Each key employee of the Company designated by the Compensation Committee
shall be eligible to participate in the Deferred Plan upon execution of a
Deferred Compensation Agreement.
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<PAGE> 55
Amount of Deferral
An eligible employee who elects to participate in the Deferred Plan may
designate in his or her Agreement with the Company any percentage of such
employee's compensation to be deferred by the Company. Compensation shall
include the employee's basic salary, bonuses, commissions, incentive
compensation, overtime pay and all other forms of cash compensation before
giving effect to amounts deferred pursuant to the Deferred Plan. An eligible
employee shall make his or her deferral election with respect to his or her base
salary separately from his or her deferral election with respect to other
compensation. Any election to commence participation or to change the amount
deferred shall be effective as of the beginning of the first pay period
beginning after the January 1 next following the date on which the employee
gives written notice to the Company of such election. In the case of an employee
who first becomes eligible to participate in the Deferred Plan in the first
calendar year in which the Deferred Plan is adopted, participants shall have 30
days after notice of eligibility to provide an election to participate. Deferral
shall be effected by reduction in the amount of salary, and/or bonuses and other
incentive compensation, if applicable, paid through the payroll system. Amounts
deferred shall be credited on the Company's books to a bookkeeping account for
each participant of the Deferred Plan and will be accumulated until payable.
Payment of Amounts Deferred
Concurrently with his or her election to participate in the Deferred Plan,
an eligible employee shall designate a specified future date to which payment of
the amount covered by such election is to be deferred and shall also designate
the method of payment, which shall be either a lump sum payment on the
designated payment date or substantially equal installments for a two, three,
four or five-year period commencing on the designated date. Upon the death or
permanent disability of the participant, payment of all amounts deferred by such
participant shall be paid as soon as reasonably practicable following the date
of such death or disability. In the event of the death of the participant,
amounts payable pursuant to the Deferred Plan shall be paid to the beneficiary
specifically designated in the participant's agreement, or if the beneficiary is
not designated, or the designated beneficiary is not living, then to the
participant's estate. No interest shall be paid by the Company on amounts
deferred by an eligible employee under this Deferred Plan unless the employee's
Agreement with the Company specifically provides therefor.
Withdrawal of Deferred Amounts
No deferrals under the Deferred Plan may be withdrawn by the employee prior
to the designated payment date, except in cases of extreme financial hardship or
for good cause as demonstrated by the employee to and accepted by the
Compensation Committee. Any distribution by reason of financial hardship shall
not exceed the amount reasonably necessary to eliminate the extreme financial
hardship.
Unsecured General Creditor
All title to and beneficial interest in all funds maintained or held by the
Company on account of this Deferred Plan, whether or not earmarked for that
purpose, shall be and remain in the Company and no employee shall have any
interest in such funds. The Company shall have no obligation to any employee to
maintain a fund, separate from the Company's general accounts, on account of the
Deferred Plan and the Company's obligation under the Deferred Plan shall be
merely that of an unfunded and unsecured promise of the Company to pay money in
the future.
Assignment
A participant shall have no right to sell, assign, transfer, pledge,
anticipate, mortgage or otherwise encumber, transfer, hypothecate or convey in
advance of actual receipt any amounts payable under the Deferred Plan. No part
of the amounts payable under the Deferred Plan shall, prior to actual payment,
be subject to seizure or sequestration for payment of debts, judgments, alimony
or separate maintenance owed by a participant or any other person or be
transferable by operation of law in the event of a participant's or any other
person's bankruptcy or insolvency.
Withholding
To the extent required by federal, state, local or foreign law, the Company
shall have the right to withhold from payments made under the Deferred Plan, any
taxes required to be withheld.
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Deferred Plan Amendment
The Deferred Plan may be amended by the Board of Directors of the Company
at any time and from time to time, provided that no such amendment shall operate
to adversely affect a participant's rights under the Deferred Plan with respect
to amounts deferred prior to the date of such amendment.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee will be formed prior to the closing of the
Offering. The Company intends that none of the executive officers of the Company
will serve on the compensation committee of another entity or on any other
committee of the board of directors of another entity performing similar
functions.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Old Long Beach presently owns 100% of the outstanding Common Stock of the
Company. Upon consummation of this Offering, if the Underwriters exercise the
over-allotment option in full, Old Long Beach will have no continuing interest
in the Company. In connection with the Reorganization, Old Long Beach and the
Company are entering into certain agreements for the purpose of providing
certain services and defining their ongoing relationship. The agreements have
been developed in the context of a parent/subsidiary relationship and therefore
are not the result of arm's-length negotiations between independent parties. It
is the intention of the Company and Old Long Beach that such agreements and the
transactions provided for therein, taken as a whole, are fair to both parties,
while continuing certain mutually beneficial arrangements. However, there can be
no assurance that each of such agreements, or the transactions provided for
therein, are or will be on terms at least as favorable to the Company as could
have been obtained from unaffiliated parties.
Additional or modified arrangements and transactions may be entered into by
the Company, Old Long Beach and their respective affiliates after completion of
this Offering. Any such future arrangements and transactions will be determined
through negotiations between the Company and Old Long Beach.
The following is a summary of the arrangements and transactions between the
Company and Old Long Beach being entered into in connection with the
Reorganization and the Indemnification Agreements between the Company and its
executive officers and directors. For a chart depicting the corporate
relationship between the Company and Old Long Beach, see "Reorganization."
CONTRIBUTION AGREEMENT
Pursuant to a contribution agreement (the "Contribution Agreement") between
LBFC and Old Long Beach that is being entered into in connection with the
Reorganization, Old Long Beach will transfer to LBFC all personnel and the
assets of the broker-sourced lending and loan sales operations of Old Long Beach
in exchange for 25,000,000 shares of Common Stock. The assets being transferred
include independent broker lists, trade name, office and equipment leases,
certain other contract rights, furniture, fixtures and equipment. In addition,
all mortgage loans in process, that are not yet funded at the time of the
Reorganization, are also being transferred to LBFC. No funded loans or other
personnel and assets from the other operations of Old Long Beach are being
transferred to LBFC, and Old Long Beach shall be solely responsible for any
liabilities that may arise from such retained operations, personnel and assets.
LBFC is not assuming any liabilities arising out of Old Long Beach's lending or
loan servicing activities prior to the Reorganization. LBFC will assume certain
liabilities associated with equipment leases and property leases related to
assets acquired in the Reorganization and certain accrued vacation and other
employee benefits arising before the Reorganization for the employees being
transferred to LBFC. As part of the Contribution Agreement, the Company and Old
Long Beach will agree not to solicit or hire the employees of the other for a
period of five years.
Old Long Beach and Ameriquest Capital Corporation ("Old Long Beach
Holdings"), a Delaware corporation and the sole stockholder of Old Long Beach,
have also agreed to indemnify and hold the Company harmless from any tax
liability attributable to periods ending on or before the consummation of this
Offering. For periods ending after the consummation of this Offering, the
Company will pay its tax liability directly to
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<PAGE> 57
the appropriate taxing authorities. Old Long Beach Holdings generally will
control audits and administrative and judicial proceedings with respect to
periods ending on or before the consummation of this Offering, although Old Long
Beach Holdings cannot compromise or settle any issue that increases the
Company's liability without first obtaining the consent of the Company. The
Company generally will control all other audits and administrative and judicial
proceedings.
The Internal Revenue Service and the California Franchise Tax Board are
currently auditing Old Long Beach in connection with issues relating to the
timing of recognition of income and expenses. Under the Contribution Agreement,
Old Long Beach Holdings will indemnify the Company against any liability
incurred by the Company in connection with such audit.
ADMINISTRATIVE SERVICES AGREEMENTS
The Company (while operating as a division of Old Long Beach) has been
historically allocated portions of total expenses of various administrative
services provided to it by Old Long Beach. The costs of such services primarily
included general corporate overhead, such as data processing, information
services and cash management services, employee benefits and other
administrative functions. These expenses were calculated as a pro rata share of
certain administrative costs based on a variety of factors which take into
consideration loan origination volume and historical ratios of direct expenses
incurred by the various divisions of Old Long Beach to total direct expenses,
which management believed was a reasonable method of allocation. The allocation
of expenses to the Company for the years ended December 31, 1994, 1995 and 1996
was approximately $9.7 million, $7.0 million, and $8.9 million, respectively.
In connection with the Reorganization, the Company and Old Long Beach are
entering into an administrative services agreement under which Old Long Beach
will continue to provide various services to the Company, including certain
employee benefits administration, information services, data processing
functions and mail room services. Certain precautions are being taken to
eliminate the opportunity for Old Long Beach to improperly use the confidential
information relating to the Company to which Old Long Beach will have access
after the Reorganization as a result of the services provided pursuant to the
administrative services agreement.
Old Long Beach will charge the Company a fixed fee of $125,000 per month
for the information systems and data processing services that Old Long Beach
will provide under the administrative services agreement. Old Long Beach will
charge the Company for the other services that are provided under the
administrative services agreement in an amount substantially equal to the cost
of providing such services. The administrative services agreement will have a
one-year term, unless earlier terminated by the Company upon 30 days' written
notice. The Company currently anticipates it will have the capability to perform
the functions covered by the administrative services agreement internally within
one year from the date of the Reorganization. Once the Company develops the
internal capability to perform each such function, the Company intends to
terminate the administrative services agreement with respect to that function.
In addition, the Company and Old Long Beach are entering into a second
administrative services agreement pursuant to which the Company will assist Old
Long Beach in selling the mortgage loans originated by Old Long Beach and
provide investor coordination and information for the existing loan portfolio as
well as new loan originations. The administrative services agreement will
continue until terminated by the Company or Old Long Beach upon 30 days' written
notice to the other party given any time after April 18, 1998. There will be a
fixed fee of $55,000 per month for such services. The Company currently
anticipates Old Long Beach will have the capability to internally perform these
sales functions within one year from the date of the Reorganization. Once Old
Long Beach develops such internal capability, it is anticipated that Old Long
Beach will terminate this administrative services agreement.
LOAN SUB-SERVICING AGREEMENT
In connection with the Reorganization, the Company and the Sub-Servicer (a
division of Old Long Beach) are entering into a three-year loan sub-servicing
agreement (the "Loan Sub-Servicing Agreement") pursuant to which the
Sub-Servicer will sub-service mortgage loans originated or purchased by the
Company
56
<PAGE> 58
after the Reorganization. The Company expects to retain substantially all of the
servicing rights for such loans, including loans sold to investors.
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. Under the Loan Sub-Servicing Agreement,
the Company is obligated to pay the Sub-Servicer a 45 basis point annual
servicing fee on the declining balance of each loan serviced.
The Sub-Servicer is required to pay all expenses related to the performance
of its duties under the Loan Sub-Servicing Agreement. However, the Company will
provide the funding for required advances on delinquent mortgage payments, taxes
and required insurance premiums that are not collected from borrowers with
respect to any mortgage loan.
The Company may terminate for cause the Loan Sub-Servicing Agreement with
notice upon the occurrence of one or more of the events specified in such
agreement, generally relating to the Sub-Servicer's proper and timely
performance of its duties and obligations under the Loan Sub-Servicing
Agreement. Either the Company or the Sub-Servicer may terminate the Loan
Sub-Servicing Agreement without cause at any time effective after 18 months upon
six months' prior written notice to the other party. In the event of a
termination, either party may request that the loans that were sub-serviced by
the Sub-Servicer be transferred to the Company or its designee for servicing,
subject to obtaining any required consents to such transfer. The Company may in
the future commence its own servicing operations.
Under the Loan Sub-Servicing Agreement, the Company is entitled to all late
payment charges, penalties and assumption fees collected in connection with the
mortgage loans. The Company also receives any benefit derived from interest
earned on collected principal and interest payments between the date of
collection and the date of remittance to the Company and, to the extent allowed
by law, from interest earned on tax and insurance impound funds.
INDEMNIFICATION AGREEMENTS
The Company will enter into indemnification agreements with its executive
officers and directors which require the Company to indemnify each in certain
circumstances, in the manner and to the fullest extent permitted by the Delaware
General Corporation Law.
57
<PAGE> 59
BENEFICIAL OWNERSHIP OF SECURITIES AND SELLING STOCKHOLDER
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock after giving effect to the
Reorganization, and as adjusted to reflect the sale of 21,750,000 shares of
Common Stock by the Selling Stockholder offered hereby, by (i) each director of
the Company, (ii) the Company's most highly compensated executive officers,
(iii) each person known to the Company to be the beneficial owner of more than
5% of the Common Stock and (iv) all directors and executive officers of the
Company as a group.
<TABLE>
<CAPTION>
COMMON COMMON
STOCK OWNED STOCK TO BE
PRIOR TO OWNED AFTER
OFFERING(1) NUMBER OF THE OFFERING(4)
---------------------- SHARES TO BE ----------------------
NUMBER OF SOLD IN THE NUMBER OF
NAME(2) SHARES PERCENT OFFERING SHARES PERCENT
- ------------------------------------ ---------- ------- ------------ ---------- -------
<S> <C> <C> <C> <C> <C>
Old Long Beach(3)................... 25,000,000 100% 21,750,000 3,250,000(5) 13%(5)
M. Jack Mayesh...................... -- -- -- -- --
Edward Resendez..................... -- -- -- -- --
Frank J. Curry...................... -- -- -- -- --
James H. Leonetti................... -- -- -- -- --
James J. Sullivan................... -- -- -- -- --
David S. Engelman................... -- -- -- -- --
C. Stephen Mansfield................ -- -- -- -- --
All Directors and Officers as a
Group (seven persons)............. -- -- -- -- --
</TABLE>
- ---------------
(1) The persons named in the table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned.
(2) Each of such persons may be reached at 1100 Town & Country Road, Suite 900,
Orange, California 92868.
(3) Before the Reorganization, Old Long Beach was the parent of the Company. Old
Long Beach is a wholly-owned subsidiary of Old Long Beach Holdings, of which
Roland E. Arnall owns 69.9% of the currently outstanding common stock.
(4) Certain officers and directors of the Company are being offered the
opportunity to purchase shares of Common Stock at the Offering price. In
addition, certain officers of the Company are being granted options to
purchase shares of Common Stock pursuant to the 1997 Stock Incentive Plan.
See "Management -- 1997 Stock Incentive Plan."
(5) Assumes no exercise of the Underwriters' over-allotment option. If the
Underwriters' over-allotment option is exercised in full, Old Long Beach
will own no shares of LBFC. See "Underwriting."
58
<PAGE> 60
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of LBFC consists of (i) 25,000,000 shares of
preferred stock, $.001 par value (the "Preferred Stock"), and (ii) 150,000,000
shares of common stock, $.001 par value (the "Common Stock").
COMMON STOCK
All of the outstanding Common Stock is beneficially owned by the Selling
Stockholder. Upon completion of the Offering, there will be 25,000,000 shares of
Common Stock outstanding, 3,250,000 of which will be owned by the Selling
Stockholder (assuming no exercise of the Underwriters' over-allotment option).
If the Underwriters' over-allotment option is exercised in full, the Selling
Stockholder will own no shares of Common Stock. The issued and outstanding
shares of Common Stock have been duly authorized, validly issued, fully paid and
nonassessable.
Holders of Common Stock are entitled to one vote for each share held of
record. Shares of Common Stock do not have cumulative voting rights with respect
to the election of directors.
Holders of Common Stock do not have any preemptive rights or rights to
subscribe for additional securities of LBFC. Shares of Common Stock are not
redeemable and there are no sinking fund provisions. The shares of Common Stock
are not convertible into any other series or class of LBFC's securities.
Subject to the preferences applicable to Preferred Stock outstanding at the
time, holders of shares of Common Stock are entitled to dividends as may be as
declared by the Board of Directors from time to time out of assets or funds of
LBFC legally available therefor, and are entitled, in the event of liquidation,
to share ratably in all assets remaining after payment of debts and liabilities
and Preferred Stock preferences, if any.
LBFC's Board of Directors will have five members following completion of
this Offering. Either the directors or the stockholders may amend the Bylaws to
change the size of the Board of Directors, subject to the requirement in the
Bylaws that the entire Board of Directors must consist of at least five and no
more than nine directors. After the initial term, each director serves for a
term ending on the date of the third annual meeting following the annual meeting
at which such director was elected and until his or her successor is duly
elected and qualified or until his or her death, resignation or removal. Any
stockholder entitled to vote at a meeting regarding the election of director may
nominate a person for election as a director, provided that the stockholder
gives LBFC written notice of the nomination at least 90 days before the meeting
(or, if later, the seventh day after the first public announcement of the date
of such meeting), which notice must contain specified information about the
stockholder and the nominee.
The Common Stock has been approved for listing on the Nasdaq National
Market under the symbol "LBFC."
PREFERRED STOCK
Pursuant to LBFC's Certificate of Incorporation, the Board of Directors has
the authority to issue up to 25,000,000 shares of Preferred Stock in one or more
series with such designations, powers, preferences and rights, including 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
LBFC'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. LBFC currently
has no plans to issue any shares of its Preferred Stock.
59
<PAGE> 61
CERTAIN PROVISIONS OF DELAWARE LAW
LBFC 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
LBFC's outstanding voting stock) from engaging in a "business combination" (as
defined in Section 203) with LBFC for three years following the date that person
became an interested stockholder unless: (i) before that person became an
interested stockholder, the Board of Directors 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 stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of LBFC outstanding at the
time the transaction commenced (excluding stock held by directors who are also
officers of LBFC 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 LBFC's Board of Directors 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 LBFC 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 LBFC 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 LBFC'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 LBFC can, without stockholder approval, issue shares of capital
stock, which may have the effect of delaying, deferring or preventing a change
of control of LBFC. LBFC has no plan or arrangement for the issuance of any
shares of capital stock other than in the ordinary course pursuant to the 1997
Stock Incentive Plan.
CERTAIN CHARTER AND BYLAW PROVISIONS
LBFC's Certificate of Incorporation provides that no action which has not
been previously approved by the Board of Directors may be taken by the
stockholders except at an annual meeting or a special meeting of the
stockholders.
LBFC's Bylaws require stockholders to provide advance notice of any
stockholder nominations for directors 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.
The Certificate of Incorporation of LBFC contains certain provisions
permitted under the Delaware General Corporation Law relating to the liability
of directors. These provisions eliminate the directors' liability for monetary
damages for a breach of fiduciary duty, except in certain circumstances
involving wrongful acts, including the breach of a director's duty of loyalty or
acts or omissions which involve intentional misconduct or a knowing violation of
a law. LBFC's Certificate of Incorporation also contains provisions to indemnify
its directors and officers to the fullest extent permitted by the Delaware
General Corporation Law.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
60
<PAGE> 62
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, LBFC will have 25,000,000 shares of
Common Stock outstanding. The 21,750,000 shares of Common Stock sold in this
Offering (25,000,000 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradable without restriction under the
Securities Act, except for any such shares held at any time by an "affiliate" of
the Company, as such term is defined in Rule 144 promulgated under the
Securities Act ("Rule 144"). If the Underwriters' over-allotment option is not
exercised, Old Long Beach will own 3,250,000 shares of Common Stock which will
be "restricted securities," as that term is defined in Rule 144. The Selling
Stockholder has agreed with the Underwriters that it will not, without the prior
written consent of the Representative, offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock, for a period of 180 days after
the date of the completion of the Offering, subject to certain limited
exceptions.
An "affiliate" or holder of restricted securities is entitled to sell,
within any three-month period, a number of shares that does not exceed the
greater of one percent (1%) of the then outstanding shares of the Common Stock
or the average weekly trading volume of the Common Stock during the four
calendar weeks preceding such sale. Sales under Rule 144 are subject to certain
manner of sale limitations, notice requirements and the availability of current
public information about the Company.
In addition, LBFC intends to file a registration statement under the
Securities Act shortly after the completion of this Offering (to become
effective as soon thereafter as practicable) to register 3,000,000 shares of
Common Stock reserved for issuance pursuant of the 1997 Stock Incentive Plan.
Shares issued upon exercise of outstanding options under the 1997 Stock
Incentive Plan after the effective date of such registration statement generally
may be sold on the open market.
Prior to this Offering there has been no public market for the Common
Stock. No prediction can be made as to the effect, if any, that future sales of
shares pursuant to a future registration statement or Rule 144 or the
availability of shares for future sale will have on the market price of the
Common Stock prevailing from time to time. Sales of substantial amounts of the
Common Stock in the public market, or the perception that such sales could
occur, could adversely affect prevailing market prices.
61
<PAGE> 63
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 Selling Stockholder the following
respective number of shares of Common Stock at the 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............................................. 21,750,000
==========
</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 Common Stock offered hereby
if any such shares are purchased.
The Selling Stockholder has been advised by the Underwriters that the
Underwriters propose to offer the shares of Common Stock to the public at the
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 this Offering, the offering
price and other selling terms may be changed by the Representative of the
Underwriters.
The Underwriters have reserved up to 500,000 shares of Common Stock offered
hereby for sale at the Offering price to directors, officers and employees of
the Company and to certain other persons.
The Selling Stockholder (if the over-allotment option is not exercised in
full) and the Company have each agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of Common Stock, or any security convertible
into or exercisable for shares of Common Stock, for a period of 180 days after
the date of this Prospectus without the prior written consent of the
Representative.
The Selling Stockholder has granted to the Underwriters an option,
exercisable not later than 30 days after the date of this Prospectus, to
purchase up to additional 3,250,000 shares of Common Stock at the 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 Common Stock to be
purchased by it shown in the above table bears to 3,250,000 and the Selling
Stockholder will be obligated, pursuant to the option, to sell such shares to
the Underwriters. The Underwriters may exercise such option in whole or in part
only to cover over-allotments made in connection with the sale of Common Stock
offered hereby. If purchased, the Underwriters will offer such additional shares
on the same terms as those on which the 21,750,000 shares are being offered.
The Representative of the Underwriters has advised the Company that the
Underwriters do not intend to confirm sales to any account over which they
exercise discretionary authority.
The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). The Company and the
Selling Stockholder have been advised that in the opinion of the Securities and
Exchange
62
<PAGE> 64
Commission (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 Common Stock offered hereby, each
of the Company and the Selling Stockholder 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.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Selling Stockholder, and in such case
may purchase Common Stock in the open market following completion of the
Offering to cover all or a portion of such short position. The Underwriters may
also cover all or a portion of such short position by exercising the
Underwriters' over-allotment option referred to above. In addition, the
Representative, on behalf of the Underwriters, may impose "penalty bids" under
contractual arrangements with the Underwriters whereby it may reclaim from an
Underwriter (or dealer participating in the Offering) for the account of other
Underwriters, the selling concession with respect to Common Stock that is
distributed in the Offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. The
imposition of a penalty bid might also affect the price of the Common Stock to
the extent that it could discourage resales of the security. Neither the Company
nor any of the Underwriters makes any representation or prediction as to the
direction or magnitude of any effect that the transactions described above may
have on the price of the Common Stock. In addition, neither the Company nor any
of the Underwriters makes any representation that the Representative will engage
in such transactions or that such transactions, once commenced, will not be
discontinued without notice.
Prior to this Offering, there has been no established public trading market
for the Common Stock. The initial public offering price will be determined by
negotiation between the Selling Stockholder and the Underwriters. Among the
factors to be considered in determining the initial public offering price will
be prevailing market and economic conditions, revenues and earnings of the
Company, market valuations of other companies engaged in activities similar to
the Company, estimates of the business potential and prospects of the Company,
the present state of the Company's business operations, the Company's management
and other factors deemed relevant.
The Common Stock has been approved for listing on the Nasdaq National
Market under the symbol "LBFC." There can be no assurance, however, that the
Company will be able to maintain the inclusion of the Common Stock in the Nasdaq
National Market or that an active trading market will develop.
LEGAL MATTERS
Certain legal matters will be passed upon for the Company by Gibson, Dunn &
Crutcher LLP, Orange County, California. Certain legal matters will be passed
upon for the Underwriters by Brobeck, Phleger & Harrison LLP, Newport Beach,
California.
63
<PAGE> 65
EXPERTS
The statement of financial condition of Long Beach Financial Corporation as
of February 14, 1997 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 Long Beach Mortgage Company Broker-Sourced Loan
Division as of December 31, 1995 and 1996 and for each of the three years in the
period ended December 31, 1996 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.
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (File No. 333-22013) under the Securities Act with respect to the 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 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. The address of the Commission's website 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.
64
<PAGE> 66
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
------
<S> <C>
LONG BEACH FINANCIAL CORPORATION:
Independent Auditors' Report......................................................... F-2
Consolidated Statement of Financial Condition as of February 14, 1997................ F-3
Notes to Consolidated Financial Statement............................................ F-4
LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION:
Independent Auditors' Report......................................................... F-6
Statements of Financial Condition as of December 31, 1995 and 1996................... F-7
Statements of Operations for each of the three years in the period ended December 31,
1996............................................................................... F-8
Statements of Divisional Equity (Deficit) for each of the three years in the period
ended December 31, 1996............................................................ F-9
Statements of Cash Flows for each of the three years in the period ended December 31,
1996............................................................................... F-10
Notes to Financial Statements........................................................ F-11
</TABLE>
F-1
<PAGE> 67
INDEPENDENT AUDITORS' REPORT
To the Stockholder of
Long Beach Financial Corporation:
We have audited the accompanying consolidated statement of financial
condition of Long Beach Financial Corporation and subsidiary (the "Company") as
of February 14, 1997. 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 consolidated statement of financial condition presents
fairly, in all material respects, the financial position of Long Beach Financial
Corporation and subsidiary as of February 14, 1997, in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 14, 1997
F-2
<PAGE> 68
LONG BEACH FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
AS OF FEBRUARY 14, 1997
<TABLE>
<S> <C>
ASSETS
Cash.............................................................................. $520,000
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Stockholder's equity:
Preferred stock, $.001 par value;
25,000,000 shares authorized; no shares outstanding.......................... --
Common stock, $.001 par value; 150,000,000 shares authorized;
one share issued and outstanding............................................. --
Additional paid in capital...................................................... $520,000
---------
Total stockholder's equity.............................................. $520,000
========
</TABLE>
See notes to consolidated financial statement.
F-3
<PAGE> 69
LONG BEACH FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
AS OF FEBRUARY 14, 1997
1. GENERAL
Long Beach Financial Corporation ("LBFC") was formed by Long Beach Mortgage
Company ("Old Long Beach") to be a holding company whose assets will
substantially consist of certain of the assets of Old Long Beach's
broker-sourced mortgage lending and loan sales operations. The financial
statements of LBFC include its wholly owned subsidiary Ameriquest Mortgage
Corporation.
Old Long Beach is reorganizing its business operations (the
"Reorganization") by transferring certain assets (including independent broker
lists, office leases, furniture, leasehold improvements and equipment) and
personnel related to the broker-sourced mortgage lending and loan sales
operations of Old Long Beach and approximately $40 million in cash to LBFC, in
exchange for 25,000,000 shares of common stock for the purpose of selling
certain shares of LBFC in an initial public offering (the "Offering"). The
assets being transferred to LBFC include loans in process as of the time of the
Reorganization but do not include loans funded prior to the Reorganization or
servicing rights with respect to loans funded prior to the Reorganization. LBFC
will have no interest in Old Long Beach's direct-sourced mortgage lending or
loan servicing operations, which are being retained by Old Long Beach after the
Reorganization. In the Reorganization, LBFC is acquiring the right to the "Long
Beach Mortgage Company" name and Old Long Beach will no longer use the name in
its business. LBFC will then contribute such assets to its subsidiary,
Ameriquest Mortgage Corporation, which is licensed to perform mortgage banking
activities. As part of the Reorganization, Ameriquest Mortgage Corporation will
change its name to Long Beach Mortgage Company. LBFC is not assuming any of the
liabilities of Old Long Beach that may have arisen out of Old Long Beach's
lending or loan servicing activities prior to the Reorganization other than
certain liabilities relating to the assets or personnel being transferred. A
condition precedent to effecting the Reorganization is the establishment by LBFC
of an independent warehouse financing facility for its broker-sourced
operations.
The acquisition will be accounted for similar to a pooling of interests.
The consolidated financial position and consolidated results of operations of
LBFC will consist substantially of the certain assets of Old Long Beach's
broker-sourced loan division as described above.
As a result of the Offering, the tax basis (for income tax purposes) of the
assets transferred from Old Long Beach to LBFC in the Reorganization will be
increased, in the hands of LBFC, to their fair market value (determined by
reference to the initial public offering price). Such tax basis is generally
expected to produce a tax benefit to LBFC in future tax years through
depreciation or amortization deductions or through decreased gain or (subject to
certain limitations) increased loss on a disposition of any LBFC asset. However,
the "anti-churning" rules under Section 197 of the Internal Revenue Code of
1986, as amended (the "Code"), (generally applicable to the sale or transfer of
certain types of intangible assets between related parties), might apply to
disallow such amortization with respect to certain intangible assets of LBFC.
Pursuant to the requirements of Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes", LBFC will record a deferred tax
asset (with a corresponding credit to additional paid in capital) for the tax
effect of the excess of the tax basis of LBFC's assets following the Offering
over their net book value. Solely for financial accounting and reporting
purposes, such tax basis will be reduced to take into account management's
assessment of the possible application of the "anti-churning" rules under
Section 197 of the Code. Adjustments of the net deferred tax asset attributable
to the resolution of the uncertainties associated with provisions of the Code
will be charged against or credited to additional paid in capital.
F-4
<PAGE> 70
2. AGREEMENTS WITH RELATED PARTIES
Administrative Services -- In connection with the Reorganization, LBFC and
Old Long Beach are entering into an administrative services agreement under
which Old Long Beach will continue to provide various services to LBFC,
including certain employee benefits administration, finance and accounting
technical support, information services and data processing functions. Any
failure by Old Long Beach to provide such administrative services to LBFC during
the term of the administrative services agreement could have a material adverse
effect on LBFC's results of operations and financial condition.
In addition, LBFC and Old Long Beach are entering into a second
administrative services agreement pursuant to which LBFC will perform all
functions necessary on behalf of Old Long Beach to sell the mortgage loans
originated by Old Long Beach. Once Old Long Beach develops such internal
capability, Old Long Beach will terminate such agreement.
Loan Subservicing -- In connection with the Reorganization, LBFC and Old
Long Beach are entering into a loan sub-servicing agreement (the "Loan
Sub-Servicing Agreement") pursuant to which a division of Old Long Beach will
sub-service mortgage loans originated or purchased by LBFC after the
Reorganization.
Income Taxes -- In connection with the Reorganization, Old Long Beach and
Long Beach Financial Services Company, the sole stockholder of Old Long Beach,
have agreed to indemnify and hold LBFC harmless from any tax liability
attributable to periods ending on or before the consummation of the Offering.
For periods ending after the consummation of the Offering, LBFC will pay its tax
liability directly to the appropriate taxing authorities.
These agreements have been developed in the context of a parent/subsidiary
relationship and therefore are not the result of arm's length negotiations
between independent parties.
F-5
<PAGE> 71
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholder of
Long Beach Mortgage Company:
We have audited the accompanying statements of financial condition of Long
Beach Mortgage Company Broker-Sourced Loan Division (the "Company") as of
December 31, 1995 and 1996, and the related statements of operations, divisional
equity and cash flows for each of the three years in the period ended December
31, 1996. 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 Long Beach Mortgage Company Broker-Sourced
Loan Division as of December 31, 1995 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
As more fully described in Notes 1 and 3, the Company is part of Long Beach
Mortgage Company ("Old Long Beach") and had no separate legal status or
existence through December 31, 1996. The Company had various transactions with
Old Long Beach, including various expense allocations and reimbursements, that
are material in amount. The financial statements of the Company have been
prepared from the records of Old Long Beach and may not necessarily be
indicative of the conditions that would have existed if the Company had operated
as an independent entity.
As described in Note 2, on January 1, 1995, the Company adopted Statement
of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing
Rights."
DELOITTE & TOUCHE LLP
Costa Mesa, California
February 16, 1997
F-6
<PAGE> 72
LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION
STATEMENTS OF FINANCIAL CONDITION
AS OF DECEMBER 31, 1995 AND 1996
ASSETS
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Loans held for sale (Note 5)...................................... $21,342,000 $49,580,000
Receivable from sales of loans (Note 2)........................... 25,103,000
Premises and equipment, net (Notes 4 and 6)....................... 1,826,000 2,033,000
Deferred income taxes (Note 7).................................... 882,000 2,120,000
Prepaid expenses and other assets................................. 728,000 914,000
----------- -----------
Total assets............................................ $24,778,000 $79,750,000
=========== ===========
LIABILITIES AND DIVISIONAL EQUITY
Liabilities:
Warehouse financing facility (Note 5)............................. $20,613,000 $72,829,000
Accounts payable and accrued liabilities (Note 6)................. 2,433,000 5,784,000
----------- -----------
Total liabilities....................................... 23,046,000 78,613,000
Commitments and contingencies (Note 6)
Divisional equity................................................. 1,732,000 1,137,000
----------- -----------
Total liabilities and divisional equity................. $24,778,000 $79,750,000
=========== ===========
</TABLE>
See notes to financial statements.
F-7
<PAGE> 73
LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION
STATEMENTS OF OPERATIONS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1994 1995 1996
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Gain on sales of loans.............................. $21,668,000 $31,691,000 $50,699,000
Interest income..................................... 2,510,000 2,494,000 3,275,000
----------- ----------- -----------
Total revenues............................ 24,178,000 34,185,000 53,974,000
EXPENSES:
Compensation and employee benefits.................. 15,496,000 13,564,000 22,299,000
Rent and other occupancy costs (Note 6)............. 2,565,000 3,258,000 4,188,000
Office supplies and courier service................. 712,000 816,000 1,903,000
Depreciation........................................ 281,000 667,000 1,025,000
Legal and professional.............................. 1,443,000 1,082,000 1,828,000
Interest (Notes 3 and 5)............................ 1,814,000 2,312,000 2,814,000
Other (Note 6)...................................... 1,831,000 2,525,000 3,945,000
----------- ----------- -----------
Total expenses............................ 24,142,000 24,224,000 38,002,000
----------- ----------- -----------
INCOME BEFORE PROVISION FOR INCOME TAXES............ 36,000 9,961,000 15,972,000
PROVISION FOR INCOME TAXES (Note 7)................. 14,000 4,169,000 6,580,000
----------- ----------- -----------
NET INCOME.......................................... $ 22,000 $ 5,792,000 $ 9,392,000
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-8
<PAGE> 74
LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION
STATEMENTS OF DIVISIONAL EQUITY (DEFICIT)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
BALANCE, January 1, 1994........................................................ $ (127,000)
Net change in divisional deficit arising from intracompany transactions (Note
3)............................................................................ (757,000)
Net income...................................................................... 22,000
-----------
BALANCE, December 31, 1994...................................................... (862,000)
Net change in divisional equity arising from intracompany transactions (Note
3)............................................................................ (3,198,000)
Net income...................................................................... 5,792,000
-----------
BALANCE, December 31, 1995...................................................... 1,732,000
Net change in divisional equity arising from intracompany transactions (Note
3)............................................................................ (9,987,000)
Net income...................................................................... 9,392,000
-----------
BALANCE, December 31, 1996...................................................... $ 1,137,000
===========
</TABLE>
See notes to financial statements.
F-9
<PAGE> 75
LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION
STATEMENTS OF CASH FLOWS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
1994 1995 1996
------------- ------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income....................................... $ 22,000 $ 5,792,000 $ 9,392,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization of premises,
equipment and warehouse financing facility
issuance costs............................... 354,000 900,000 1,270,000
Loans originated and purchased for sale........ (565,547,000) (592,542,000) (1,058,122,000)
Proceeds from sales of loans held for sale..... 562,054,000 580,366,000 1,029,789,000
Noncash gain recognized on capitalization of
mortgage servicing rights.................... -- (4,144,000) (9,225,000)
Proceeds from mortgage servicing rights
transferred to Old Long Beach................ -- 4,144,000 9,225,000
Principal repayments and other changes in loans
held for sale................................ 3,079,000 1,198,000 95,000
Changes in:
Receivable from sales of loans............... -- -- (25,103,000)
Deferred income taxes........................ -- (882,000) (1,238,000)
Prepaid expenses and other assets............ 153,000 (333,000) (186,000)
Accounts payable and accrued liabilities..... 876,000 523,000 3,351,000
------------- ------------- ---------------
Net cash provided by (used in) operating
activities............................ 991,000 (4,978,000) (40,752,000)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of premises and equipment............... (1,663,000) (721,000) (1,232,000)
------------- ------------- ---------------
Net cash used in investing activities... (1,663,000) (721,000) (1,232,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in warehouse financing facility....... 11,410,000 8,897,000 51,971,000
Net change in warehouse financing from Old Long
Beach.......................................... (9,981,000) -- --
Cash provided to Old Long Beach.................. (757,000) (3,198,000) (9,987,000)
------------- ------------- ---------------
Net cash provided by financing
activities............................ 672,000 5,699,000 41,984,000
------------- ------------- ---------------
NET INCREASE (DECREASE) IN CASH.................. -- -- --
CASH, beginning of year.......................... -- -- --
------------- ------------- ---------------
CASH, end of year................................ $ -- $ -- $ --
============= ============= ===============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION --
Cash paid during the year for:
Interest on warehouse financing facility..... $ 350,000 $ 1,581,000 $ 2,569,000
============= ============= ===============
SUPPLEMENTAL SCHEDULE OF NONCASH ACTIVITIES:
Transfer of loans to real estate acquired
through foreclosure.......................... $ 168,000 $ -- $ --
============= ============= ===============
</TABLE>
F-10
<PAGE> 76
LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION
NOTES TO FINANCIAL STATEMENTS
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Long Beach Mortgage Company Broker-Sourced Loan Division (the "Company") is
engaged in the business of originating, purchasing and selling sub-prime
residential mortgage loans secured by one-to-four 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 for
traditional "A" credit because their credit history, income or other factors
cause them not to conform to standard agency lending criteria.
The Company follows a strategy of selling substantially all of it loan
originations (while retaining the related servicing rights in most cases) in the
secondary market through loan sales. Prior to originating loans, the Company
generally obtains a purchase commitment with respect to such loans from a loan
purchaser, thereby assuring a buyer for the loans once they are funded.
The Company had no separate legal status or existence through December 31,
1996 and operated as a division of Long Beach Mortgage Company ("Old Long
Beach"). In the normal course of business, the Company had various transactions
with other divisions of Old Long Beach that are material in amount. The
accompanying financial statements of the Company have been prepared from records
maintained by Old Long Beach. These financial statements also reflect key
assumptions regarding the allocation of certain revenue and expense items and
certain balance sheet accounts, many of which could be material (Note 3). The
accompanying historical financial statements of the Company may not necessarily
be indicative of the conditions that would have existed if the Company had
operated as an independent entity.
Prior to 1994, Old Long Beach operated as a federally-insured thrift
institution (then known as Long Beach Bank, F.S.B.). Long Beach Bank, F.S.B.
ceased operations and voluntarily surrendered its federal thrift charter in
October 1994 and transferred its broker-sourced business, along with its
direct-sourced business and loan servicing operations, to Old Long Beach, a then
newly formed entity, which has been operating under the name "Long Beach
Mortgage Company."
Old Long Beach is reorganizing its business operations (the
"Reorganization") by transferring certain assets (including independent broker
lists, office leases, furniture, leasehold improvements and equipment) and
personnel related to the broker-sourced mortgage lending and loan sales
operations of Old Long Beach and approximately $40 million in cash to a newly
formed company, Long Beach Financial Corporation ("LBFC"), in exchange for
25,000,000 shares of common stock for the purpose of selling certain shares of
LBFC in an initial public offering (the "Offering"). The assets being
transferred to LBFC include loans in process as of the time of the
Reorganization but do not include loans funded prior to the Reorganization or
servicing rights with respect to loans funded prior to the Reorganization. In
the Reorganization, LBFC is acquiring the right to the "Long Beach Mortgage
Company" name, and Old Long Beach will no longer use the name in its business.
LBFC will then contribute such assets to a subsidiary licensed to perform
mortgage banking activities.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Loans Held for Sale -- Loans held for sale are carried at the lower of
aggregate cost or market value. Loan origination fees and related direct
origination costs are deferred until the related loan is sold. Market value is
determined by outstanding commitments from investors, if any, or current
investor yield requirements on the aggregate basis.
Mortgage Servicing Rights -- Effective January 1, 1995, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 122, "Accounting for
Mortgage Servicing Rights," which requires that upon sale of servicing retained
mortgages, companies capitalize the cost associated with the right to service
mortgage loans based on their relative fair values. Retroactive implementation
of SFAS No. 122 was not permitted. The impact of adopting SFAS No. 122 was an
increase in pretax income of $4.1 million for the
F-11
<PAGE> 77
LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
year ended December 31, 1995. The Company capitalized $9.2 million in mortgage
servicing rights during the year ended December 31, 1996. The Company determines
fair value based on the present value of estimated net future cash flows related
to servicing income.
During 1995 and 1996, immediately after sale of the loans, the Company
transferred the servicing rights to an affiliated division of Old Long Beach at
their carrying value. If, in the future, the Company retains the mortgage
servicing rights asset, the cost allocated to the servicing rights will be
amortized in proportion to and over the period of estimated net future servicing
fee income. Such servicing rights will be reviewed periodically for impairment
which would be recognized in a valuation allowance for such pool in the period
of impairment.
Receivable from Sales of Loans -- Receivable from sales of loans represents
proceeds due from certain sales transactions which closed in December 1996. All
amounts due to the Company were collected by January 10, 1997.
Premises and Equipment -- Premises and equipment are stated at cost and
depreciated over the estimated useful lives of the assets using the
straight-line method. 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 five years.
Income Taxes -- 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. The
income tax provision has been computed as if the Company filed "separate
company" federal and state tax returns.
Divisional Equity -- Divisional equity represents cumulative net income
(loss), net of allocations of costs and expenses incurred by the Company and
paid by Old Long Beach, and cash generated and remitted to Old Long Beach.
Revenue Recognition -- Gain on sales of loans, representing the difference
between the total sales price received for the loans and the net carrying amount
of the loan, is recognized when mortgage loans are sold and delivered to the
purchasers.
Interest income is recorded as earned. Interest income represents the
interest earned on loans during the warehousing period (the period prior to
their sale).
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 Based Compensation -- In 1995, the Financial Accounting Standards
Board ("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 methods, which require 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. The Company will not adopt the accounting method in SFAS No. 123 with
respect to future stock incentive plans and will account for such plans in
accordance with Accounting Principles Board Opinion No. 25.
F-12
<PAGE> 78
LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
Recent Accounting Developments -- In June 1996 the FASB issued SFAS No.
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which was amended by SFAS No. 127. This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities based on
consistent application of a financial-components approach that focuses on
control. It distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. Under the financial-components approach,
after a transfer of financial assets, an entity recognizes all financial and
servicing assets it controls and liabilities it has incurred and derecognizes
financial assets it no longer controls and liabilities that have been
extinguished. The financial-components approach focuses on the assets and
liabilities that exist after the transfer. Many of these assets and liabilities
are components of financial assets that existed prior to the transfer. If a
transfer does not meet the criteria for a sale, the transfer is accounted for as
a secured borrowing with pledge of collateral. The Statement is effective for
transfers and servicing of financial assets and extinguishments of liabilities
occurring after December 31, 1996. Retroactive application of this Statement is
not permitted. The Company does not anticipate that the implementation of SFAS
No. 125 will have a material impact on its results of operations or financial
condition.
3. ASSUMPTIONS RELATED TO HISTORICAL FINANCIAL STATEMENTS OF THE COMPANY
The accompanying financial statements reflect the assets, liabilities,
revenues and expenses that were directly related to the continuing operations of
the Company as they were operated by Old Long Beach. Old Long Beach's historical
cost basis of the assets and liabilities has been carried over to the Company.
In cases involving assets, liabilities, revenues and expenses not specifically
identifiable to any particular division of Old Long Beach, certain allocations
were made to reflect the operations of the Company. Allocations have been made
for, among other things, accounting, information services, legal, compliance,
and other executive and administrative services. These allocations were based on
a variety of factors which take into consideration the loan origination volume,
employee head count, and historical ratios of direct expenses incurred by the
divisions to total direct expenses. Management believes these allocations
provide a reliable basis for the accompanying financial statements, which are
also based on the following assumptions:
1. No cash balances are recorded as part of these historical financial
statements as it was the practice of Old Long Beach not to maintain
separate cash balances for the various divisions.
2. The net change in divisional equity (deficit) arising from
intracompany transactions, as reflected in the statements of divisional
equity (deficit) includes, (i) the aggregate intracompany allocations of
costs and expenses incurred by the Company and paid by Old Long Beach, (ii)
cash generated by the Company and collected by Old Long Beach during the
periods presented and (iii) cash advanced by Old Long Beach on behalf of
the Company. The net change in divisional equity (deficit) arising from
intracompany transactions also includes all liabilities of the Company,
such as income taxes payable, that are not separate legal obligations of
the Company but have been charged to the Company.
3. Prior to October 1994, when Long Beach Bank, F.S.B. ceased
operations and Old Long Beach commenced operations as a mortgage banking
company with the concurrent establishment of the warehouse financing
facility (see Note 5), interest expense was recorded as if Old Long Beach
provided warehouse financing bearing interest at a rate equal to its
internal cost of funds.
The cash generated by the Company and collected by Old Long Beach consisted
primarily of proceeds from the sales of loans of $562.1 million, $580.4 million
and $1.0 billion for the years ended December 31, 1994, 1995, and 1996,
respectively. Advances by Old Long Beach on behalf of the Company consisted
primarily of the cash used to pay operating expenses and fund loans. Also, Old
Long Beach allocated a portion of the net borrowings under its warehouse
financing facility to the Company. Cash used to fund loans was $565.5 million,
$592.5 million and $1.1 billion for the years ended December 31, 1994, 1995 and
1996, respectively.
F-13
<PAGE> 79
LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
Total costs allocated to the Company by Old Long Beach for the years ended
December 31, 1994, 1995 and 1996 were $9.7 million, $7.0 million and $8.9
million, respectively. While the Company believes that the expenses reflected in
the accompanying statements of operations would not have been materially
affected if it had operated as a stand alone entity, no assurance can be given
that such expenses are indicative of expenses to be incurred in the future.
4. PREMISES AND EQUIPMENT
Premises and equipment at December 31 consists of the following:
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Furniture and equipment............................ $2,789,000 $ 2,947,000
Leasehold improvements............................. -- 149,000
---------- -----------
2,789,000 3,096,000
Less accumulated depreciation and amortization..... (963,000) (1,063,000)
---------- -----------
$1,826,000 $ 2,033,000
========== ===========
</TABLE>
5. WAREHOUSE FINANCING FACILITY
The Company shares the use of an Old Long Beach warehouse financing
facility funded by a national banking association and a syndicate of lenders.
This facility commenced in October 1994 when Old Long Beach voluntarily
surrendered its thrift charter. The facility which the Company utilizes, along
with other divisions of Old Long Beach, provides for a borrowing capacity of
$300 million. The facility expires on May 31, 1997 and is collateralized by
loans held for sale and advances to investors. The facility bears interest at a
fixed rate, a rate based on the London Interbank Offered Rate ("LIBOR") for U.S.
dollar deposits, or a combination of the two, at the option of Old Long Beach.
The following table presents data on the warehouse financing facility of
Old Long Beach for the years ended December 31:
<TABLE>
<CAPTION>
1994 1995 1996
----------- ------------ ------------
<S> <C> <C> <C>
Weighted average interest rate for the
period.................................. 7.49% 7.77% 7.28%
Weighted average interest rate at the end
of the period........................... 7.90% 7.51% 7.25%
Weighted average amount outstanding for
the period.............................. $53,223,000 $ 78,588,000 $ 97,714,000
Maximum amount outstanding at any
month-end............................... $78,747,000 $108,735,000 $170,102,000
</TABLE>
Because this facility will not be available to the Company after the
Reorganization and Offering, the Company is in negotiations to establish an
independent line of credit for the exclusive use of Company operations. The
Company believes that it will establish this new facility with adequate
borrowing capacity and terms similar to those of the existing facility described
above. The establishment of such a facility is a condition precedent to
effecting the Reorganization.
The Company was allocated capitalized warehouse financing issuance costs of
$352,000, $34,000 and $165,000 for the years ended December 31, 1994, 1995 and
1996, respectively. The Company recorded interest expense related to the
amortization of warehouse financing issuance costs of $73,000, $233,000 and
$245,000 for the years ended December 31, 1994, 1995 and 1996, respectively. At
December 31, 1995, the unamortized warehouse financing issuance cost was
$80,000. There were no unamortized warehouse financing issuance costs at
December 31, 1996.
F-14
<PAGE> 80
LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
6. COMMITMENTS, CONTINGENCIES, CONCENTRATIONS OF RISK AND RELATED PARTY
TRANSACTIONS
COMMITMENTS
The Company's operations are conducted from leased facilities located in
various areas of the United States. These leases have clauses which provide for
increases in rent based on increases in the cost of living index and options for
renewal. Rental expense for the years ended December 31, 1994, 1995 and 1996 was
$840,000, $1,290,000 and $1,394,000, respectively. The future minimum lease
payments are as follows:
<TABLE>
<S> <C>
Year ending December 31:
1997......................................................... $ 897,000
1998......................................................... 682,000
1999......................................................... 577,000
2000......................................................... 509,000
2001......................................................... 223,000
Thereafter................................................... --
----------
$2,888,000
==========
</TABLE>
The following table sets forth the minimum lease payments related to the
Company's capital lease obligations of certain furniture and equipment as of
December 31, 1996:
<TABLE>
<S> <C>
Year ending December 31:
1997.......................................................... $120,500
1998.......................................................... 120,500
1999.......................................................... 120,500
2000.......................................................... 120,500
2001.......................................................... 65,000
--------
547,000
Less amounts representing interest.............................. (92,000)
--------
Capital lease obligations as of December 31, 1996............... $455,000
========
</TABLE>
The capital lease obligations are included in accrued liabilities in the
accompanying statement of financial condition. As of December 31, 1996, the net
book value of furniture and equipment under capital lease was $447,000. The
Company did not have any capital lease obligations as of December 31, 1995.
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 is party to financial instruments with off-balance sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments primarily represent commitments to fund and sell
loans. These instruments involve, to varying degrees, elements of interest rate
risk and credit risk in excess of the amount recognized in the statement of
financial condition. The credit risk is mitigated by the Company's evaluation of
the creditworthiness of potential borrowers on a case-by-case basis.
F-15
<PAGE> 81
LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
Commitments to fund and sell loans generally have fixed expiration dates or
other termination clauses and may require payment of a fee. Also, external
market forces impact the probability of commitments being exercised; therefore,
total commitments outstanding do not necessarily represent future cash
requirements.
The Company had commitments to fund loans of $107.7 million and $165.4
million at December 31, 1995 and 1996, respectively. The Company had no loan
purchase commitments outstanding at December 31, 1995. The Company's loan
purchase commitments totaled $7.0 million at December 31, 1996. Old Long Beach
had loan sale commitments of $293.0 million at December 31, 1995. Old Long Beach
has entered into forward loan sale contracts under which it has committed to
deliver $720.0 million loans that will be originated prior to April 1, 1997. The
Company will sell any such loans to Old Long Beach at the same price that Old
Long Beach has committed to sell such loans to its loan purchaser in order to
enable Old Long Beach to fulfill this commitment. The Company expects that loans
originated by the Company on or after April 1, 1997 will be sold by it pursuant
to loan sales contracts entered into directly with the purchasers.
CONTINGENCIES
In September 1996, Old Long Beach entered into a settlement agreement with
the U.S. Department of Justice ("DOJ") arising out of a DOJ investigation and
complaint which alleged that Long Beach Bank, F.S.B. during the period from
January 1991 through June 1994 charged certain African-American, Hispanic,
female and older borrowers more than younger, white male borrowers in violation
of fair lending laws. Old Long Beach denied all allegations in the complaint and
all claims of discrimination. Old Long Beach also disputed the validity of the
statistical analysis relied upon by the DOJ as the principal basis for its
claims and further maintained that the DOJ theories of liability regarding
broker-sourced lending were legally unsupportable. Nonetheless, to avoid costly,
protracted litigation, Old Long Beach agreed to establish a $3 million fund to
reimburse up to 1,200 borrowers identified by the DOJ as the maximum number of
individuals who may have been affected by the alleged fair lending violations.
Old Long Beach asserted that the better solution to the issued raised by the DOJ
was an intensive national effort in consumer education and industry-wide
initiatives directed at employee and broker education and training. For this
reason, Old Long Beach also agreed to contribute an additional $1 million
(payable over 3 years) to fund consumer education programs in conjunction with
civil rights groups. Old Long Beach has established all funds required by the
settlement agreement.
The DOJ settlement, which is binding upon the Company as a successor to Old
Long Beach, provides that the Company will (i) document any price exceptions
from the Company's rate sheet on broker-sourced loans, (ii) periodically review
the results of its broker-sourced lending operations for its compliance with
fair lending laws but in no event shall the Company be required to disclose any
documents or information therewith, including the identities of any brokers with
whom it does business, (iii) retain all loan application files submitted for
mortgage loans and all loan-rider documents and notices relevant to any pricing
decisions until September 1999 and report to the DOJ semi-annually on compliance
with the settlement agreement and (iv) provide to brokers information about the
Company's fair-lending and pricing procedures and an opportunity to participate
in fair-lending training.
While the Company believes it is in compliance with the broker-sourced
provisions of the settlement agreement, there can be no assurance that the DOJ
will not take a contrary position in the future and seek to compel compliance by
the Company. The Company was allocated $267,000 and $1,065,000 in 1995 and 1996,
respectively, of the settlement costs on the basis of the portion of the
settlement pertaining to broker-sourced loans, as stipulated in the settlement
agreement, which is included in other expenses in the accompanying statement of
operations.
When the Company operated as a division of Old Long Beach, it was involved
in various lawsuits incidental to its business, none of which had a material
adverse effect on the Company. However, in the
F-16
<PAGE> 82
LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
Reorganization, the Company is not assuming any liabilities that may arise out
of any lending activities of Old Long Beach prior to the Reorganization, other
than certain liabilities relating to the assets or personnel being transferred,
including liabilities related to the broker-sourced mortgage loan operations,
nor is the Company indemnifying Old Long Beach against any such liabilities. As
such, the Company is not involved currently in any litigation.
CONCENTRATIONS OF RISK
The Company funds substantially all of the loans which it originates or
purchases through borrowings under the warehouse financing facility (see Note
5). These borrowings are in turn repaid with the proceeds received by the
Company from selling such loans. Because this facility will not be available to
the Company after the Reorganization and Offering, any failure to obtain
adequate funding under new borrowing facilities 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 replacing
existing financing, it would have to curtail its loan production activities,
thereby having a material adverse effect on the Company's results of operations
and financial condition.
Periods of economic slowdown may reduce the demand for mortgage loans as
people elect not to purchase new homes due to economic uncertainty and also may
adversely affect the financial condition of potential borrowers so that they do
not meet the Company's underwriting criteria. In addition, economic slowdowns
may cause a decline in real estate values. Any material decline in real estate
values will reduce the ability of borrowers to use home equity to support
borrowings by negatively affecting loan-to-value ratios of the home equity
collateral. To the extent that the loan-to-value ratios of prospective
borrowers' home equity collateral do not meet the Company's underwriting
criteria, the volume of loans originated by the Company could decline.
The Company began originating sub-prime mortgage loans in southern
California in 1988 and started to expand its business outside California on a
limited basis in 1992. In 1994, the Company began to focus its attention on more
aggressive expansion outside California. For the year ended December 31, 1996,
approximately 37.1% of the dollar volume of loans originated or purchased by the
Company were secured by properties located in California. No other state
contained properties securing more than 10% of the dollar volume of loans
originated or purchased by the Company during the year ended December 31, 1996.
Although the Company has a nationwide independent broker network and regional
processing center network, the Company is likely to continue to have a
significant amount of its loan originations and purchases in California for the
foreseeable future, primarily because California represents a significant
portion of the national mortgage marketplace. Consequently, the Company's
results of operations and financial condition are dependent upon the general
trends in the California economy and its residential real estate market.
Residential real estate market declines may adversely affect the values of
properties securing loans such that the principal balances of such loans will
equal or exceed the value of the mortgaged properties. Reduced collateral value
will adversely affect the volume of the Company's loans as well as the pricing
of the Company's loans and the Company's ability to sell its loans.
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. Accordingly, the
actual rates of delinquencies, foreclosures and losses on such loans could be
higher under adverse economic conditions than those currently experienced by the
mortgage lending industry in general. Any sustained period of increased
delinquencies, foreclosures or losses after the loans are sold could adversely
affect the pricing of the Company's loan sales and the ability of the Company to
sell its loans.
F-17
<PAGE> 83
LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
The Company has historically sold substantially all of its loan
originations in the secondary market to a limited number of institutional
purchasers. There can be no assurance that such purchasers of the Company's
loans will continue to purchase loans or be willing to purchase loans under
terms which such purchasers have historically purchased the Company's loans. To
the extent that the Company could not successfully replace such loan purchasers
or negotiate favorable terms for such loan purchasers, the Company's results of
operations and financial condition could be materially adversely affected.
The Company depends largely on independent mortgage brokers, and to a
lesser extent, smaller mortgage companies and commercial banks for its
originations and purchases of loans. The Company's competitors also seek to
establish relationships with such independent mortgage brokers, mortgage
companies and commercial banks, none of whom is obligated by contract or
otherwise to continue to do business with the Company. The Company's future
operating and financial results may be more susceptible to fluctuations in the
volume and costs of its broker-sourced loans resulting from, among other things,
competition from other purchasers of such loans.
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 and judicial and administrative decisions imposing requirements and
restrictions on a substantial portion of its operations. These rules and
regulations, among other things, impose licensing obligations on the Company,
establish eligibility criteria for mortgage loans, prohibit discrimination,
provide for inspections and appraisals of properties, require credit reports on
loan applicants, regulate assessment, collection, foreclosure and claims
handling, investment and interest payments on escrow balances and payment
features, mandate certain disclosures and notices to borrowers and, in some
cases, fix maximum interest rates, fees and mortgage loan amounts. Failure to
comply with these requirements can lead to loss of approved status, termination
or suspension of servicing contracts without compensation to the servicer,
demands for indemnifications or mortgage loan repurchases, certain rights of
recission for borrowers, class action lawsuits and administrative enforcement
actions. Although the Company believes that it has systems and procedures to
facilitate compliance with these requirements and believes that it is in
compliance in all material respects with applicable local, state and federal
laws, rules and regulations, in the future more restrictive laws, rules and
regulations or the judicial interpretation of existing laws, rules and
regulations could make compliance more difficult or expensive.
Lawsuits have been filed against several mortgage lenders, including Old
Long Beach, alleging that such lenders have made certain payments to independent
mortgage brokers in violation of RESPA. These lawsuits have generally been filed
on behalf of a purported nationwide class of borrowers alleging that payments
made by a lender to a broker in addition to payments made by the borrower to a
broker are prohibited by RESPA and are therefore illegal. If these cases are
resolved against the lenders, it may cause an industry-wide change in the way
independent mortgage brokers are compensated. The Company's broker compensation
programs permit such payments. Although the Company believes that its broker
compensation programs comply with all applicable laws and are consistent with
long-standing industry practice and regulatory interpretations, in the future,
new regulatory interpretations or judicial decisions may require the Company to
change its broker compensation practices. Such a change may have a material
adverse effect on the Company and the entire mortgage lending industry.
RELATED PARTY TRANSACTIONS
Administrative Services -- In connection with the Reorganization, the
Company and Old Long Beach are entering into an administrative services
agreement under which Old Long Beach will continue to provide various services
to the Company, including certain employee benefits administration, finance and
accounting technical support, information services and data processing
functions. Any failure by Old Long Beach to
F-18
<PAGE> 84
LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
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.
In addition, the Company and Old Long Beach are entering into a second
administrative services agreement pursuant to which the Company will perform all
functions necessary on behalf of Old Long Beach to sell the mortgage loans
originated by Old Long Beach. Once Old Long Beach develops such internal
capability, Old Long Beach will terminate such agreement.
Loan Sub-Servicing -- In connection with the Reorganization, the Company
and Old Long Beach are entering into a loan sub-servicing agreement pursuant to
which a division of Old Long Beach will sub-service mortgage loans originated or
purchased by the Company after the Reorganization.
Income Taxes -- In connection with the Reorganization, Old Long Beach and
Long Beach Financial Services Company, the sole stockholder of Old Long Beach,
have agreed to indemnify and hold the Company harmless from any tax liability
attributable to periods ending on or before the consummation of the Offering.
For periods ending after the consummation of the Offering, the Company will pay
its tax liability directly to the appropriate taxing authorities.
The above-described agreements have been developed in the context of a
parent/subsidiary relationship and therefore are not the result of arm's length
negotiations between independent parties.
7. INCOME TAXES
The income tax provision (benefit) consists of the following:
<TABLE>
<CAPTION>
1994 1995 1996
--------- ---------- -----------
<S> <C> <C> <C>
Current:
Federal..................................... $ 189,000 $3,606,000 $ 5,895,000
State....................................... 1,000 1,125,000 1,923,000
--------- ----------- -----------
190,000 4,731,000 7,818,000
--------- ----------- -----------
Deferred:
Federal..................................... (195,000) (562,000) (1,135,000)
State....................................... 19,000 (103,000)
--------- ----------- -----------
(176,000) (562,000) (1,238,000)
--------- ----------- -----------
$ 14,000 $4,169,000 $ 6,580,000
========= =========== ===========
</TABLE>
Actual income tax rates differed from statutory rates as follows:
<TABLE>
<CAPTION>
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Federal income taxes at statutory rates................. 35.0% 35.0% 35.0%
California franchise tax, net of federal tax benefit.... 4.0 7.4 7.4
Other................................................... (.1) (0.5) (1.2)
---- ---- ----
38.9% 41.9% 41.2%
==== ==== ====
</TABLE>
F-19
<PAGE> 85
LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
The components of the net deferred tax assets (liabilities) are as follows:
<TABLE>
<CAPTION>
1995 1996
--------- ----------
<S> <C> <C>
Deferred tax liabilities:
Depreciation.............................................. $(110,000) $ (158,000)
--------- ----------
Deferred tax assets:
Bad debt reserves......................................... -- 164,000
Mark to market adjustment................................. 426,000 998,000
Legal reserves............................................ 183,000 482,000
State taxes............................................... 383,000 634,000
--------- ----------
992,000 2,278,000
--------- ----------
Net deferred tax asset...................................... $ 882,000 $2,120,000
========= ==========
</TABLE>
8. FINANCIAL INSTRUMENTS AND OFF-BALANCE SHEET ACTIVITIES
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 at
December 31:
<TABLE>
<CAPTION>
1995 1996
------------------------- -------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Loans held for sale............ $21,342,000 $22,459,000 $49,580,000 $52,122,000
Liabilities:
Warehouse financing facility... $20,613,000 $20,613,000 $72,829,000 $72,829,000
Off-balance-sheet unrealized gains
(losses):
Loan origination commitments... $ -- $ -- $ -- $ --
</TABLE>
The estimated fair value of loans is based upon quoted market prices.
Warehouse financing facility is valued at par as management believes that
the terms of the warehouse financing facility represent current market rates.
The fair value of loan origination commitments is estimated using the fees
currently charged to enter into similar agreements, taking into account the
remaining terms of the agreements and the present creditworthiness of the
counterparties.
The fair value estimates are based on pertinent information available to
management as of December 31, 1995 and 1996. 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.
F-20
<PAGE> 86
LONG BEACH MORTGAGE COMPANY BROKER-SOURCED LOAN DIVISION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1996
9. EMPLOYEE BENEFIT PLAN
Old Long Beach has a 401(k) defined contribution plan available to
substantially all employees. Employees may generally contribute up to 15% of
qualifying contribution each year; and Old Long Beach, at its discretion, may
match up to the first 6% of qualifying compensation. Employees become vested in
Old Long Beach's contribution at a rate of 25% per year after the second year of
service, with complete vesting after five years. The Company's allocated share
of contribution expense was $144,000, $84,000 and $149,000 in the years ended
December 31, 1994, 1995 and 1996, respectively, based on estimated contribution
levels. The Company determined that it would not contribute for the 1994 plan
year in 1995, and the expense was reversed and recorded as income in that
period.
F-21
<PAGE> 87
======================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE 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>
Summary................................... 3
Risk Factors.............................. 8
Reorganization............................ 16
Dividends................................. 19
Dilution.................................. 19
Capitalization............................ 20
Selected Consolidated Financial Data...... 21
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 22
Business.................................. 29
Unaudited Pro Forma Consolidated Financial
Data.................................... 46
Management................................ 48
Certain Relationships and Related
Transactions............................ 55
Beneficial Ownership of Securities and
Selling Stockholder..................... 58
Description of Capital Stock.............. 59
Shares Eligible for Future Sale........... 61
Underwriting.............................. 62
Legal Matters............................. 63
Experts................................... 64
Available Information..................... 64
Index to Financial Statements............. F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED 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.
======================================================
======================================================
21,750,000 SHARES
LONG BEACH FINANCIAL
CORPORATION
COMMON STOCK
-----------------
PROSPECTUS
-----------------
FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.
, 1997
======================================================
<PAGE> 88
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the offering (all of which will
be borne by Long Beach Mortgage Company ("Old Long Beach")) are as follows:
<TABLE>
<CAPTION>
EXPENSES AMOUNT
------------------------------------------------------------------ --------
<S> <C>
Securities and Exchange Commission Registration Fee............... $ 90,910
National Association of Securities Dealers, Inc. Filing Fee....... 30,500
Nasdaq Listing Fee................................................ 50,000
Printing Expenses................................................. 150,000
Legal Fees and Expenses........................................... 300,000
Transfer Agent and Registrar Fees................................. 2,000
Accounting Fees and Expenses...................................... 200,000
Blue Sky Fees and Expenses........................................ 10,000
Miscellaneous Expenses............................................ 16,590
--------
Total................................................... $850,000
========
</TABLE>
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 the 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 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.
II-1
<PAGE> 89
As permitted by Section 102(b)(7) of the GCL, the Company's Certificate of
Incorporation and Bylaws each provide 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 Certificate of Incorporation requires the Company to
indemnify any person (or the estate of any person) who was or is 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 Company and whether
civil, criminal, administrative or investigative or otherwise by reason of the
fact that such person is or was a director or officer of the Company, or is or
was serving at the request of the Company as a director or officer of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses incurred (including attorneys' fees), judgments, fines and amounts paid
in settlement. Any such expenses shall be paid by the Company 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.
Notwithstanding the foregoing, the Company will not make such an advance if
a determination is reasonably and promptly made by the Board of Directors by a
majority vote of a quorum of disinterested Directors, or (if such a quorum is
not obtainable or, even if obtainable, a quorum of disinterested Directors so
directs) by independent legal counsel to the Company, that, based upon the facts
known to the Board of Directors or such counsel at the time such determination
is made, (a) the party seeking an advance acted in bad faith or deliberately
breached his or her duty to the Company or its stockholders, and (b) as a result
of such actions by the party seeking an advance, it is more likely than not that
it will ultimately be determined that such party is not entitled to
indemnification pursuant to the provisions of the Certificate of Incorporation
or Bylaws, as applicable.
The Company may, to the fullest extent permitted by the GCL, purchase and
maintain insurance on behalf of any such person against any liability which may
be asserted against such person. The Company 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 in the Certificate of Incorporation.
The Company may, but only to the extent that the Board of Directors may
authorize from time to time, grant rights to indemnification and to the
advancement of expenses to any employee or agent of the Company to the fullest
extent of the provisions described above as it applies to the indemnification
and advancement of expenses of directors and officers of the Company.
The Company anticipates obtaining a policy of directors' and officers'
liability insurance prior to the completion of the 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.
The Company will enter into indemnification agreements (the
"Indemnification Agreements") with its executive officers and directors. These
Indemnification Agreements require the Company to indemnify, in the manner and
to the fullest extent permitted by the GCL, each executive officer and director
if he or she is or was a party to, or is threatened to be made a party to, any
action, suit or proceeding individually or in the right of the Company or any
subsidiary of the Company, by reason of (a) the fact that such executive officer
or director is or was an executive officer or director of the Company or any
subsidiary and/or (b) the fact that such executive officer or director is or was
serving at the request of the Company as a director or officer of another
corporation or other enterprise. The indemnification extends to all expenses as
incurred (including attorneys' fees), judgments, fines and amounts paid in
settlement of such action, suit or proceeding. The
II-2
<PAGE> 90
Company must further advance, within 20 days of a written request, all expenses
incurred by the executive officer or director in connection with the
investigation, defense, settlement or appeal of any such action or proceeding;
provided, however, that the executive officer or director must repay such
amounts advanced if it is ultimately determined that he or she is not entitled
to be indemnified by the Company. Notwithstanding the foregoing, the Company
will not make such an advance if a determination is reasonably and promptly made
by the Board of Directors by a majority vote of a quorum of disinterested
Directors, or (if such a quorum is not obtainable or, even if obtainable, a
quorum of disinterested Directors so directs) by independent legal counsel to
the Company, that, based upon the facts known to the Board of Directors or such
counsel at the time such determination is made, (a) the party seeking an advance
acted in bad faith or deliberately breached his or her duty to the Company or
its stockholders, and (b) as a result of such actions by the party seeking an
advance, it is more likely than not that it will ultimately be determined that
such party is not entitled to indemnification pursuant to the provisions of the
Indemnification Agreement. Under the Indemnification Agreements, the executive
officers and directors are permitted to petition the court to seek recovery of
amounts due under the Indemnification Agreements and to recover the expenses of
seeking such recovery if he or she is successful. Absent the Indemnification
Agreements, indemnification that might be made available to executive officers
and directors could be changed by amendments to the Company's Certificate of
Incorporation or Bylaws. Benefits under the Indemnification Agreements are not
available, however, to indemnify an executive officer or director (a) with
respect to proceedings or claims initiated by the executive officer or director
that are not by way of defense (unless authorized by the Board of Directors);
(b) with respect to liability for transactions from which the executive officer
or director derived an improper personal benefit; (c) if the executive officer
or director is determined to have committed acts of active and deliberate
dishonesty; (d) for expenses or liabilities that have been paid to the executive
officer or director under an insurance policy maintained by the Company or
otherwise by any other means; or (e) for an accounting of profits realized from
the purchase and sale of securities within the meaning of Section 16(b) of the
Securities Exchange Act of 1934.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers or
persons controlling the Company pursuant to the foregoing provisions, the
registrant has been informed that in the opinion of the Securities and Exchange
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.
The Company issued one share of its common stock to Old Long Beach on
January 31, 1997, in consideration of $1,000 in cash. The Company is issuing an
additional 24,999,999 shares of its common stock to Old Long Beach in
consideration of the contribution to the Company by Old Long Beach of the assets
and personnel related to Old Long Beach's broker-sourced mortgage lending and
loan sales operations and approximately $40 million in cash. These issuances to
Old Long Beach constitute 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.
II-3
<PAGE> 91
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
*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
**5.1 Opinion of Gibson, Dunn & Crutcher LLP
8.1 Opinion of Gibson, Dunn & Crutcher LLP
**10.1 Form of 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 Long
Beach Financial 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 Form of 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
*21.1 List of Subsidiaries
23.1 Consent of Deloitte & Touche LLP
23.2 Consent of Deloitte & Touche LLP
**23.3 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 5.1)
23.4 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 8.1)
*24.1 Power of Attorney (included on signature page)
*27 Financial Data Schedule
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
(b) Financial Statement Schedules.
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the applicable instructions or are inapplicable and therefore
have been omitted.
II-4
<PAGE> 92
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising out of the Securities
Act of 1933 (the "Act") 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.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, 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 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 Act, 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 offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
II-5
<PAGE> 93
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Orange, State of California, on April 15, 1997.
LONG BEACH FINANCIAL CORPORATION
By: *
------------------------------------
M. Jack Mayesh
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities indicated on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------- ---------------
<S> <C> <C>
* Chairman of the Board of April 15, 1997
- ------------------------------------------ Directors and Chief Executive
M. Jack Mayesh Officer (Principal Executive
Officer)
/s/ JAMES H. LEONETTI Chief Financial Officer, April 15, 1997
- ------------------------------------------ Senior Vice President
James H. Leonetti (Principal Financial Officer)
* Controller April 15, 1997
- ------------------------------------------ (Principal Accounting Officer)
Brett Atkinson
* President, Director April 15, 1997
- ------------------------------------------
Edward Resendez
* Director April 15, 1997
- ------------------------------------------
David S. Engelman
* Director April 15, 1997
- ------------------------------------------
C. Stephen Mansfield
*By: /s/ JAMES J. SULLIVAN April 15, 1997
-------------------------------------
James J. Sullivan
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 94
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- ------- ------------------------------------------------------------------------ ------------
<C> <S> <C>
1.1 Form of Underwriting Agreement..........................................
*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........
**5.1 Opinion of Gibson, Dunn & Crutcher LLP..................................
8.1 Opinion of Gibson, Dunn & Crutcher LLP..................................
**10.1 Form of 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 Long Beach Financial 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 Form of 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..............................
*21.1 List of Subsidiaries....................................................
23.1 Consent of Deloitte & Touche LLP........................................
23.2 Consent of Deloitte & Touche LLP........................................
**23.3 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 5.1)........
23.4 Consent of Gibson, Dunn & Crutcher LLP (included in Exhibit 8.1)
*24.1 Power of Attorney (included on signature page)..........................
*27 Financial Data Schedule.................................................
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
<PAGE> 1
Exhibit 1.1
LONG BEACH FINANCIAL CORPORATION
21,750,000 SHARES(1)
COMMON STOCK
FORM OF UNDERWRITING AGREEMENT
April __, 1997
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
as Representatives of the Several Underwriters
c/o Friedman, Billings, Ramsey & Co., Inc.
Potomac Tower
1001 Nineteenth Street North
Arlington, Virginia 22209
Ladies and Gentlemen:
Long Beach Financial Corporation, a Delaware corporation (the
"Company") and Long Beach Mortgage Company, a Delaware corporation that is to be
renamed Ameriquest Mortgage Company immediately following the consummation of
the Reorganization (as hereinafter defined) (the "Selling Securityholder"),
hereby confirm their agreement with the several underwriters named in Schedule I
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. This Agreement contemplates the
consummation, as of the Firm Closing Date (as hereinafter defined), of the
"Reorganization" pursuant to which the Selling Securityholder will contribute to
the Company $40 million in cash and the assets and personnel relating to the
Company's broker-sourced mortgage lending and loan sales operations, as more
fully set forth in the Prospectus (as hereinafter defined). All references
herein to the Company and the Selling Securityholder and representations and
warranties relating thereto are made as of the date hereof, except for those
representations and warranties herein which state that they are made as of the
Firm Closing Date and the consummation of the Reorganization.
1. Securities. Subject to the terms and conditions herein contained,
the Selling Securityholder proposes to sell to the several Underwriters on the
Firm Closing Date an aggregate of 21,750,000 shares of the Company's Common
Stock, $0.001 par value per share (the "Common Stock") (such Common Stock shall
be referred to herein as the "Firm Securities"). The Selling Securityholder also
proposes to grant to the several Underwriters an option to purchase up to an
aggregate of 3,250,000 additional shares of Common Stock, all of which will be
sold by the Selling Securityholder (the "Option Securities" and collectively
with the Firm Securities, the "Securities") if requested by the Representative
as provided in Section 3 of this Agreement. The Common Stock is more fully
described in the Registration Statement and the Prospectus hereinafter
mentioned.
- -------------------
1 Plus an option to purchase from the Selling Securityholder up to 3,250,000
additional shares to cover over-allotments, if any.
<PAGE> 2
2. Representations and Warranties of the Company and the Selling
Securityholder
(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. 333-22013) 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 have been so filed, if applicable. Copies of
such registration statement and of each amendment thereto, if any,
including the related preliminary prospectus (meeting the requirements
of Rule 430A under the Act) heretofore filed by the Company with the
Commission have been delivered to you. After the execution of this
Agreement, the Company will file with the Commission either: (A) if
such registration statement, as it may have been amended, has been
declared by the Commission to be effective under the Act, either (1) 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 (2) 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 (A)(1) or (A)(2) of this sentence, as have been provided to and
approved by the Representative prior to the execution of this
Agreement; or (B) 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 abbreviated 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. If the Company has elected to rely on Rule 462(b) under the
Act and the Rule 462(b) Registration Statement (as hereinafter defined)
has not been declared effective: (A) the Company has filed a Rule
462(b) Registration Statement in compliance with the Act and the rules
and regulations of the Commission promulgated thereunder and that the
Rule 462(b) Registration Statement is effective upon filing pursuant to
Rule 462(b) under the Act and the Company has received confirmation of
its receipt; and (B) the 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. 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
abbreviated 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
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
2
<PAGE> 3
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 or instituted
proceedings for such purpose. 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 promulgated 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 promulgated 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 or any Term Sheet,
if applicable, 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 promulgated 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 in, or omissions from, 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 or on
behalf of the Underwriters specifically for use therein.
(iii) Each of the Company and its subsidiary, Ameriquest Mortgage
Corporation, a Delaware corporation that is to be renamed Long Beach
Mortgage Company immediately following the consummation of the
Reorganization (the "Subsidiary"), has been duly incorporated and is
validly existing and in good standing under the laws of its
jurisdiction of organization and is duly qualified to transact business
as a foreign entity and is in good standing under the laws of all other
jurisdictions where the ownership or leasing of its properties or the
conduct of its businesses requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on
the business, properties, business prospects, financial condition or
results of operations of the Company and the Subsidiary, taken as a
whole (a "Material Adverse Effect").
(iv) Each of the Company and the Subsidiary will have, as of the
Firm Closing Date, the corporate power and authority to own or lease
its properties and conduct its 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 the legal right, corporate power and authority to enter into this
Agreement and to perform the transactions contemplated hereby.
(v) All issued and outstanding shares of the Subsidiary have
been duly authorized and validly issued, are fully paid and
nonassessable, and have not been issued in violation of or subject to
any preemptive right, co-sale right, registration right, right of first
refusal or other similar right and are owned by the Company free and
clear of any pledge, security interests, liens, encumbrances, claims or
3
<PAGE> 4
equitable interests. The Company does not own or control, directly or
indirectly, any corporation, association or other entity other than the
Subsidiary.
(vi) The Company has, or as of the Firm Closing Date will have,
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) under the caption "Capitalization." All
of the issued and outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid and
nonassessable, have been issued in compliance with all Federal and
state securities laws, and have not been issued in violation of or
subject to any preemptive rights or other rights to subscribe for or
purchase securities. 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.
(vii) The capital stock of the Company conforms to the
description thereof and statements relating thereto contained in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), and such statements correctly state the
substance of the instruments defining the capitalization of the
Company.
(viii) 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 the Subsidiary convertible into or exchangeable for any
capital stock or ownership interests of the Company or the Subsidiary;
(B) warrants, rights or options to subscribe for or purchase from the
Company or the Subsidiary any such capital stock or ownership interest
or any such convertible or exchangeable securities or obligations; or
(C) obligations of the Company or the Subsidiary to issue any shares of
capital stock or any ownership interests, any such convertible or
exchangeable securities or obligations, or any such warrants, rights or
options. The description of the Company's stock option and deferred
compensation plans, and the options or other rights granted or to be
granted thereunder, set forth in the Prospectus accurately and fairly
presents the information required to be shown with respect to such
plans, arrangements, options and rights.
(ix) The audited consolidated financial statements of the
Company and the Subsidiary, together with the related schedules and
notes, and the unaudited consolidated financial information, included
in the Registration Statement and the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus), present
fairly the financial position of the Company and the Subsidiary, the
results of operations and changes in financial condition as of the
dates and periods therein specified. Such financial statements and
schedules have been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods
involved (except as otherwise noted therein). The consolidated and
summary financial and statistical data included in the Registration
Statement present fairly the information included therein and have been
compiled on a basis consistent with the audited financial statements
presented therein. No other financial statements or schedules are
required to be included in the Registration Statement.
(x) Deloitte & Touche LLP, who have audited certain financial
statements of the Company and the Subsidiary and delivered their report
with respect to the audited consolidated financial statements, together
with the related schedules and notes, 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 within the meaning of the Act and the applicable
rules and regulations thereunder.
(xi) 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
4
<PAGE> 5
and binding agreement of the Company, enforceable against the Company
in accordance with its terms, except as the enforcement hereof may be
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors'
rights generally, or by general equitable principles.
(xii) No legal or governmental action, suit, claim or other
proceedings are pending to which the Company or the Subsidiary is a
party or to which the property of the Company or the Subsidiary is
subject that would have a Material Adverse Effect, and to the best
knowledge of the Company no such actions, suits or proceedings have
been threatened against the Company or the Subsidiary or with respect
to any of their respective properties or is required to be described in
the Registration Statement or the Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), and is not
so described; and no contract or other document is required to be
described in the Registration Statement or the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus), or to be filed as an exhibit to the Registration Statement
that is not described therein or filed as required and any such
description of such contracts or agreements conforms in all material
respects to the terms of such contracts or agreements.
(xiii) Neither the Company nor the Subsidiary is in violation of
its certificate of incorporation or bylaws.
(xiv) The following agreements to which the Company or the
Subsidiary is a party, and any other agreements to which the Company or
the Subsidiary is a party which are described in the Registration
Statement and Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus), will be, as of the Firm
Closing Date, valid agreements enforceable by the Company and the
Subsidiary (as applicable), except as the enforcement thereof may be
limited by applicable bankruptcy, insolvency, reorganization,
moratorium or similar laws relating to or affecting creditors' rights
generally or by general equitable principles and except where the lack
of enforceability would not have a Material Adverse Effect: (A) that
certain 4/97 Senior Secured Credit Agreement dated April __, 1997
between the Subsidiary and Texas Commerce Bank, National Association,
as agent and lender, and any other documents governing the Subsidiary's
line of credit from Texas Commerce Bank (the Credit Agreement and all
such other documents, collectively the "Warehouse Documents"); (B) the
two Administrative Services Agreements, the Contribution Agreement and
the Loan Sub-Servicing Agreement, each dated as of April __, 1997
between the Company and the Selling Securityholder, and any other
documents governing the Reorganization and the relationship between the
Company and the Selling Securityholder following the Reorganization
(all such agreements and other documents, collectively, the
"Reorganization Documents"); and (C) all purchase agreements and any
other documents governing whole loan sales by the Company or the
Subsidiary (all such agreements and other documents, collectively, the
"Loan Sale Documents").
(xv) Neither the Company nor the Subsidiary (and to the
Company's and the Subsidiary's best knowledge the party or parties
contracting with the Company and the Subsidiary) is in default to an
extent which could result in a Material Adverse Effect under any of the
following agreements, and no event has occurred which, with notice or
lapse of time or both, would constitute a default under any of the
following agreements: (A) the Warehouse Documents; (B) the
Reorganization Documents; (C) the Loan Sale Documents; or (D) any other
contract, indenture, mortgage, loan agreement, joint venture or other
agreement or instrument to which the Company or the Subsidiary is a
party or by which it or any of its respective properties are bound.
(xvi) Neither the Company nor the Subsidiary is in violation, to
an extent which could result in a Material Adverse Effect, of any law,
order, rule, regulation, writ, injunction, judgment or decree of any
court or governmental agency or body to which the Company or the
Subsidiary is subject, or of the Department of Justice settlement (the
"DOJ Settlement") described under the caption
5
<PAGE> 6
"Risk Factors" in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), assuming such
settlement applies to the Company and the Subsidiary.
(xvii) The compliance by the Company with the provisions of this
Agreement and the consummation of the Reorganization and the other
transactions herein contemplated do not and will not: (A) require the
consent, approval, authorization, registration or qualification of or
with any governmental authority, except (1) such as have been obtained,
such as may be required under state securities or blue sky laws and, if
the Registration Statement 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, and (2) for any
consent, approval, authorization, registration or qualification the
lack of which would not have a Material Adverse Effect; or (B) conflict
with or result in a breach or violation of any of the terms and
provisions of, or constitute a default under, the Reorganization
Documents, the Warehouse Documents, the Loan Sale Documents, the DOJ
Settlement or any material indenture, mortgage, deed of trust, lease or
other agreement or instrument to which the Company or the Subsidiary is
a party or by which the Company or the Subsidiary or any of their
respective properties are bound, or the charter documents or by-laws of
the Company or the Subsidiary, 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 the Subsidiary, except
for any conflict, breach or violation which would not result in a
Material Adverse Effect.
(xviii) 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 the Subsidiary has sustained any
loss or interference with their respective businesses or properties
having 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 development involving the business, properties, business
prospects, financial condition or results of operations of the Company
or the Subsidiary, whether or not arising from transactions in the
ordinary course of business, in the condition (financial or otherwise)
having a Material Adverse Effect, except as described in the
Registration Statement and the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).
(xix) Neither the Company nor the Subsidiary has directly or
indirectly: (A) 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 (B) since the filing of the Registration Statement: (1)
sold, bid for, purchased, or paid anyone any compensation for
soliciting purchases of, the Securities, or (2) paid or agreed to pay
to any person any compensation for soliciting another to purchase any
other securities of the Company.
(xx) To the best knowledge of the Company and except as set
forth in the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus), loans sold by the Company, the
Subsidiary or the Selling Securityholder have performed in a manner
that would not impair, to an extent which would result in a Material
Adverse Effect, the Company's or the Subsidiary's ability to consummate
future whole loan sales.
(xxi) Neither the Company nor the Subsidiary, or, to the best
knowledge of the Company or the Subsidiary, any of their respective
employees, have at any time during the last five (5) years: (A) failed
to disclose fully any contribution in violation of law; or (B) made any
payment to any federal or state governmental officer or official, or
other person charged with similar public or quasi-public duties, other
than payments required or permitted by the laws of the United States or
any jurisdiction thereof.
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(xxii) (A) The Company and the Subsidiary possess all
certificates, authorizations, licenses, franchises and permits issued
by the appropriate Federal, state or foreign regulatory authorities
necessary to own, lease and operate their respective properties and to
conduct their respective businesses described in the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus), except for those the lack of which would not have a
Material Adverse Effect; and (B) neither the Company or the Subsidiary
has received any notice of proceedings relating to, the revocation or
modification of any such certificate, authorization, license, franchise
or permit, except as described in the Prospectus (or, if the Prospectus
is not in existence, the most recent Preliminary Prospectus). Except as
described in the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus), none of the Company's or the
Subsidiary's certificates, authorizations, licenses, franchises or
permits contain any restrictions or conditions that would result in any
Material Adverse Effect.
(xxiii) The Company is familiar with the Investment Company Act
of 1940, as amended, and has in the past conducted its affairs, and
will in the future conduct its affairs, in such a manner to ensure that
the Company was not and will not be an "investment company" or a
company "controlled" by an "investment company" within the meaning of
the Investment Company Act of 1940, as amended, and the rules and
regulations thereunder.
(xxiv) The Company and the Subsidiary have timely filed all
foreign, Federal, state and local tax returns that are required to be
filed and have paid all taxes and assessments required to be paid by
them and any other assessment, fine or penalty levied against them, 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).
(xxv) Except for the shares of the Subsidiary owned by the
Company, neither the Company nor the 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.
(xxvi) As of the Firm Closing Date, each of the Company and the
Subsidiary will 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.
(xxvii) Neither the Company nor the Subsidiary has distributed or
will distribute, prior to the later of: (A) the Firm Closing Date, or
any date on which the Option Securities are to be purchased, as the
case may be; and (B) the completion of the distribution of the
Securities, any offering material in connection with the offering and
sale of the Securities other than any Preliminary Prospectus, the
Prospectus, the Registration Statement or Term Sheet or any amendment
or supplement thereto, or other materials, if any, permitted by the
Act.
(xxviii) Except as set forth in the Registration Statement and
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus): (A) each of the Company and the Subsidiary
has, or immediately following the consummation of the Reorganization
will have, good and marketable title to all properties and assets
described in the Registration Statement and Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary
Prospectus), as owned by it, free and clear of any pledge, lien,
security interest, encumbrance, claim or equitable interest (including
without limitation, any pledge, lien, security interest, encumbrance,
claim or equitable interest of the Selling Securityholder or creditors
of the Selling Securityholder), other than such as would not result in
a
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<PAGE> 8
Material Adverse Effect; and (B) each of the Company and the Subsidiary
has, or immediately following the consummation of the Reorganization
will have, a valid and enforceable lease or sublease for their
headquarters at 1100 Town & Country Road, Orange, California described
in the Registration Statement and Prospectus (or, if the Prospectus is
not in existence, the most recent Preliminary Prospectus), as leased by
it, except as the enforcement thereof may be limited by applicable
bankruptcy, insolvency, reorganization, moratorium or other similar
laws relating to or affecting creditors' rights generally or by general
equitable principles. Except as set forth in the Registration Statement
and Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus), the Company and the Subsidiary owns or
leases, or immediately following the consummation of the Reorganization
will own or lease, all properties as are necessary to its operations as
now conducted or as proposed to be conducted following the consummation
of the Reorganization, except for those the lack of which would not
have a Material Adverse Effect.
(xxix) No labor dispute with the employees of the Company or the
Subsidiary exists or, to the Company's knowledge, is threatened or
imminent that might be expected to result in any Material Adverse
Effect. No collective bargaining agreement exists with any of the
Company's or the Subsidiary's employees and no such agreement is
imminent.
(xxx) The Company and the Subsidiary own or possess adequate
rights to use all material patents, patent rights, licenses,
inventions, copyrights, know-how (including trade secrets and other
unpatented and/or unpatentable proprietary or confidential information,
systems or procedures), trademarks, service marks and trade names
currently employed by them in connection with the business to be
operated by them, which are material to the Company's and the
Subsidiary's ability to conduct their business as described in the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus); and neither the Company nor the 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 decision, ruling
or finding, would result in a Material Adverse Effect.
(xxxi) The Company and the Subsidiary will, as of the Firm
Closing Date, maintain insurance with 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,
including, but not limited to, insurance covering real and personal
property owned or leased by the Company and the Subsidiary against
theft, damage, destruction, errors and omissions, business interruption
and acts of vandalism; neither the Company nor the Subsidiary has been
refused any insurance coverage sought or applied for; and neither the
Company nor the 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
result in any Material Adverse Effect.
(xxxii) Each certificate signed by any officer of the Company and
delivered to the Representative or counsel for the Underwriters
pursuant to this Agreement shall be deemed to be a representation and
warranty by the Company and the Selling Securityholder to each
Underwriter as to the matters covered thereby.
(xxxiii) The Securities sold by the Selling Securityholder have
been approved for quotation on the Nasdaq National Market, subject to
official notice of issuance.
(xxxiv) (A) The Company and the Subsidiary are in material
compliance with all rules, laws and regulations relating to the use,
treatment, storage and disposal of toxic substances and protection of
health or the environment ("Environmental Laws") which are applicable
to their respective businesses; (B) the Company and the Subsidiary have
received no notice from any governmental authority or third party of an
asserted claim under Environmental Laws, which claim is required to be
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<PAGE> 9
disclosed in the Registration Statement and the Prospectus; (C) the
Company and the Subsidiary have no reason to believe that either of
them will be required to make future material capital expenditures to
comply with Environmental Laws; and (D) to the best knowledge of the
Company, no property which is owned, leased or occupied by the Company
or the Subsidiary has been designated as a Superfund site pursuant to
the Comprehensive Response, Compensation, and Liability Act of 1980, as
amended (42 U.S.C. Section 9601, et seq.), or otherwise designated as a
contaminated site under applicable state or local law.
(xxxv) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by the Company or the Subsidiary to or for
the benefit of any of the officers or directors of the Company or the
Subsidiary or any of the members of the families of any of them, except
as disclosed in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(xxxvi) All action necessary to effect the Reorganization (as
defined in the Prospectus (or, if the Prospectus is not in existence,
the most recent draft of the Preliminary Prospectus)) has been approved
by all necessary corporate action on behalf of the Company, the
Subsidiary and the Selling Securityholder, and all governmental and
other third-party consents and approvals necessary to effect the
Reorganization have been obtained, except for governmental and other
third-party consents the lack of which would not have a Material
Adverse Effect. The Representative and their counsel have been provided
true and correct copies of all the final, signed corporate resolutions,
governmental and other third-party consents and approvals (which
consents have been obtained as of the Firm Closing Date and any Option
Closing Date), the Reorganization Documents, and all other documents
necessary to effect the Reorganization.
(b) The Selling Securityholder hereby additionally represents and
warrants to and agrees with each of the several Underwriters that:
(i) The Selling Securityholder will have on the Firm Closing
Date good and marketable title to all the shares of Securities to be
sold by the Selling Securityholder hereunder, free and clear of all
liens, encumbrances, equities, security interests and claims
whatsoever, with full right and authority to deliver the same
hereunder, and that upon the delivery of and payment for such shares of
the Securities hereunder, the several Underwriters will receive good
and marketable title thereto, free and clear of all liens,
encumbrances, equities, security interests and claims whatsoever.
(ii) The Selling Securityholder has reviewed the Registration
Statement and Prospectus (or, if the Prospectus is not in existence,
the most recent draft of the Preliminary Prospectus) and, on the
Effective Date, to the best knowledge of the Selling Securityholder,
each such document did not and will not contain any untrue statement of
a material fact and did not omit to state any material fact required to
be stated therein or necessary in order to make the statements therein
not misleading; and, on the Firm Closing Date and any later date on
which Option Securities are to be purchased, the Prospectus and the
Registration Statement, will not contain any untrue statement of a
material fact or omitted or omits 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.
(iii) To the best knowledge of the Selling Securityholder, none
of the representations and warranties of the Company set forth in
Section 2(a) hereof is untrue or inaccurate in any material respect.
(iv) All consents, approvals, authorizations and orders
required for the execution and delivery by such Selling Securityholder
of this Agreement and the sale and delivery of the Securities to be
sold by such Selling Securityholder under this Agreement, other than,
at the time of the execution hereof (if the Registration Statement has
not yet been declared effective by the Commission), the issuance
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<PAGE> 10
of the order of the Commission declaring the Registration Statement
effective and such consents, approvals, authorizations or orders as may
be necessary under state or other securities or Blue Sky laws, have
been obtained and are in full force and effect; and such Selling
Securityholder has full legal right, power and authority to enter into
and perform its obligations under this Agreement and to sell, assign,
transfer and deliver the Securities to be sold by such Selling
Securityholder under this Agreement.
(v) The Selling Securityholder is not in default under the
Reorganization Documents, the Loan Sale Documents or the DOJ
Settlement, which default would have a Material Adverse Effect.
(vi) The execution and delivery of this Agreement have been duly
authorized by the Selling Securityholder and this Agreement has been
duly executed and delivered by the Selling Securityholder, and is the
valid and binding agreement of the Selling Securityholder, enforceable
in accordance with its terms, except as the enforcement hereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally or by
general equitable principles; and, except for a breach or violation
which would not have a Material Adverse Effect, the performance of this
Agreement and the consummation of the transactions contemplated hereby
will not result in a breach or violation of any of the terms and
provisions of or constitute a default under the Reorganization
Documents, or any bond, debenture, note or other evidence of
indebtedness, or under any material lease, contract, indenture,
mortgage, deed of trust, loan agreement, joint venture or other
agreement or instrument to which such Selling Securityholder is a party
or by which such Selling Securityholder, or any Securities to be sold
by such Selling Securityholder hereunder, may be bound or result in any
violation of any law, order, rule, regulation, writ, injunction,
judgment or decree of any court, government or governmental agency or
body, domestic or foreign, having jurisdiction over such Selling
Securityholder or over the properties of such Selling Securityholder.
(vii) No legal or governmental action, suit, claim or other
proceedings are pending to which the Selling Securityholder is a party
or to which the property of the Selling Securityholder is subject that
would have a Material Adverse Effect on the Company or the Subsidiary,
and, to the best knowledge of the Selling Securityholder, no such
actions, suits or proceedings have been threatened against the Selling
Securityholder or with respect to any of its properties or is required
to be described in the Registration Statement or the Prospectus (or, if
the Prospectus is not in existence, the most recent Preliminary
Prospectus), and is not so described.
(viii) All information furnished by or on behalf of such Selling
Securityholder relating to such Selling Securityholder and the
Securities that is set forth in the Registration Statement or the
Prospectus (or, if the Prospectus is not in existence, the most recent
draft of the Preliminary Prospectus) is, and at the time the
Registration Statement became or becomes, as the case may be, effective
and at all times subsequent thereto up to and on the Firm Closing Date,
and on any later date on which Option Securities are to be purchased,
was or will be, true, correct and complete, and does not, and at the
time the Registration Statement became or becomes, as the case may be,
effective and at all times subsequent thereto up to and on the Firm
Closing Date, and on any later date on which Option Securities are to
be purchased, will not, contain any untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make such information not misleading.
(ix) The Selling Securityholder will review the Prospectus and
will comply with all agreements and satisfy all conditions on its part
to be complied with or satisfied pursuant to this Agreement on or prior
to the Firm Closing Date, or any later date on which Option Securities
are to be purchased, as the case may be, and will advise its attorneys
and the Representative prior to the Firm Closing Date, if any statement
to be made on behalf of such Selling Securityholder in the certificate
contemplated by Section 7(f) hereof would be inaccurate if made as of
the Firm Closing Date or such later date on which Option Securities are
to be purchased, as the case may be.
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<PAGE> 11
(x) The Selling Securityholder does not have, or has waived
prior to the date hereof, any registration right or other similar right
to participate in the offering made by the Prospectus, other than such
rights of participation as have been satisfied by the participation of
such Selling Securityholder in the transactions to which this Agreement
relates in accordance with the terms of this Agreement; and such
Selling Securityholder does not own any warrants, options or similar
rights to acquire, and does not have any right or arrangement to
acquire, any capital stock, rights, warrants, options or other
securities from the Company, other than those described in the
Registration Statement and the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus).
(xi) Except for the sale of the Securities and compensation of
the Underwriters therefor pursuant to this Agreement, the Selling
Securityholder has not directly or indirectly (A) 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 (B) since the filing of the
Registration Statement (1) sold, bid for, purchased, or paid anyone any
compensation for soliciting purchases of, the Securities, or (2) paid
or agreed to pay to any person any compensation for soliciting another
to purchase any other securities of the Company.
(xii) The Selling Securityholder has not distributed and will not
distribute, prior to the later of: (A) the Firm Closing Date; and (B)
the completion of the distribution of the Securities, any offering
material in connection with the offering and sale of the Securities
other than any Preliminary Prospectus, the Prospectus, the Registration
Statement or Term Sheet or any amendment or supplement thereto, or
other materials, if any, permitted by the Act.
(xiii) Except as set forth in the Reorganization Documents or the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), no liability or obligations of the Selling
Securityholder have been assigned to or assumed by the Company or the
Subsidiary or otherwise become the joint, several or individual
liabilities or obligations of the Company or the Subsidiary. No
liabilities or obligations of the Selling Securityholder in connection
with any sales or purchases of securities by the Selling Securityholder
prior to the date of this Agreement have been or will be assigned to or
assumed by the Company or the Subsidiary, or by operation or law or
otherwise have or will become the liabilities of the Company or the
Subsidiary.
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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 Selling Securityholder agrees to sell to each of the Underwriters,
and each of the Underwriters, severally and not jointly, agrees to purchase from
the Selling Securityholder, at a purchase price of $______ per share, the number
of Firm Securities set forth opposite the name of such Underwriter in Schedule I
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 Selling
Securityholder 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 to the
account of the Selling Securityholder. Such delivery of and payment for the Firm
Securities shall be made at the offices of Gibson, Dunn & Crutcher, Jamboree
Center, 4 Park Plaza, Suite 1700, Irvine, California 92614, at 9:00 a.m.,
California time, on April __, 1997, 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 Selling
Securityholder 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. Notwithstanding the foregoing, if
the Representative elects that the delivery to the Underwriters of all or a
portion of the Firm Securities be effected through the "Full Fast" system of the
Depository Trust Corporation, such that all or a portion of the Firm Securities
will be denominated in book-entry form and there will be no certificate
therefor, then in lieu of certificates for the Firm Securities, the Selling
Stockholder shall deliver to the Company's transfer agent at least 24 hours
prior to the Firm Closing Date, instructions in form and substance satisfactory
to the Representative, instructing such transfer agent to register such shares
through the Full Fast system on the Firm Closing Date.
(b) For the purpose of covering any over-allotments in connection with
the distribution and sale of the Firm Securities as contemplated by the
Prospectus, the Selling Securityholder 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. Any Option Securities that the Underwriters
elect to purchase will be purchased from the Selling Securityholder. The option
granted hereby may be exercised as to all or any part of the Option 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 be obligated to purchase only those Option Securities for
which the Underwriters have exercised such option. The Representative may from
time to time exercise the option granted hereby by giving notice in writing or
by telephone (confirmed in writing) to the Selling Securityholder 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 (2) business days or later than
five (5) 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
each such notice, or each such other time on such other date as the
Representative and the Selling Securityholder may agree upon or as the
Representative may determine pursuant to Section 9 hereof, is each herein called
an "Option Closing Date" with respect to the Option Securities covered by such
notice. Upon each such exercise of the option as provided herein, the Selling
Securityholder 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 Selling Securityholder 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
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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 such 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 Selling Securityholder 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 for the Securities by the Underwriters,
by facsimile or otherwise, indicates completion of the closing of a purchase of
the Securities from the Selling Securityholder. Furthermore, in the event that
the Underwriters wire funds to the Selling Securityholder prior to the
completion of the closing of a purchase of Securities, the Selling
Securityholder hereby acknowledges that until the Underwriters execute and
deliver a receipt for the Securities, by facsimile or otherwise, the Selling
Securityholder 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 Selling
Securityholder to the Underwriters on the same day the wired funds were received
by the Selling Securityholder, the Selling Securityholder agrees to pay to the
Underwriters in respect of each day the wire funds are not returned by it, in
same-day funds, interest on the amount of such wire funds at the "Prime Rate"
quoted in the Wall Street Journal on the date hereof.
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 and the Selling Securityholder. The Company
(with respect only to Sections 5(a) through and including 5(n) below) and the
Selling Securityholder (with respect only to Sections 5(d), 5(e), 5(o) and 5(p)
below) covenant and agree with each of the Underwriters that:
(a) The Company will use its best efforts to cause any amendments to
the Registration Statement to become effective as promptly as possible. The
Company will file the Prospectus or any Term Sheet and any amendment or
supplement thereto with the Commission in the manner and within the time period
required by Rules 424(b) and 434 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.
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(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 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 or the Selling
Securityholder (whichever first learns of the event or other reason to amend or
supplement the Prospectus) will promptly notify the Representative thereof and,
subject to Section 5(a) hereof, the Company will prepare and file with the
Commission, at the Selling Securityholder'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) During a period of one (1) year after the date hereof, none of the
Company, the Subsidiary or the Selling Securityholder will, without the prior
written consent of the Representative (which shall not be unreasonably
withheld), waive any material default or amend in any material respect any
material provision of the Reorganization Documents or any other documents used
to effect the Reorganization.
(f) The Company will, without charge, provide: (i) to the
Representative and to counsel for the Underwriters a signed copy of the Original
Registration Statement 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) 10:00 p.m., New York City time, on the date of determination
of the initial 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 initial
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 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.
(g) 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 the Selling
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<PAGE> 15
Securityholder shall pay the applicable fees in accordance with Rule 111
promulgated under the Act by the earlier of: (i) 10:00 p.m., New York City time,
on the date of this Agreement; and (ii) the time confirmations are sent or
given, as specified by Rule 462(b)(2).
(h) 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.
(i) During a period of three (3) years after the date hereof, the
Company, within the periods prescribed by applicable law, will furnish to its
stockholders annual reports (including financial statements audited by
independent certified public accountants) and will furnish to its stockholders
unaudited quarterly reports of operations for each of the first three quarters
of the fiscal year as required of companies with a class of securities
registered under the Exchange Act, and will make available to you and the other
several Underwriters hereunder upon request: (i) concurrently with making such
reports available to its stockholders, statements of operations of the Company
for each of the first three quarters in the form made available to the Company's
stockholders; (ii) concurrently with the furnishing thereof to its stockholders,
a balance sheet of the Company as of the end of such fiscal year, together with
statements of operations, of stockholders' equity and of cash flow of the
Company for such fiscal year, accompanied by a copy of the certificate or report
thereon of nationally recognized independent certified public accountants; (iii)
concurrently with the furnishing of such reports to its stockholders, copies of
all reports (financial or other) mailed to stockholders; (iv) as soon as they
are available, copies of all reports and financial statements furnished to or
filed with the Commission, any securities exchange or the Nasdaq National Market
by the Company (except for documents for which confidential treatment is
requested); and (v) every material press release and every material news item or
article in respect of the Company or its affairs which was generally released to
stockholders or to the public. During such three (3) year period, if the Company
shall have any active subsidiaries (including the Subsidiary), the foregoing
financial statements shall be on a consolidated basis to the extent that the
accounts of the Company are consolidated with any subsidiaries, and shall be
accompanied by similar financial statements for any significant subsidiary that
is not so consolidated.
(j) Except for issuances pursuant to the exercise of stock options to
be granted as described in the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus): the Company will not from
the date hereof until the expiration of the 180 day period after the date of the
Prospectus (the "Lock-up Period"), 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 dispose (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of any option to purchase or other disposition) of any shares of
Common Stock or any securities convertible into, or exchangeable or exercisable
for, shares of Common Stock.
(k) For a period of 180 days after the date hereof, 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.
(l) The Company will obtain each of the lockup agreements described in
Section 7(g) hereof prior to the Firm Closing Date.
(m) 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
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 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, and in accordance with applicable law and the rules and policies of The
Nasdaq Stock
15
<PAGE> 16
Market, Inc., 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.
(n) 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 for a period of three (3) years
following the Firm Closing Date; provided, however, that during such three (3)
year period, the Company may, with the prior written consent of the
Representative acting in its sole discretion, apply to list the securities on a
national securities exchange in lieu of being included for quotation the Nasdaq
National Market.
(o) The Selling Securityholder will not, directly or indirectly: (i)
take any action designed to cause or 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 (except for the sale of Securities by the Selling Securityholder
under this Agreement).
(p) Except for the Securities to be sold by the Selling Securityholder
to the Underwriters hereunder, the Selling Securityholder will not, during the
Lock-up Period, 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 dispose (or
announce any offer, sale, offer of sale, contract of sale, pledge, grant of any
option to purchase or other disposition) of any shares of Common Stock or any
securities convertible into, or exchangeable or exercisable for, shares of
Common Stock. The foregoing restriction is expressly agreed to preclude the
holder of the Securities from engaging in any hedging or other transaction which
is designed to or reasonably expected to lead to or result in a disposition of
Securities during the Lock-up Period, even if such Securities would be disposed
of by someone other than the Selling Securityholder. Such prohibited hedging or
other transactions would include, without limitation, any short sale (whether or
not against the box) or any purchase, sale or grant of any right (including,
without limitation, any put or call option) with respect to any Securities or
with respect to any security (other than a broad-based market basket or index)
that includes, relates to or derives any significant part of its value from
Securities. The Selling Securityholder also agrees and consents to the entry of
stop transfer instructions with the Company's transfer agent against the
transfer of the securities held by the Selling Securityholder except in
compliance with this restriction.
6. Expenses. The Selling Securityholder 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: (a) 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 and a reasonable quantity of Preliminary Prospectuses and
Prospectuses as determined by the Representative; (b) all arrangements relating
to the delivery to the Underwriters of copies of the foregoing documents; (c)
the fees and disbursements of its counsel, the accountants and any other experts
or advisors retained by the Company; (d) the preparation, issuance and delivery
to the Underwriters of any certificates evidencing the Securities, including
transfer agent's and registrar's fees; (e) 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 (not to exceed
$15,000); (f) the filing fees of the Commission and the National Association of
Securities Dealers, Inc. relating to the Securities; (g) the filing and other
fees of securing quotation of the Securities on the Nasdaq National Market; (h)
the direct costs of the Company in connection with any meetings with prospective
investors in the Securities; and (i) advertising relating to the offering of the
Securities (other than as shall have been specifically approved by the
Representative to be paid for by the Underwriters). If the sale of the
Securities provided for herein is not consummated due to the failure, refusal or
inability on the part of the Company or the Selling Securityholder to perform
all obligations and
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<PAGE> 17
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 Representative shall
be entitled to receive certain payments in the circumstances set forth in
Paragraph 4(d) of the engagement letter dated February 19, 1997 among the
Representative, the Company and the Selling Securityholder. Neither the Company
nor the Selling Securityholder shall 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, in the Representative's sole discretion, to the accuracy of the
representations and warranties of the Company and the Selling Securityholder
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 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 Selling Securityholder, 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 and the
Selling Securityholder, to the effect that:
(i) Each of the Selling Securityholder, the Company and the
Subsidiary has been duly organized and is validly existing and in good
standing under the laws of its jurisdiction of organization and each of
the Company and the Subsidiary is duly qualified to transact business
as a foreign entity and is in good standing under the laws of all other
jurisdictions where the ownership or leasing of its properties or the
conduct of its businesses requires such qualification, except where the
failure to be so qualified would not have a Material Adverse Effect.
(ii) Each of the Selling Securityholder, the Company and the
Subsidiary has the corporate power and authority to own or lease its
properties and conduct its businesses as described in the Registration
Statement and the Prospectus; and the Company and the Selling
Securityholder has the corporate power and authority to enter into this
Agreement and to carry out the terms and provisions hereof to be
carried out by it.
(iii) The issued and outstanding shares of the Subsidiary have
been duly authorized and validly issued, are fully paid and
nonassessable, and, to the knowledge of such counsel, have not been
issued in violation of or subject to any preemptive right, co-sale
right, registration right, right of first refusal or other similar
right; and, to the knowledge of such counsel, 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 Firm Closing Date or any
other pledge, security interests, liens, encumbrances, claims or
equitable interests. The Company does not own or control, directly or
indirectly, any corporation, association or other entity other than the
Subsidiary.
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<PAGE> 18
(iv) The Company has an authorized, issued and outstanding
capitalization as set forth in the Prospectus. All of the issued and
outstanding shares of capital stock of the Company (including the
Securities to be sold by the Selling Securityholder) have been duly
authorized and validly issued and are fully paid and nonassessable,
have been issued to the Selling Securityholder in compliance with all
Federal and state securities laws, and, to the 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
Securities have been approved for quotation on the Nasdaq National
Market, subject to official notice of issuance.
(v) The sale by the Selling Securityholder of the Securities to
the Underwriters under this Agreement has been duly authorized by the
Selling Securityholder; the Selling Securityholder is the record holder
of the Securities being sold by the Selling Securityholder under this
Agreement; and upon delivery of and payment for the Securities held by
the Selling Securityholder as contemplated by this Agreement, each of
the Underwriters will acquire all right, title and interest of the
Selling Securityholder to the Securities purchased by it from the
Selling Securityholder, to the knowledge of such counsel, free and
clear of any adverse claims.
(vi) 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 "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;
and the description in the Prospectus of the governmental rules and
regulations described under the captions "Risk Factors" and
"Business--Regulation" provides a fair summary of such rules and
regulations in all material respects (except for the DOJ Settlement
with respect to which such counsel need express no opinion).
(vii) The execution and delivery of this Agreement have been duly
authorized by all necessary corporate action of the Selling
Securityholder and the Company and this Agreement has been duly
executed and delivered by the Selling Securityholder and the Company.
(viii) To the knowledge of such counsel: (A) no legal or
governmental proceedings are pending to which the Selling
Securityholder, the Company or the Subsidiary is a party or to which
the property of the Selling Securityholder, the Company or the
Subsidiary 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 the
Subsidiary 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.
(ix) To the knowledge of such counsel, neither the Selling
Securityholder, the Company, nor the Subsidiary is: (A) in violation of
its certificate of incorporation or bylaws; or (B) in violation, to an
extent which could result in a Material Adverse Effect, of any law,
order, rule, regulation, writ, injunction, judgment or decree of any
court or governmental agency or body to which the Company or the
Subsidiary is subject (except for the DOJ Settlement, as to which such
counsel need express no opinion).
(x) The compliance and performance by the Selling
Securityholder and the Company with the other provisions of this
Agreement and the consummation of the transactions herein contemplated
do not: (A) require the consent, approval, authorization, registration
or qualification of or with any governmental authority, domestic or
foreign, except counsel need express no opinion regarding regulatory
matters referenced in Section 7(c) hereof, such as have been obtained
under the Act, the
18
<PAGE> 19
Exchange Act, or such as may be required under state securities or blue
sky laws, as to which such counsel need express no opinion; or (B)
result in a breach or violation of any of the terms and provisions of,
or constitute a default under the certificate of incorporation or
bylaws of the Selling Securityholder or the Company; or (C) to the
knowledge of such counsel, result in a breach or violation of any of
the terms and provisions of, or constitute a default under any
obligation, agreement, covenant or condition contained in the
Reorganization Documents, which default would have a Material Adverse
Effect; or (D) to the knowledge of such counsel, result in a breach or
violation of any of the terms and provisions of, or constitute a
default under any law, order, rule, regulation, writ, injunction,
judgment or decree of any court or governmental agency or body to which
the Selling Securityholder, the Company or the Subsidiary is subject,
which breach, violation or default would have a Material Adverse
Effect.
(xi) 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 424(b) and 434 has been made in the
manner and within the time period required by Rules 424(b) and 434;
and, to the knowledge of such counsel, 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 by the Commission.
(xii) The Registration Statement filed, as amended, 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.
(xiii) 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).
(xiv) 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 Investment Company Act of
1940, as amended.
(xv) 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 corporate laws of the State of
Delaware.
(xvi) The execution and delivery of the Reorganization Documents
have been duly authorized by all necessary corporate action on the part
of the Company, and the Selling Securityholder.
Such counsel shall also state that they have no reason to believe that
the Registration Statement, as of its effective date and the date of such
opinion, 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 and
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 Selling Securityholder, the Company and the Subsidiary, and
public officials and opinions of counsel as are reasonably acceptable to the
Representative.
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<PAGE> 20
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 Representative shall have received a memorandum dated as of
the Firm Closing Date from special regulatory counsel acceptable to the
Representative that sets forth the governmental or regulatory agency licenses,
consents and approvals that the Subsidiary has obtained in connection with the
conduct of its business.
(d) The Representative 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 public accountants with respect to the
Company and its consolidated Subsidiary within the meaning of the Act
and the applicable rules and regulations thereunder.
(ii) In their opinion, the audited consolidated financial
statements and schedules 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
stockholders, the Board of Directors and any committees thereof of the
Company and its consolidated Subsidiary, and inquiries of certain
officials of the Company and its consolidated Subsidiary 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 long-term debt of the Company
and its consolidated Subsidiary or any decreases in net current assets
or stockholders' equity of the Company and its consolidated Subsidiary,
in each case compared with amounts shown on the December 31, 1996
consolidated balance sheet included in the Registration Statement and
the Prospectus, or for the period from January 1, 1997 to such
specified date there are any decreases, as compared to total revenues,
net income or pro forma net income per share, respectively, of the
Company and its consolidated Subsidiary, except in all instances for
changes, decreases or increases set forth in such letter.
(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 Subsidiary 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 Subsidiary 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, it shall be a further condition to the
obligations of the Underwriters that: (A) such letters shall be accompanied by a
written explanation of the Company as to the significance thereof, unless the
Representative deems such explanation unnecessary; and (B) such changes,
decreases or increases do not, in the sole judgment of the Representative, make
it impractical or inadvisable to proceed with the purchase and delivery of the
Securities as contemplated by the Registration Statement, as amended as of the
date hereof.
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<PAGE> 21
References to the Registration Statement and the Prospectus in this
paragraph (d) with respect to either letter referred to above shall include any
amendment or supplement thereto at the date of such letter.
(e) The Representative shall have received a certificate, dated the
Firm Closing Date, of the principal executive officer, the principal financial
or accounting officer, respectively, of the Company to the effect that:
(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 Company's knowledge, are contemplated by the Commission.
(iii) When the Registration Statement was declared effective, and
at all times subsequent thereto up to the delivery of such certificate,
the Registration Statement and the Prospectus 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 promulgated thereunder, the Registration
Statement, and any amendment or supplement thereto, did not and 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, the Prospectus did not and 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 since the
effective date of the Registration Statement, there has occurred no
event required to be set forth in an amended or supplemented Prospectus
which has not been so set forth.
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<PAGE> 22
(iv) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus: (A) there
has not been any change in the business, properties, business
prospects, financial condition or results of operations of the Company
and the Subsidiary which would have a Material Adverse Effect; (B)
neither the Company nor the Subsidiary has been involved in any
transaction that is material to the Company and the Subsidiary, taken
as a whole, except transactions entered into in the ordinary course of
business; (C) neither the Company nor the Subsidiary has incurred any
obligation, direct or contingent, that is material to the Company and
the Subsidiary, taken as a whole, except obligations incurred in the
ordinary course of business; (D) there has not been any change in the
capital stock or outstanding indebtedness of the Company or the
Subsidiary that is material to the Company and the Subsidiary, taken as
a whole; (E) neither the Company nor the Subsidiary has declared or
paid any dividend or distribution of any kind on the capital stock of
the Company or the Subsidiary; or (F) neither the Company nor the
Subsidiary has sustained any loss or damage (whether or not insured) to
the property of the Company or the Subsidiary which has a Material
Adverse Effect.
(f) The Representative shall have received a certificate, dated the
Firm Closing Date, of the Selling Securityholder to the effect that the
representations and warranties of such Selling Securityholder 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 such Selling Securityholder has
performed all covenants and agreements on its part to be performed or satisfied
at or prior to the Firm Closing Date.
(g) The Representative shall have received from the Selling
Stockholder and each person who is a director or executive officer of the
Company 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 during the
Lock-Up Period.
(h) 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 and the Selling Securityholder.
(i) Prior to the commencement of the offering of the Securities, the
Securities shall have been approved for quotation on the Nasdaq National Market,
subject to official notice of issuance.
(j) 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.
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,
22
<PAGE> 23
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) The Company and the Selling Securityholder, 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 Exchange Act against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter or such controlling
person may become subject under the Act and the Exchange Act, or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon the following (except for liability
arising under Section 8(a)(ii) for which such indemnification is given by the
Selling Securityholder individually and not by the Company):
(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 Selling Securityholder 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 and including any Rule 462(b)
Registration Statement; or (B) any application or other document, or
any amendment or supplement thereto, executed by the Company or Selling
Securityholder or based upon written information furnished by or on
behalf of the Company or Selling Securityholder 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, a material fact
required to be stated therein or necessary to make the statements
therein not misleading, or 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, in light of the circumstances under which they were made, not
misleading; or
(v) any untrue statement or alleged untrue statement of any
material fact contained in any audio or visual materials prepared,
approved or used by the Company in connection with the marketing of the
Securities, including without limitation, slides, videos, films and
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 any other proceeding in connection with any such loss, claim, damage,
liability or action; provided, however, that neither the Company nor the Selling
Securityholder will 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 such
Underwriter through the Representative specifically for use therein; and
provided, further, that neither the Company nor the Selling Securityholder 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
23
<PAGE> 24
deliver the Prospectus (as amended or supplemented) was a result of
noncompliance by the Company with this Agreement. This indemnity agreement will
be in addition to any liability which the Company or the Selling Securityholder
may otherwise have. Neither the Company nor the Selling Securityholder will,
without the prior written consent of the Underwriter or Underwriters purchasing,
in the aggregate, more than 50% of the Securities, 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 such Underwriter or any person who controls any such
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, the Selling Securityholder 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,
Selling Securityholder or controlling person of the Company 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 the Selling Securityholder 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 that there may be one or more legal defenses available
to it and/or other indemnified parties which are different from or additional to
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
24
<PAGE> 25
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 the Selling
Securityholder 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 and the Selling Securityholder 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, the Selling Securityholder 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, the Selling Securityholder and the Underwriters agree that it would 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 Master 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 the Selling Securityholder
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 the Selling
Securityholder, as the case may be.
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
25
<PAGE> 26
hereunder to purchase the Firm Securities or Option 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, the
Selling Securityholder 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, the Selling
Securityholder and 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 Selling
Securityholder 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 the Subsidiary shall have, in the sole
judgment of the Representative, sustained any loss or interference with
their respective businesses or properties having 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 or development in the business, properties, business
prospects, financial condition or results of operations of the Company
and the Subsidiary, that results in, or could be expected to 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);
(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 (including automatic halts in trading
pursuant to market decline triggers other than those in which solely
program trading is temporarily halted) 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;
(iv) the enactment, publication, decree or other promulgation of
any Federal or state statute, regulation, rule or order of, or
commencement of any proceeding or investigation of the
26
<PAGE> 27
Company by, any court, legislative body, agency or other government
authority which in the Underwriters' sole opinion materially and
adversely affects or will materially or adversely affect the business
or operations of the Company; or
(v) 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: (a) in
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 or facsimile
transmission and confirmed in writing to Friedman, Billings, Ramsey & Co., Inc.,
1001 19th Street North, 18th Floor, Arlington, VA 22209, Facsimile (703)
312-9756, Attention: Robert Smith, with a copy to Brobeck, Phleger & Harrison
LLP, 4675 MacArthur Court, Suite 1000, Newport Beach, CA 92660, Attention: Bruce
R. Hallett, Esq.; and if sent to the Company, shall be delivered or sent by mail
or facsimile transmission and confirmed in writing to the Company at 1100 Town &
Country Road, Suite 1100, Orange, CA 92868, Facsimile: (714) 543-6847,
Attention: M. Jack Mayesh, with a copy to Gibson, Dunn & Crutcher LLP, Jamboree
Center, 4 Park Plaza, Suite 1700, Irvine, CA 92614, Facsimile: (714) 451-4220,
Attention: Robert E. Dean, Esq., and if sent to Selling Securityholder, shall be
delivered by mail or facsimile transmission and confirmed in writing to Selling
Securityholder at 1100 Town & Country Road, Suite 1100, Orange, CA 92868,
Facsimile: (714) 245-0970, Attention: Norman R. Gritsch, with a copy to Gibson,
Dunn & Crutcher LLP, Jamboree Center, 4 Park Plaza, Suite 1700, Irvine, CA
92614, Facsimile: (714) 451-4220, Attention: Robert E. Dean, Esq.
14. Successors. This Agreement shall inure to the benefit of and shall be
binding upon the several Underwriters, the Company, the Selling Securityholder
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 indemnities of the Company and the Selling Securityholder 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, the Selling Securityholder and any person or persons who
control the Company or the Selling Securityholder 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.
27
<PAGE> 28
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 the Selling
Securityholder 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. The Selling Securityholder designates and appoints Norman R. Gritsch,
and the Company designates and appoints James J. Sullivan and such other persons
as may hereafter be selected by the Company or the Selling Securityholder
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 the Selling
Securityholder 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 the Selling Securityholder 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 the Selling
Securityholder refuses to accept service, the Company and the Selling
Securityholder each hereby agrees that service of process sufficient for
personal jurisdiction in any action against the Company or the Selling
Securityholder in the State of California may be made by registered or certified
mail, return receipt requested, to the Company and/or the Selling
Securityholder, as applicable, at their respective addresses provided in Section
13 hereof, and the Selling Securityholder 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 the Selling Securityholder 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.
28
<PAGE> 29
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, the Selling
Securityholder and each of the several Underwriters.
Very truly yours,
"COMPANY"
LONG BEACH FINANCIAL CORPORATION
By______________________________________
Name:
Title:
"SELLING SECURITYHOLDER"
LONG BEACH MORTGAGE COMPANY
By______________________________________
Name:
Title:
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
By___________________________
Name:
Title:
For itself and as the Representative.
29
<PAGE> 30
Schedule I
UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm
Underwriter Securities to be Purchased
- ----------- --------------------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc........
----------
Total........................................ 21,750,000
</TABLE>
30
<PAGE> 1
EXHIBIT 4.1
SPECIMEN OF THE COMMON STOCK OF LONG BEACH FINANCIAL CORPORATION
[decorative border surrounds the edges of the certificate]
COMMON STOCK COMMON STOCK
[L O G O, consisting of the capital letters "LBF" surmounted by a seagull,
with the word "CORP" in capital letters and smaller type]
[box surrounded by a decorative [box surrounded by a decorative
border, with the word "NUMBER" border, with the word "SHARES"
at the top of the box and "LB" at the top of the box]
at the left side of the box]
<TABLE>
<S> <C> <C>
INCORPORATED UNDER THE LAWS OF LONG BEACH FINANCIAL CORPORATION SEE REVERSE FOR
THE STATE OF DELAWARE CERTAIN DEFINITIONS
CUSIP 542446 10 9
</TABLE>
THIS CERTIFIES THAT
[space]
IS THE RECORD HOLDER OF
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $.001 PER SHARE
OF
LONG BEACH FINANCIAL CORPORATION
TRANSFERABLE ON THE BOOKS OF THE CORPORATION BY THE REGISTERED HOLDER HEREOF IN
PERSON OR BY DULY AUTHORIZED ATTORNEY UPON SURRENDER OF THIS CERTIFICATE
PROPERLY
ENDORSED AND UPON PAYMENT OF ANY APPLICABLE TAXES. THIS CERTIFICATE IS NOT VALID
UNLESS COUNTERSIGNED AND REGISTERED BY THE TRANSFER AGENT AND REGISTRAR.
WITNESS THE FACSIMILE SEAL OF THE CORPORATION AND THE FACSIMILE SIGNATURES OF
ITS DULY AUTHORIZED OFFICERS.
DATED:
/s/ JAMES J. SULLIVAN /s/ M. JACK MAYESH
- --------------------- ---------------------
SECRETARY [S E A L, CHAIRMAN OF THE BOARD
consisting of two concentric circles.
The inside circle contains the words
"Corporate Seal 1997 Delaware" and
the outside circle contains the words
"Long Beach Financial Corporation" and a star]
COUNTERSIGNED AND REGISTERED
AMERICAN STOCK TRANSFER & TRUST COMPANY
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE> 2
The Corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating
optional, or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights, so far as the same shall have been fixed, and a statement of the
authority of the Board of Directors to designate and fix any preferences,
rights and limitations of any wholly unissued series. Such requests shall be
made to the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations;
<TABLE>
<CAPTION>
<S> <C>
TEN COM -- as tenants in common UNIF GIFT MIN ACT -- _______________________Custodian____________________
TEN ENT -- as tenants by the entireties (Cust) (Minor)
JT TEN -- as joint tenants with right of Under Uniform Gifts to Minors
survivorship and not as tenants Act_________________________________________________
in common (State)
UNIF TRF MIN ACT --______Custodian ( Until age______ )
(Cust)
___________under Uniform Transfers
(Minor)
to Minors Act_____________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ______________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_____________________________________
| |
| |
- ----------------------------------------
_______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do
hereby irrevocably constitute and appoint
______________________________________________________________________ Attorney
to transfer the said stock on the books of the within named
Corporation with full power of substitution in the premises.
Date______________________________
X ___________________________________
X ___________________________________
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME(S) AS
WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
Signature(s) Guaranteed
By ________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN
ELIGIBLE GUARANTOR INSTITUTION(BANKS, STOCKBROKERS,
SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE
MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 8.1
April 15, 1997
(714) 451-3800 C 54247-00050
Long Beach Financial Corporation
1100 Town & Country Road
Suite 900
Orange, CA 92868-4664
Re: Registration Statement on Form S-1
Gentlemen:
We are acting as counsel to Long Beach Mortgage Company, a Delaware
corporation (the "Company"), in connection with the initial public offering
(the "Offering") of the shares of common stock, $.001 par value per share (the
"Common Stock"), of Long Beach Financial Corporation, a Delaware corporation
("LBFC"). You have requested our opinion as to whether the transfer of the
assets and personnel related to the Company's broker-sourced mortgage lending
and loan sales operations and $40 million cash (the "Wholesale Lending Assets")
by the Company to LBFC in exchange for 24,999,999 shares of Common Stock (the
"Reorganization") will be treated for federal income tax purposes as a taxable
sale of assets.
In rendering our opinion, we have examined (i) the firm commitment
underwriting agreement to be signed on or about April 17, 1997, between the
Company, LBFC, and Freidman, Billings, Ramsey & Co., Inc., on its behalf and as
representative for the other underwriters (the "Underwriting Agreement"), (ii)
the Contribution Agreement to be signed on or about April 22, 1997, between the
Company and LBFC (the "Contribution Agreement"), and have, with your
permission, relied upon, and assumed as correct now and of as the closing date
of the Offering, the factual information contained in the Registration
Statement on Form S-1 (Registration No. 333-22013) filed with the Securities
and Exchange Commission in connection with the Offering (the "Registration
Statement").
<PAGE> 2
Long Beach Mortgage Company
April 15, 1997
Page 2
FACTS
Prior to the Reorganization and Offering, the Company will own 1 share
of Common Stock, which will represent at such time all of the outstanding
shares of Common Stock of LBFC. Pursuant to Section 1.3 of the Contribution
Agreement, as consideration for the transfer of the Wholesale Lending Assets,
LBFC will issue to the Company 24,999,999 shares of Common Stock. Following
the Reorganization, the 25,000,000 shares of Common Stock will represent all of
the issued and outstanding shares of LBFC.
Under Section 1.1 of the Contribution Agreement, the Company will
transfer the Wholesale Lending Assets to LBFC in the Reorganization at the
"Effective Time." Section 1.7 of said agreement indicates that the "Effective
Time" means the time that is immediately prior to the sale of the Common Stock
by the Company pursuant to the Underwriting Agreement. Under Section 4.1 of
the Contribution Agreement, the obligation of the Company to transfer the
Wholesale Lending Assets is subject to the satisfaction, at or prior to the
Effective Time, of each of the following conditions:
(i) There being, at the Effective Time, no (1)
threatened, instituted or pending action, proceeding, application,
claim or counterclaim by or before any court or governmental authority
or agency seeking to restrain or prohibit the consummation of the
transactions contemplated in the Contribution Agreement or by the
Underwriting Agreement or (2) statute, rule, regulations, decree,
order or injunction promulgated, enacted or enforced by any court or
governmental agency or authority restraining or prohibiting the
consummation of such transactions;
(ii) The Registration Statement shall have been declared
effective by the SEC and, at the Effective Time, no stop order
suspending the effectiveness of the Registration Statement shall have
been issued and no proceedings for that purpose shall be pending
before the SEC or any state securities or "blue sky" commissioner or
authority; and
(iii) All conditions precedent to the obligations of the
underwriters to consummate the purchase of the Common Stock from the
Company pursuant to the terms of the Underwriting Agreement (except the
consummation of the reorganization contemplated by the Contribution
Agreement) shall have been satisfied or waived and each of the parties
to the Underwriting Agreement shall be prepared to consummate the
transactions contemplated thereby.
In the Offering and pursuant to the terms of the Underwriting
Agreement, the Company has agreed to sell to the underwriters on a firm
commitment basis 21,750,000 (87%) of the 25,000,000 shares of Common Stock the
Company will possess immediately following the Reorganization. LBFC will not
receive any proceeds from the sale of the Common Shares by the Company in the
Offering. Subsequent to the Offering, the Company will own 3,250,000 (13%) of
the outstanding Common Stock of LBFC. Pursuant to the terms of the
Underwriting Agreement,
<PAGE> 3
Long Beach Mortgage Company
April 15, 1997
Page 3
if the underwriters' over-allotment option is exercised in full, the Company
will sell all of the remaining 3,250,000 shares of Common Stock.
LAW AND ANALYSIS
Under Section 351(a) of the Internal Revenue Code of 1986, as amended
(the "Code"), no gain or loss is recognized upon a transfer of assets by a one
or more persons to a corporation in exchange for stock in such corporation if,
immediately after the exchange, such person or persons are in control of the
corporation (a "Section 351 Transaction"). For this purpose, control means 80%
of all shares of voting stock and 80% of all other classes of stock. I.R.C.
Section 368(c).
A transfer of assets in exchange for stock of the transferee
corporation will not, however, qualify as a Section 351 Transaction if the
transferor is under a legally binding obligation, at the time the assets are
transferred, to sell an amount of stock that results in the loss of control of
the transferee corporation by the transferor. See, e.g., American Bantam Car v.
Commissioner, 11 T.C. 397 (1948), aff'd per curiam, 177 F.2d 513 (3rd Cir.
1949); Hazeltine Corp. v. Commissioner, 89 F.2d 513, 518 (1937); Intermountain
Lumber Co. v. Commissioner, 65 T.C. 1025, 1031-32 (1976). The Internal Revenue
Service (the "Service") has adopted the same line of reasoning in published
rulings. See Rev. Rul. 79-194, 1979-1 C.B. 145 (situation 2); Rev. Rul.
70-522, 1970-2 C.B. 81; Rev. Rul. 70-140, 1970-1 C.B. 73. Other case
authorities have indicated that the existence of a plan to dispose of control
at the time the assets are transferred is sufficient to lose control,
regardless of whether the transferors are legally bound under the plan to sell
the stock of the transferee corporation. Culligan Water Conditioning of
Tri-Cities v. United States, 567 F.2d 867, 869 (9th Cir. 1978); Manhattan
Building Co. v. Commissioner, 27 T.C. 1032 (1957).
If, under the foregoing authorities, a transfer of assets in exchange
for stock fails to qualify as a Section 351 Transaction because the transferor
does not control the transferee corporation immediately after the transfer, the
transfer is treated as a taxable sale of assets to the transferee corporation.
See, e.g., Hazeltine Corp. v. Commissioner, 89 F.2d at 518; Intermountain
Lumber Co. v. Commissioner, 65 T.C. at 1031-32; Rev. Rul. 70-522, 1970-2 C.B.
81.
Under the Contribution Agreement, the Wholesale Lending Assets will
not be transferred until all conditions precedent to the obligations of the
underwriters to purchase the 21,750,000 shares of Common Stock from the Company
have been satisfied or waived. At such time, the Company will be contractually
obligated under the Underwriting Agreement to sell immediately the 21,750,000
shares of Common Stock to the underwriters. Following the sale of the
21,750,000 shares of Common Stock to the underwriters, the Company will own
3,250,000 shares of Common Stock, or 13% of the outstanding Common Stock of
LBFC. Accordingly, at the time the Wholesale Lending Assets are transferred to
LBFC, the Company will be legally obligated to sell immediately an amount of
shares that will result in the Company not owning 80% of all shares of voting
stock and 80% of all other classes of stock of LBFC. Based on the authorities
discussed above, the Company will not control (under Section 368(c) of the
Code) LBFC immediately after the transfer of the Wholesale Lending Assets.
<PAGE> 4
Long Beach Mortgage Company
April 15, 1997
Page 4
OPINION
Based upon the documents, legal principles, and analysis described and
set forth above, we conclude that the Reorganization will constitute a taxable
sale of assets for federal income tax purposes. In addition, in our opinion
the discussion regarding certain federal income tax matters under the headings
"Risk Factors Tax Risk Related to Deferred Tax Asset" and "Reorganization Tax
Consequences," to the extent it constitutes matters of law or summaries of
legal matters or conclusions, is accurate in every material respect. Our
opinion is limited to the matters described above and does not address any
other aspects of the Reorganization. Specifically, and without limiting the
foregoing, our opinion does not address: (i) the ability of LBFC to amortize
any of the Wholesale Lending Assets for federal income tax purposes, (ii) the
value (if any) of the deferred tax asset to be reflected on LBFC's unaudited
pro forma consolidated statement of financial condition (or any similar
statement), (iii) the accuracy of any portion of the discussion under such
headings that describe or reach conclusions regarding generally accepted
accounting principles, or (iv) the fair market value of any of the Wholesale
Lending Assets (whether tangible or intangible).
This opinion expresses our views only as to federal income issues
specifically addressed herein. This opinion expresses our views only as to
federal income tax laws in effect as of the date hereof, including the Internal
Revenue Code of 1986, as amended, applicable Treasury Regulations, published
rulings and administrative practices of the Service and court decisions. This
opinion represents our best legal judgment as to the matters addresses herein,
but is not binding on the Service or the courts. Furthermore, the legal
authorities upon which we rely are subject to change either prospectively or
retroactively. Any change in such authorities or any change in the facts might
adversely affect the conclusions stated herein.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ GIBSON, DUNN & CRUTCHER LLP
---------------------------------
GIBSON, DUNN & CRUTCHER LLP
<PAGE> 1
EXHIBIT 10.4
FORM OF DIRECTOR/OFFICER INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (this "AGREEMENT") is made as of
_______________________, by and between LONG BEACH FINANCIAL CORPORATION, a
Delaware corporation (the "COMPANY"), and ___________________________
("INDEMNITEE"), a director of the Company.
I.
DEFINITIONS
"AFFILIATE" shall mean (a) with respect to any corporation, any
officer, director or 10% or more stockholder of such corporation, or (b) with
respect to any individual, any partner or immediate family member of such
individual or the estate of such individual, or (c) with respect to any
partnership, trust or joint venture, any partner, co-venturer or trustee of such
partnership, trust of joint venture, or any beneficiary or owner having 10% or
more interest in the equity, property or profits of such partnership, trust or
joint venture, or (d) with respect to any Person, any other Person that,
directly or indirectly, controls, is controlled by, or is under common control
with such Person or any Affiliate of such Person.
"BOARD" shall mean the Board of Directors of the Company.
"DGCL" shall mean the Delaware General Corporation Law, as may be
amended from time to time.
"PERSON" shall mean any individual, partnership, corporation, joint
venture, trust, estate, or other entity.
"SUBSIDIARY" shall mean any corporation of which the Company owns,
directly or indirectly, through one or more subsidiaries, securities having more
than 50% of the voting power of such corporation.
II.
LIABILITY AND INDEMNIFICATION
2.1 LIABILITY AND INDEMNIFICATION. To the fullest extent permitted by
the DGCL, Indemnitee shall not be liable to the Company or its stockholders for
monetary damages for breach of his or her fiduciary duty as a director. The
Company shall indemnify, in the manner and to the fullest extent permitted by
the DGCL, Indemnitee (or his or her estate) if Indemnitee 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 Company,
and whether civil, criminal, administrative, investigative or otherwise, by
reason of the fact that Indemnitee is or was a director of the Company or any
Subsidiary of the Company, or is or was serving as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise,
against all expenses as incurred (including attorneys' fees), judgments, fines
and amounts paid in settlement of such action, suit or proceeding.
<PAGE> 2
2.2 ENFORCING THIS AGREEMENT. If Indemnitee properly makes a claim for
indemnification or an advance of expenses that is payable pursuant to the terms
of this Agreement, and that claim is not paid by the Company, or on its behalf,
within sixty (60) days after a written claim has been received by the Company,
except in the case of a claim for an advance of expenses, in which case the
applicable period shall be twenty (20) days, Indemnitee may at any time
thereafter bring suit against the Company to recover the unpaid amount of the
claim and if successful in whole or in part, Indemnitee shall be entitled to be
paid also all expenses actually and reasonably incurred in connection with
prosecuting such claim. In (a) any suit brought by Indemnitee to enforce a right
to indemnification hereunder (but not in a suit brought by Indemnitee to enforce
a right to an advance of expenses) it shall be a defense that, and (b) any suit
by the Company to recover an advance of expenses pursuant to the terms of an
undertaking the Company shall be entitled to recover such expenses upon a final
adjudication that, Indemnitee has not met any applicable standard for
indemnification set forth hereunder or in the DGCL. Neither the failure of the
Company (including the Board, independent legal counsel or stockholders) to have
made a determination prior to the commencement of such suit that indemnification
of Indemnitee is proper in the circumstances because Indemnitee has met the
applicable standard of conduct set forth in the DGCL, nor an actual
determination by the Company (including the Board, independent legal counsel or
stockholders) that Indemnitee has not met such applicable standard of conduct,
shall either create a presumption that Indemnitee has not met the applicable
standard of conduct or, in the case of such a suit brought by Indemnitee, be a
defense to such suit. In any suit brought by Indemnitee to enforce a right to
indemnification or to an advance of expenses hereunder, or by the Company to
recover an advance of expenses pursuant to the terms of the undertaking of
Indemnitee in Section 3.1, the burden of proving that Indemnitee is not entitled
to be indemnified, or to such advance of expenses, shall be on the Company.
2.3 SUBROGATION. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all papers required and shall do
everything that may be necessary to secure such rights, including the execution
of such documents necessary to enable the Company effectively to bring suit to
enforce such rights.
III.
ADVANCEMENT OF EXPENSES; INDEMNIFICATION PROCEDURE
3.1 ADVANCEMENT OF EXPENSES. The Company shall advance all expenses
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referenced in
Section 2.1. Indemnitee hereby undertakes to repay such amounts advanced only
if, and to the extent that, it shall ultimately be determined that Indemnitee is
not entitled to be indemnified by the Company as authorized hereby or that such
indemnification is not otherwise permitted by applicable law. The advances to be
made hereunder shall be paid by the Company to Indemnitee within twenty (20)
days following delivery of a written request therefor or by Indemnitee to the
Company. Notwithstanding the foregoing or any other provision of this Agreement,
no advance shall be made by the Company if a determination is reasonably and
promptly made by the Board by a majority vote of a quorum of disinterested
2
<PAGE> 3
directors, or (if such a quorum is not obtainable or, even if obtainable, a
quorum of disinterested directors so directs) by independent legal counsel to
the Company, that based upon the facts known to the Board or such legal counsel
at the time such determination is made (a) Indemnitee acted in bad faith or
deliberately breached Indemnitee's duty to the Company or its stockholders and
(b) as a result of such actions by Indemnitee, it is more likely than not that
it will ultimately be determined that Indemnitee is not entitled to
indemnification pursuant to this Agreement.
3.2 NOTICE/COOPERATION BY INDEMNITEE. Indemnitee shall, as a condition
precedent to Indemnitee's right to be indemnified under this Agreement, give the
Company notice in writing as soon as practicable of any claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be given in the manner set forth in
Section 10.3 and to the address stated therein, or such other address as the
Company shall designate in writing to Indemnitee. In addition, Indemnitee shall
give the Company such information and cooperation as it may reasonably require
and as shall be within Indemnitee's power.
3.3 NOTICE TO INSURERS. If, at the time of the receipt of a notice of a
claim pursuant to Section 3.2, the Company has director liability insurance in
effect, the Company shall give prompt notice of the commencement of such
proceeding to the insurers in accordance with the procedures set forth in the
respective policies. The Company shall thereafter take all necessary or
desirable actions to cause such insurers to pay, on behalf of Indemnitee, all
amounts payable as a result of such proceeding in accordance with the terms of
such policies.
3.4 SELECTION OF COUNSEL. In the event the Company shall be obligated
under Section 3.1 to pay the expenses of any proceeding against Indemnitee, the
Company shall be entitled to assume the defense of such proceeding, with counsel
approved by Indemnitee, upon the delivery to Indemnitee of written notice of the
Company's election so to do. After delivery of such notice, approval of such
counsel by Indemnitee and the retention of such counsel by the Company, the
Company 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 (a) Indemnitee shall have the right to employ separate counsel in
any such proceeding at Indemnitee's expense; and (b) if (i) the employment of
counsel by Indemnitee has been authorized by the Company, (ii) Indemnitee shall
have reasonably concluded that there may be a conflict of interest between the
Company and Indemnitee in the conduct of any such defense or (iii) the Company
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 at the
expense of the Company (subject to the provisions of this Agreement).
IV.
ADDITIONAL INDEMNIFICATION RIGHTS;
NON-EXCLUSIVITY
4.1 APPLICATION. The provisions of this Agreement shall be deemed
applicable to all actual or alleged actions or omissions by Indemnitee during
any and all periods of time that Indemnitee was, is or shall be serving as a
director of the Company or a Subsidiary.
3
<PAGE> 4
4.2 SCOPE. The Company hereby agrees to indemnify Indemnitee to the
fullest extent permitted by law (except as set forth in Articles VIII and IX),
notwithstanding that such indemnification is not specifically authorized by the
other provisions of this Agreement, the Company's Certificate of Incorporation,
the Company's Bylaws or by statute. In the event of any changes, after the date
of this Agreement, in any applicable law, statute, or rule that expands the
right of a Delaware corporation to indemnify a member of its board of directors,
such changes shall be, ipso facto, within the purview of Indemnitee's rights and
the Company's obligations under this Agreement. In the event of any change in
any applicable law, statute or rule that narrows the right of a Delaware
corporation to indemnify a member of its board of directors, such change shall
have no effect on this Agreement or the parties' rights and obligations
hereunder.
4.3 NON-EXCLUSIVITY. The indemnification provided by this Agreement
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its Bylaws, any agreement, any
vote of stockholders or disinterested directors, the DGCL or otherwise, both as
to action in Indemnitee's official capacity and as to action in another capacity
while holding such office. The indemnification provided under this Agreement
shall continue as to Indemnitee for any action taken or not taken while serving
in an indemnified capacity even though he may have ceased to serve in such
capacity at the time of any action, suit or other covered proceeding.
V.
PARTIAL INDEMNIFICATION
If Indemnitee is entitled under any provision of this Agreement to
indemnification by the Company for some or a portion of the expenses, judgments,
fines or penalties actually or reasonably incurred by Indemnitee in the
investigation, defense, appeal or settlement of any civil or criminal action,
suit or proceedings but not, however, for the total amount thereof, the Company
shall nevertheless indemnify Indemnitee for that portion to which Indemnitee is
entitled.
VI.
MUTUAL ACKNOWLEDGMENT
Both the Company and Indemnitee acknowledge that in certain instances,
federal law or public policy may override applicable state law and prohibit the
Company from indemnifying its directors under this Agreement or otherwise. For
example, the Company and Indemnitee acknowledge that the Securities and Exchange
Commission (the "SEC") has taken the position that indemnification is not
permissible for liabilities arising under certain federal securities laws, and
federal legislation prohibits indemnification for certain ERISA violations.
Indemnitee understands and acknowledges that the Company has undertaken or may
be required in the future to undertake with the SEC to submit the question of
indemnification to a court in certain circumstances for a determination of the
Company's rights under public policy to indemnify Indemnitee.
4
<PAGE> 5
VII.
LIABILITY INSURANCE
The Company shall, from time to time, make the good faith determination
whether or not it is practicable for the Company to obtain and maintain a policy
or policies of insurance with reputable insurance companies, providing the
directors with coverage for losses from wrongful acts, or to ensure the
Company's performance of its indemnification obligations under this Agreement.
Among other considerations, the Company will weigh the costs of obtaining such
insurance coverage against the protection afforded by such coverage. In all such
policies of liability insurance, Indemnitee shall be named as an insured in such
a manner as to provide Indemnitee the same rights and benefits as are accorded
to the most favorably insured of the Company's directors. Notwithstanding the
foregoing, the Company shall have no obligations to obtain or maintain such
insurance if the Company determines in good faith that such insurance is not
reasonably available, if the premium costs for such insurance are
disproportionate to the amount of coverage provided, if the coverage provided by
such insurance is limited by exclusions so as to provide an insufficient
benefit, or if Indemnitee is covered by similar insurance maintained by a parent
or Subsidiary of the Company.
VIII.
SEVERABILITY
Nothing in this Agreement is intended to require or shall be construed
as requiring the Company to do or fail to do any act in violation of applicable
law. The Company's inability, pursuant to court order, to perform its
obligations under this Agreement shall not constitute a breach of this
Agreement. If this Agreement, or any portion hereof, shall be invalidated on any
ground by any court or competent jurisdiction, the Company shall nevertheless
indemnify Indemnitee to the full 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.
IX.
EXCEPTIONS TO THE COMPANY'S OBLIGATIONS
Any other provision to the contrary notwithstanding, the Company shall
not be obligated pursuant to the terms of this Agreement for the following:
9.1 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, unless said proceedings or
claims were authorized by the Board.
9.2 IMPROPER PERSONAL BENEFIT. To indemnify Indemnitee against
liability for any transactions from which Indemnitee, or any Affiliate of
Indemnitee, derived an improper personal benefit, including, but not limited to,
self-dealing or usurpation of a corporate opportunity.
9.3 DISHONESTY. To indemnify Indemnitee if a judgment or other final
adjudication adverse to Indemnitee establishes that Indemnitee committed acts of
active and deliberate
5
<PAGE> 6
dishonesty, with actual dishonest purpose and intent, which acts were material
to the cause of action so adjudicated.
9.4 INSURED CLAIMS; PAID CLAIMS. To indemnify Indemnitee for expenses
or liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) that
have been paid directly to Indemnitee (a) by an insurance carrier under a policy
of liability insurance maintained by the Company or (b) otherwise by any other
means.
9.5 CLAIMS UNDER SECTION 16(b). To indemnify Indemnitee for an
accounting of profits in fact realized from the purchase and sale of securities
within the meaning of Section 16(b) of the Securities Exchange Act of 1934, as
amended, or any similar successor statute.
X.
MISCELLANEOUS
10.1 CONSTRUCTION OF CERTAIN PHASES. For purposes of this Agreement,
(a) references to the "COMPANY" shall include any resulting or surviving
corporation in any merger or consolidation in which the Company (as then
constituted) is not the resulting or surviving corporation so that Indemnitee
will continue to have the full benefits of this Agreement; (b) references to
"OTHER ENTERPRISES" shall include employee benefit plans; (c) references to
"FINES" shall include any excise taxes assessed on Indemnitee with respect to an
employee benefit plan; (d) references to "SERVING AT THE REQUEST OF THE COMPANY"
shall include any service as a director, officer, employee or agent of the
Company which impose duties on, or involves services by, such director, officer,
employee or agent with respect to an employee benefit plan, its participants, or
beneficiaries; and (e) if Indemnitee acted in good faith and in a manner
Indemnitee reasonably believed to be in the best interests of the participants
and beneficiaries of an employee benefit plan, Indemnitee shall be deemed to
have acted in a manner "REASONABLY BELIEVED TO BE IN THE BEST INTERESTS OF THE
COMPANY AND ITS STOCKHOLDERS" as referenced to in this Agreement.
10.2 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon the
Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
Notwithstanding the foregoing, Indemnitee shall have no right or power to
voluntarily assign or transfer any rights granted to Indemnitee, or obligations
imposed upon the Company, by or pursuant to this Agreement. Further, the rights
of Indemnitee hereunder shall in no event accrue to the benefit of, or be
enforceable by, any judgment creditor or other involuntary transferee of
Indemnitee.
10.3 NOTICES. All notices, requests, demands and other communications
under this Agreement shall be in writing and shall be deemed duly given (a) if
mailed by domestic certified or registered mail with postage prepaid, properly
addressed to the parties at the address set forth below, or to such other
address as may be furnished to Indemnitee by the Company or to the Company by
Indemnitee, as the case may be, on the third business day after the date
postmarked, or (b) otherwise notice shall be deemed received when such notice is
actually received by the party to whom it is directed.
6
<PAGE> 7
If to Indemnitee: __________________________________
__________________________________
__________________________________
If to Company: LONG BEACH FINANCIAL CORPORATION
1100 Town & Country Road, Suite 900
Orange, CA 92868
Attn: General Counsel
10.4 CHOICE OF LAW. This Agreement shall be governed by and its
provisions construed in accordance with the laws of the State of Delaware.
10.5 COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall constitute an original and all of which together shall constitute
one and the same instrument.
IN WITNESS WHEREOF, the parties hereby have executed this Agreement as
of the date first above written.
LONG BEACH FINANCIAL CORPORATION,
a Delaware corporation
By:___________________________________
Its:__________________________________
______________________________________
Name:_________________________________
7
<PAGE> 1
Exhibit 10.7
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "AGREEMENT") is made and entered into
as of April 15, 1997, by and between LONG BEACH FINANCIAL CORPORATION, a
Delaware corporation ("LBFC"), and LONG BEACH MORTGAGE COMPANY, a Delaware
corporation, currently named Ameriquest Mortgage Corporation ("LBMC")
(collectively, the "COMPANY"), and M. JACK MAYESH ("EXECUTIVE").
I.
EMPLOYMENT
1.1 POSITION AND DUTIES. The Company hereby engages and employs
Executive in the following capacities at LBFC and LBMC:
LBFC: Chairman of the Board and Chief Executive Officer
LBMC: Chairman of the Board and Chief Executive Officer
The Company's Boards of Directors (collectively, the "BOARDS") may
provide such additional designations of title to Executive as the Boards, in
their discretion, may deem appropriate. Executive shall perform the executive
duties and functions related to the above positions, subject to the limitations
of authority set forth from time to time in any resolution of the Boards or
applicable law.
1.2 BEST EFFORTS. Executive agrees to devote his full time and
attention to the Company, to use his best efforts to advance the business and
welfare of the Company, to render his services under this Agreement fully,
faithfully, diligently, competently and to the best of his ability, and not to
engage in any other employment activities. Notwithstanding anything herein to
the contrary, Executive shall not be precluded from (a) engaging in charitable
activities and community affairs and managing his personal investments and
affairs, provided that such activities do not materially interfere with the
proper performance of his duties and responsibilities under this Agreement; or
(b) owning up to 1% of a publicly-held company engaged in the same or similar
business as the Company.
II.
COMPENSATION AND BENEFITS
2.1 BASE SALARY. For all services to be rendered by Executive under
this Agreement, the Company agrees to pay Executive an annual base salary of
$200,000 (subject to adjustment upward as recommended by the Compensation
Committee of the Board of LBFC), less deductions required by law, payable in
accordance with the normal payroll practices of the Company.
2.2 ANNUAL PERFORMANCE BONUS. On or before each April 15 following
each December 31 during the term of this Agreement, the Company shall pay to
Executive a bonus of
<PAGE> 2
up to 100% of Executive's base salary, as determined by the Boards based on
Executive's performance and the performance of the Company during the prior
calendar year. All bonus calculations shall be based upon the Company's audited
financial statements through the end of the applicable calendar year.
2.3 OTHER BENEFITS. The Company shall further provide to Executive the
following other benefits:
(a) An automobile (to be owned or leased by the Company at its
option and expense) of Executive's choice with a negotiated purchase price of no
more than $60,000, and reimbursement of all reasonable operating costs,
insurance and repairs;
(b) An annual vacation leave of a minimum of three (3) weeks per
calendar year at full pay;
(c) Full participation, on a basis commensurate with his position
with the Company, in all plans of life, accident, disability and health
insurance that generally are made available to senior executives of the Company;
and
(d) A complete annual physical examination by the doctor of
Executive's choice, with the cost of such examination to be borne by the
Company.
(e) Stock options (which shall be incentive stock options to the
extent permissible) for 500,000 shares of Company Common Stock concurrent with
the pricing of an initial public offering of the Company's Common Stock, such
options to vest 20% per year for five (5) years. Executive acknowledges that
such option grant is intended to cover the three (3) year term of this Agreement
and that the Company has no commitment to issue additional options to Executive
during the term of this Agreement or thereafter.
2.4 EXPENSE REIMBURSEMENT. The Company shall promptly reimburse
Executive for all reasonable business expenses incurred by Executive in
promoting the business of the Company, including expenditures for entertainment,
travel, or other expenses, provided that (a) such expenditures are of a nature
qualifying them as legitimate business deductions and (b) Executive furnishes to
the Company adequate records and other documentary evidence reasonably required
by the Company to substantiate such expenditures in accordance with the
Company's policies and procedures.
III.
TERMINATION AND SEVERANCE PAY
3.1 AT WILL. Executive and the Company acknowledge and agree that
Executive's employment with the Company is expressly "at will" both during and
after the term of this Agreement. This means that either party may terminate
Executive's employment with or without cause. Any termination of Executive's
employment is, however, subject to the terms and provisions of this Agreement as
to severance pay and other obligations.
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<PAGE> 3
3.2 INVOLUNTARY TERMINATION.
(a) SEVERANCE PAYMENTS. In the event that Executive's employment
with the Company is terminated by the Company for Cause (as defined in Section
3.2(c)), Executive shall be entitled to no severance pay or other benefits. In
the event that Executive's employment with the Company is terminated by the
Company other than for Cause, then in consideration of Executive's compliance
with his obligations under Article V and Article VI and Executive's execution of
a general release in favor of the Company and its affiliates, Executive shall be
entitled to severance payments in the form of (i) monthly payments to Executive
in the amount of Executive's monthly base salary as in effect on the date of
termination, payable in accordance with customary payroll practices, for twelve
(12) months following such termination; plus (ii) for each full calendar month
Executive was employed during the year of termination of employment, 1/12th of
the bonus to which Executive would have been entitled had he been employed the
entire year, payable at the time specified in Section 2.2 hereof; 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. Executive acknowledges and agrees that in the event Executive breaches
any provision of Article V or Article VI or the general release, his right to
receive severance payments under this Section 3.2(a) shall automatically
terminate and Executive shall repay all severance payments received.
(b) BENEFITS. Following the notification of termination, Executive
shall cease to be a Company employee and shall not be entitled to any employee
benefits. This shall not preclude Executive from exercising his rights under
COBRA to pay for the continuation of benefits previously provided by the
Company. In the event that Executive's employment is terminated by the Company
other than for Cause, all Company stock options granted pursuant to Section
2.3(e) shall be deemed vested as of the date of termination.
(c) CAUSE. For purposes of this Agreement, "CAUSE" shall mean (i)
an act or acts of personal dishonesty by Executive that were intended to result
in substantial personal enrichment of Executive at the expense of the Company;
(ii) Executive's conviction of any felony; or (iii) Executive's gross
negligence, gross incompetence, willful insubordination or misconduct,
intentional or persistent failure to perform stated duties or abide by the
Company's policies, or material breach of any provision of this Agreement,
including without limitation any representation or covenant contained in Article
V or Article VI of this Agreement.
3.3 VOLUNTARY TERMINATION.
(a) SEVERANCE PAY. In the event Executive voluntarily terminates
his employment with the Company without Good Reason (as defined in Section
3.3(b)), Executive shall be entitled to no severance pay or other benefits. In
the event Executive voluntarily terminates his employment with the Company for
Good Reason (as defined in Section 3.3(b)), Executive shall be entitled to the
severance pay and stock option vesting set forth in Sections 3.2(a) and (b) if
(i) Executive gives written notice of his resignation within ninety (90) days of
the occurrence of such Good Reason and advises, as part of such resignation,
that he is resigning because of the Good Reason, and (ii) the Good Reason was
other than for Cause.
3
<PAGE> 4
For purposes of this Agreement, a resignation tendered by Executive
pursuant to a direct request of the Boards (or either of them) or another
officer with higher executive status shall, for purposes of this Agreement, be
treated as an involuntary termination, entitling Executive to severance payments
in accordance with the provisions of Section 3.2(a) so long as the request was
not based on Cause (as defined in Section 3.2(c)).
(b) GOOD REASON. For purposes of this Agreement, "GOOD REASON"
shall include (i) the material reduction or material adverse modification of
Executive's authority or duties (i.e., the substantial diminution or adverse
modification in Executive's title, status, overall position, responsibilities,
reporting relationship or general working environment); (ii) any reduction in
Executive's base compensation or bonus potential or any material reduction in
employee benefits; or (iii) any requirement to move Executive's principal place
of employment from Orange County, California, in each case without Executive's
prior written consent.
3.4 DEATH. In the event of Executive's death, this Agreement shall
automatically terminate and shall be of no further force and effect. Termination
of Executive's employment as a result of his death shall not result in any
obligation by the Company to pay severance pay or other benefits to Executive's
estate or heirs, but Executive's estate or heirs shall be entitled to a pro-rata
bonus through the date of termination at the time specified in Section 2.2.
3.5 DISABILITY. In the event of Executive's Disability (as defined
below) during the term of this Agreement for any period of at least three (3)
consecutive months, the Company shall have the right, which may be exercised in
its sole discretion, to terminate this Agreement. In the event the Company does
elect to terminate this Agreement, Executive shall not be entitled to any
severance pay at any time but shall be entitled to normal disability benefits in
accordance with the policies established from time to time by the Company. For
purposes of this Agreement, "DISABILITY" shall mean the inability of Executive
to perform his employment services hereunder by reason of physical or mental
illness or incapacity as determined by a physician chosen by the Company and
reasonably satisfactory to Executive or his legal representative.
IV.
TERM
TERM. The term of this Agreement shall commence on April 15, 1997 and
shall continue for a period of three (3) years thereafter, as such period may be
extended in writing from time to time. In the event an initial public offering
of LBFC's common stock is not successfully completed on or before December 31,
1997, this Agreement shall be null and void and the parties hereto shall have no
rights or obligations with respect hereto.
V.
NONDISCLOSURE OF INFORMATION
AND NON-SOLICITATION OF EMPLOYEES
5.1 NONDISCLOSURE OF CONFIDENTIAL INFORMATION. Except in the
performance of his duties hereunder, Executive shall not disclose to any person
or entity or use for his own direct or indirect benefit any Confidential
Information (as defined below). For purposes of this Agreement,
4
<PAGE> 5
"CONFIDENTIAL INFORMATION" shall include the Company's products, reports,
studies, services, processes, suppliers, customers, customers' account
executives, financial, sales and distribution information, price lists, identity
and list of actual and potential customers, trade secrets, technical
information, business plans and strategies to the extent that such information
has not been publicly disseminated by the Company or otherwise made available to
the public, other than through a breach hereof.
5.2 RETURN OF INFORMATION AND PROPERTY. Upon termination of
Executive's employment, Executive will deliver to the Company all customer
lists, proposals, reports, memoranda, computer software and programming, budgets
and other financial information, and other materials or records or writings of
any type (including any copies thereof and regardless of the medium in which the
information exists) made, used or obtained by Executive in connection with his
employment by the Company and all Company property.
5.3 EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT.
Executive shall be subject to the provisions of the Company's Employee
Proprietary Information and Inventions Agreement, a copy of which is attached
hereto as Exhibit A and incorporated herein by this reference.
5.4 NON-SOLICITATION. Executive agrees that, so long as he is employed
by the Company and for a period of one (1) year after termination of his
employment for any reason, he shall not (a) directly or indirectly solicit,
induce or attempt to solicit or induce any Company employee to discontinue his
or her employment with the Company, (b) usurp any opportunity of the Company
that Executive became aware of during his tenure at the Company or which is made
available to him on the basis of the belief that Executive is still employed by
the Company, or (c) directly or indirectly solicit or induce or attempt to
influence any person or business that is an account, customer or client of the
Company to restrict or cancel the business of any such account, customer or
client with the Company.
VI.
NON-COMPETITION
So long as Executive is employed by the Company and for a period of one
(1) year after termination of his employment for any reason, Executive shall
not, without the prior written consent of the Company, either directly or
indirectly, including without limitation through a partnership, joint venture,
corporation or other entity or as a consultant, director or employee, engage in
the business engaged in by the Company as of the date hereof within those
geographical areas in which the Company currently conducts active business
operations. The parties hereto agree that both the scope and nature of the
covenant and the duration and area for which the covenant not to compete set
forth in this Article VI is to be effective are reasonable in light of all facts
and circumstances.
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<PAGE> 6
VII.
MISCELLANEOUS
7.1 SUCCESSORS AND ASSIGNS; BINDING AGREEMENT. This Agreement shall
inure to the benefit of and shall be binding upon the Company, its successors
and assigns. The obligations and duties of the Executive hereunder are personal
and otherwise not assignable. This Agreement shall inure to the benefit of and
be enforceable by the Executive's legal representatives. This Agreement shall
not be terminated by the voluntary or involuntary dissolution of the Company or
by any merger or consolidation, whether or not the Company is the surviving or
resulting corporation, or upon any transfer of all or substantially all of the
assets of the Company. In the event of any such merger, consolidation or
transfer of assets, the provisions of this Agreement shall bind and inure to the
benefit of the surviving or resulting corporation, or the corporation to which
such assets shall have been transferred, as the case may be; provided, however,
that the Company will require any successor to all or substantially all of the
business and/or assets of the Company, by agreement in form and substance
satisfactory to Executive, to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place.
7.2 ARBITRATION. Other than with respect to Articles V and VI hereof,
any and all disputes arising out of the interpretation, application or breach of
this Agreement shall be subject to arbitration pursuant to the Company's Mutual
Agreement to Arbitrate Claims, a copy of which is attached hereto as Exhibit B
and incorporated herein by this reference.
7.3 NO WAIVER. The waiver by either party of a breach of any provision
of this Agreement shall not operate as or be construed as a waiver of any
subsequent breach thereof.
7.4 GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws and decisions of the State of California.
7.5 AMENDMENTS. No amendment or modification of the terms of this
Agreement shall be valid unless made by written agreement executed by the
parties hereto or their respective successors and legal representative.
7.6 SEVERABILITY. In the event that any provision of this Agreement,
including without limitation any provision of Article VI, shall to any extent be
held invalid, unreasonable or unenforceable, in any circumstances, the parties
hereto agree that the remainder of this Agreement and the application of such
provision of this Agreement to other circumstances shall be valid and
enforceable to the fullest extent permitted by law. If any provision, or any
part thereof, is held to be unenforceable because of the scope or duration of or
the area covered by such provision, the parties hereto agree that the court
making such determination shall have the power, and is hereby asked by the
parties, to reduce the scope, duration and/or area of such provisions (and to
substitute appropriate provisions for any such unenforceable provisions) in
order to make such provisions enforceable to the fullest extent permitted by
law, and/or to delete specific words and phrases, and such modified provisions
shall then be enforceable and shall be enforced.
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<PAGE> 7
7.7 ENTIRE AGREEMENT; NO OTHER CLAIMS. This Agreement constitutes the
entire agreement between the parties regarding the subject matter hereof, and
supersedes all prior or contemporaneous negotiations, understandings or
agreements of the parties, whether written or oral, with respect to such subject
matter. Executive acknowledges that all compensation and benefits of any nature
due to Executive from the Company's predecessor, Long Beach Mortgage Company,
and its affiliates (collectively "Old Long Beach"), have been paid in full and
Executive waives any and all claims relating thereto for the benefit of Old Long
Beach and the Company.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the day and year first above written.
The "Company":
LONG BEACH FINANCIAL CORPORATION,
a Delaware corporation
By: /s/ EDWARD RESENDEZ
-----------------------------
Its: President
LONG BEACH MORTGAGE COMPANY,
a Delaware corporation, currently named
Ameriquest Mortgage Corporation
By: /s/ JAMES H. LEONETTI
-----------------------------
Its: Senior Vice President, Chief
Financial Officer
"Executive":
/s/ M. JACK MAYESH
-----------------------------
M. JACK MAYESH
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<PAGE> 8
LONG BEACH FINANCIAL CORPORATION
EMPLOYEE PROPRIETARY INFORMATION
AND INVENTIONS AGREEMENT
I understand that as part of my employment ("Employment"), by Long
Beach Financial Corporation (the "Company") I am (or may be) expected to make
new contributions and discoveries of value to the Company. I further understand
that my Employment by the Company creates in me a duty of trust and
confidentiality to the Company with respect to any information (1) related,
applicable or useful to the business of the Company, including the Company's
anticipated research and development assigned to me by the Company; or (3)
resulting from the use of equipment, supplies or facilities owned, leased or
contracted for by the Company; or (4) related, applicable or useful to the
business of any client of the Company, which may be made known to me by the
Company or by any client of the Company, or learned by me during the period of
my Employment.
As part of the consideration for my Employment or continued Employment,
as the case may be, by the Company, and the compensation received by me from the
Company (including bonuses and benefits) from time to time, I hereby agree as
follows:
1. All Proprietary Information (as defined on Exhibit A hereto) and
Inventions (as defined on Exhibit A hereto) shall be the sole propriety of the
Company and its assigns, and the Company and its assigns shall be the sole owner
of all patents, trademarks, service marks and copyrights, and other rights
(collectively referred to herein as "Rights") pertaining to Proprietary
Information and Inventions. I hereby assign to the Company any rights I may have
or acquire in Proprietary Information or Inventions or Rights pertaining to the
Proprietary Information or Inventions. I further agree as to all Proprietary
Information or Inventions to assist the Company or any person designed by it in
every proper way (but at the Company's expense) to obtain and from time to time
enforce Rights relating to said Proprietary Information or Inventions in any and
all countries. I will execute all documents for use in applying for, obtaining
and enforcing such Rights on such Proprietary Information or Inventions as
thereof to the Company or persons designated by it. My obligation to assist the
Company or any person designated by it in obtaining and enforcing Rights
relating to Proprietary Information or Inventions shall continue beyond the
cessation of my Employment ("Cessation of my Employment"), but the Company shall
compensate me at a reasonable rate after the Cessation of my Employment for time
actually spent by me upon the Company's request for such assistance. In the
event the Company is unable, after reasonable effort, to secure my signature on
any document or documents needed to apply for or enforce any Right relating to
Proprietary Information or to an Invention, whether because of my physical or
mental incapacity or for any other reason whatsoever, I hereby irrevocably
designate and appoint the Company and its duly authorized officers and agents as
my agents and attorneys-in-fact to act for and in my behalf and stead in the
execution and filing of any such application and in furthering the application
for an enforcement of Rights with the same legal force and effect as if such
acts were performed by me. I hereby acknowledge that all original works of
authorship which are made by me (solely or jointly with others) within the scope
of my Employment and
EXHIBIT A
<PAGE> 9
which are protectable by copyright are "works for hire" as that term is defined
in the United States Copyright Act (17 USCA, Section 101).
2. I will promptly disclose to the Company, and the Company hereby
agrees to receive such disclosures in confidence, all discoveries, developments,
designs, improvements, inventions, formulas, software programs, processes,
techniques, know-how, negative know-how and data, whether or not patentable or
registrable under patent, copyright or similar statutes or reduced to practice,
made or conceived or reduced to practice or learned by me, either alone or
jointly with others during the period of my Employment, for the purpose of
permitting the Company to determine whether they constitute Inventions. In order
to facilitate the complete and accurate disclosures described above, I agree to
maintain complete written records of all Inventions, and of all work, study and
investigation related thereto done by me during my Employment, which records
shall be the property of the Company.
3. At all times, both during my Employment and after the Cessation of
my Employment, whether the cessation is voluntary or involuntary, for any reason
or no reason, or by disability, I will keep in strictest confidence and trust
all Proprietary Information, and I will not disclose, use, or induce or assist
in the use or disclosure of any Proprietary Information or Rights pertaining to
Proprietary Information, or anything related thereto, without the prior express
written consent of the Company, except as may be necessary in the ordinary
course of performing my duties as an employee of the Company. I recognize that
the Company has received and in the future will receive from third parties their
confidential or proprietary information subject to a duty of the Company's part
to maintain the confidentiality of such information and to use it only for
certain limited purposes. I agree that I owe the Company and such third parties,
during my Employment and thereafter, a duty to hold all such confidential or
proprietary information in the strictest confidence, and I will not disclose,
use, or induce or assist in the use or disclosure of any such confidential or
proprietary information without the prior express written consent of the
Company, except as may be necessary in the ordinary course of performing my
duties as an employee of the Company consistent with the Company's agreement
with such third party.
4. During the period of my Employment, I will not directly or
indirectly engage in any activity which the Company shall determine in good
faith to be in competition with the Company. During my Employment and for a
period of one (1) year after the Cessation of my Employment, I will not, either
directly or indirectly, either alone or in concert with others, solicit or
entice any employee of or consultant to the Company to leave the Company to work
for anyone in competition with the Company. Also, during my Employment and after
the Cessation of my Employment, I will not, alone or in concert with others, in
any way use or disclose Proprietary Information in order to solicit, entice or
in any way divert any client to do business with any business entity in
competition with the Company. During my Employment, I agree not to plan or
otherwise take any preliminary steps, either alone or in concert with others, to
set up or engage in any business enterprise that would be in competition with
the Company.
5. In the event of the Cessation of my Employment, I will deliver to
the Company all devices, records, sketches, reports, proposals, client
information, lists, correspondence, equipment, software, documents, photographs,
photostats, negatives, undeveloped film, notes, drawings, specifications, tape
recordings or other electronic recordings, programs, data and other
A-2
<PAGE> 10
materials or property of any nature belonging to the Company or pertaining to my
work with the Company, and I will not take with me, or allow a third party to
take, any of the foregoing or any reproduction of any of the foregoing.
6. Any provision in this Agreement requiring me to assign my rights in
any invention shall not apply to an invention that qualifies fully under the
provisions of Section 2870 of the California Labor Code, the terms of which have
been set forth on Exhibit A to this Agreement. I understand that I bear the full
burden of proving to the Company that an invention qualifies fully under Section
2870. By signing this Agreement, I acknowledge receipt of a copy of this
Agreement and of written notification of the provisions of Section 2870.
Notwithstanding the foregoing, I also assign to the Company (or as directed by
it) any rights I may have or acquire in any Invention, full title to which is
required to be in the United States by a contract between the Company and the
United States or any of its agencies.
7. As a matter of record I have listed in Item 1 of Exhibit B attached
hereto all inventions or improvements relevant to the subject matter of my
Employment which have been made or conceived of or first reduced to practice by
me alone or jointly with others prior to my Employment and which I desire to
remove from the operation of this Agreement. I represent and warrant that such
list is complete. If there is no such list in Item 1 of Exhibit B, I represent
that I have made no such inventions or improvements prior to my Employment with
the Company.
8. I represent that my performance of all the terms of this Agreement
and as an employee of the Company does not and will not breach any agreement to
keep in confidence proprietary information acquired by me in confidence or in
trust prior to my Employment with the Company. I have not entered into, and I
agree that I will not enter into, any agreement, either written or oral, in
conflict herewith.
9. I represent and warrant to and covenant with the Company that I
will not bring to the Company, as of this date, any materials or documents of a
former employer (which term, for purposes of this paragraph 9, shall also
include persons, firms, corporations and other entities for which I have acted
as an independent contractor or consultant) that are not generally available to
the public, unless I have obtained express written authorization from any such
former employer for their possession and use. The materials or documents of a
former employer that are not generally available to the public that I will bring
to the Company for use in my Employment are identified in Item 2 of Exhibit B
attached hereto, and as to each such item, I represent and warrant that I have
obtained prior to the effective date of my Employment express written
authorization for their possession and use in my service to the Company. I also
understand that, in my service to the Company, I am not to breach any obligation
of confidentiality that I have to former employers, and I have fulfilled all
such obligations during my Employment.
10. I acknowledge that irreparable injury will result to the Company
from my violation or continued violation of the terms of this Agreement, and I
expressly agree that the Company shall be entitled, in addition to damages and
any other remedies provided by law, to an injunction or other equitable remedy
respecting such violation or continued violation by me.
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<PAGE> 11
11. The terms and conditions of this Agreement shall apply to any
period, if any, during which I perform services for the Company as a consultant
or independent contractor, as well as any time during which I am employed
directly by the Company. Upon the Cessation of my Employment, I agree to sign
and deliver the "Termination Certificate" attached hereto as Exhibit C. My
failure to sign such Termination Certificate, however, shall not affect my
obligations under the Agreement.
12. This Agreement shall be governed by and construed under and
according to the internal substantive laws, and not the laws of conflicts, of
the State of California. If any provision of this Agreement shall be determined
by any court of competent jurisdiction to be unenforceable or otherwise invalid
as written, the same shall be enforced and validated to the extent permitted by
law. All provisions of this Agreement are severable, and the enforceability or
invalidity of any single provision hereof shall not affect the remaining
provisions. Nothing in this Agreement shall obligate the Company to continue to
retain me as an employee. I understand that this means that the Company has and
will continue to have the absolute and unconditional right to terminate my
Employment for any reason or no reason, with or without cause or prior notice,
provided that such termination shall not relieve the Company of any obligations
it may have to make payments to me pursuant to that certain letter agreement of
even date herewith. No implied waiver by the Company of any provision within
this Agreement shall arise in the absence of a waiver in writing signed by the
Company and no waiver by the Company with respect to a specific circumstances,
event or occasion shall be construed as a continuing waiver as to similar
circumstances, events or occasions. This Agreement contains the sole and entire
agreement and understanding between the Company and me with respect to the
subject matter hereof, and supersedes and replaces any prior agreements to the
extent any such agreement is inconsistent herewith. This Agreement can be
amended, modified, released or changed in whole or in part only by a written
agreement executed by the Company and myself. This Agreement shall be binding
upon me, my heirs, executors, assigns and administrators, and shall inure to the
benefit of the Company and its successors or assigns.
13. To the extent that I perform services for subsidiaries or
affiliates of the Company, my obligations and undertakings hereunder with
respect to the Company shall be deemed to include such subsidiaries and
affiliates also.
A-4
<PAGE> 12
EXHIBIT A
"PROPRIETARY INFORMATION" DEFINED:
For purposes of this Agreement, "Proprietary Information" shall mean
information generally unavailable to the public that has been created,
discovered, developed, or otherwise become known to the Company or in which
property rights have been assigned or otherwise conveyed to the Company, which
information has material economic value or potential material economic value to
the business in which the Company is or will be engaged. Proprietary Information
shall include, but not be limited to trade secrets, processes, formulas, data,
know-how, negative know-how, improvements, discoveries, developments, designs,
inventions, techniques, all technical data, proposals, reports, and client
information compiled by the Company, and any modifications or enhancements
thereto, software, programs, and information (whether or not necessarily in
writing) which has actual or potential economic value to the Company.
"INVENTIONS" DEFINED:
For purposes of this Agreement, "Inventions" shall mean all
discoveries, developments, designs, improvements, inventions, formulas,
software, programs, processes, techniques, know-how, negative know-how, and
data, whether or not patentable or registrable under patent, copyright or
similar statutes, that are related to or useful in the business or future
business of the Company or result from use of premises or other property owned,
leased or contracted for by the Company. Without limiting the generality of the
foregoing, Inventions shall also include anything that derives actual or
potential economic value from not being generally known to the public or to
other persons who can obtain economic value from its disclosure or use.
CALIFORNIA LABOR CODE SECTION 2870:
(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer.
(2) Result from any work performed by the employee for the
employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
A-5
<PAGE> 13
EXHIBIT B
ITEM 1:
The following is a complete list of all inventions or improvements
relevant to the subject matter of my employment with the Company that have been
made or conceived of or first reduced to practice by me alone or jointly with
others prior to my employment with the Company:
ITEM 2:
The following is a complete list of all materials and documents of a
former employer that are not generally available to the public that I will bring
or have brought to the Company or have used or will use in my employment:
A-6
<PAGE> 14
EXHIBIT C
LONG BEACH FINANCIAL CORPORATION
EMPLOYEE PROPRIETARY INFORMATION
AND INVENTIONS AGREEMENT
TERMINATION CERTIFICATION
I hereby certify as follows:
1. When I signed the attached Employee Proprietary Information and
Inventions Agreement (the "Agreement"), I read and understood the terms of the
Agreement.
2. I hereby acknowledge that I have fully complied with the terms of
the Agreement, including, without limitation, the disclosure and assignment to
Long Beach Financial Corporation, its subsidiaries and affiliates (the
"Company") of any Inventions covered by that Agreement, and the return of any
documents and other materials of any nature pertaining to my employment with the
Company.
3. I hereby acknowledge and agree to comply with my continuing
obligations under the Agreement, including, without limitation, my obligation
not to use for personal benefit or disclose to others any Proprietary
Information of the Company.
4. I understand and acknowledge that should I fail to comply with my
obligations under the Agreement, the Company shall have the right to obtain an
injunction against me, including, without limitation, an injunction prohibiting
me from disclosing Proprietary Information to a third party.
Dated: ____________
____________________________________
Signature of Employee
____________________________________
Print Name
A-7
<PAGE> 15
MUTUAL AGREEMENT TO ARBITRATE CLAIMS
I recognize that differences may arise between Long Beach Financial
Corporation and its subsidiaries and affiliates (collectively, "the Company")
and me during or following my employment with the Company, and that those
differences may or may not be related to my employment. I understand and agree
that by entering into this Agreement to Arbitrate Claims ("Agreement"), I
anticipate gaining the benefits of a speedy, impartial dispute-resolution
procedure.
I understand that any reference in this Agreement to the Company will
be a reference also to all subsidiary and affiliated entities; all benefit
plans; the benefit plans' sponsors, fiduciaries, administrators, affiliates; and
all successors and assigns of any of them.
Claims Covered by the Agreement
The Company and I mutually consent to the resolution by arbitration of
all claims ("claims"), whether or not arising out of my employment (or its
termination), that the Company may have against me or that I may have against
the Company or against its officers, directors, employees or agents in their
capacity as such or otherwise. The claims covered by this Agreement include, but
are not limited to, claims for wages or other compensation due; claims for
breach of any contract or covenant (express or implied); tort claims; claims for
discrimination (including, but not limited to, race, sex, religion, national
origin, age, marital status, medical condition, or disability); claims for
benefits (except where an employee benefit or pension plan specifies that its
claims procedure shall culminate in an arbitration procedure different from this
one), and claims for violation of any federal, state, or other governmental law,
statute, regulation, or ordinance, except claims excluded in the Claims Not
Covered section below.
Except as otherwise provided in this Agreement, both the Company and I
agree that neither of us shall initiate or prosecute any lawsuit or
administrative action (other than an administrative charge of discrimination) in
any way related to any claim covered by this Agreement.
Claims Not Covered by the Agreement
Claims I may have for workers' compensation or unemployment
compensation benefits are not covered by this Agreement.
Also not covered are claims by the Company for injunctive and/or other
equitable relief for unfair competition and/or the use and/or unauthorized
disclosure of trade secrets or confidential information, as to which I
understand and agree that the Company may seek and obtain relief from a court of
competent jurisdiction.
EXHIBIT B
<PAGE> 16
Required Notice of All Claims and Statute of Limitations
The Company and I agree that the aggrieved party must give written
notice of any claim to the other party within one (1) year of the date the
aggrieved party first has knowledge of the event giving rise to the claim;
otherwise the claim shall be void and deemed waived even if there is a federal
or state statute of limitations which would have given more time to pursue the
claim.
Written notice to the Company, or its officers, directors, employees or
agents, shall be sent to its Chief Executive Officer at the Company's
then-current address. I will be given written notice at the last address
recorded in my personnel file.
The written notice shall identify and describe the nature of all claims
asserted and the facts upon which such claims are based. The notice shall be
sent to the other party by certified or registered mail, return receipt
requested.
Discovery
Each party shall have the right to take the deposition of one
individual and any expert witness designated by another party. Each party also
shall have the right to propound requests for production of documents to any
party. The subpoena right specified below shall be applicable to discovery
pursuant to this paragraph. Additional discovery may be had only where the
Arbitrator selected pursuant to this Agreement so orders, upon a showing of
substantial need.
Designation of Witnesses
At least 30 days before the arbitration, the parties must exchange
lists of witnesses, including any expert, and copies of all exhibits intended to
be used at the arbitration.
Subpoenas
Each party shall have the right to subpoena witnesses and documents for
the arbitration.
Arbitration Procedures
The Company and I agree that, except as provided in this Agreement, any
arbitration shall be in accordance with the then-current Model Employment
Arbitration Procedures of the American Arbitration Association ("AAA") before an
Arbitrator who is licensed to practice law in the state of California
("Arbitrator"). The arbitration shall take place in or near the city in which I
am or was last employed by the Company, if I am or was employed in the State of
California. If I am or was employed outside the State of California, then at the
Company's headquarters in Orange, California.
The Arbitrator shall be selected as follows. The AAA shall give each
party a list of 11 arbitrators drawn from its panel of labor-management dispute
arbitrators. Each party may strike all names on the list it deems unacceptable.
If only one common name remains on the lists of all parties, that individual
shall be designated as the Arbitrator. If more than one common name remains on
the lists of all parties, the parties shall strike names alternately until only
one remains.
B-2
<PAGE> 17
The party who did not initiate the claim shall strike first. If no common name
remains on the lists of all parties, the AAA shall furnish an additional list or
lists until the Arbitrator is selected.
The Arbitrator shall apply the substantive law (and the law of
remedies, if applicable) of the state in which the claim arose, or federal law,
or both, as applicable to the claim(s) asserted. The Federal Rules of Evidence
shall apply. The Arbitrator, and not any federal, state, or local court or
agency, shall have exclusive authority to resolve any dispute relating to the
interpretation, applicability, enforceability or formation of this Agreement,
including but not limited to any claim that all or any part of this Agreement is
void or voidable. The arbitration shall be final and binding upon the parties.
The Arbitrator shall have jurisdiction to hear and rule on pre-hearing
disputes and is authorized to hold pre-hearing conferences by telephone or in
person as the Arbitrator deems necessary. The Arbitrator shall have the
authority to entertain a motion to dismiss and/or a motion for summary judgment
by any party and shall apply the standards governing such motions under the
Federal Rules of Civil Procedure.
Either party, at its expense, may arrange for and pay the cost of a
court reporter to provide a stenographic record of proceedings.
Either party, upon request at the close of hearing, shall be given
leave to file a post-hearing brief. The time for filing such a brief shall be
set by the Arbitrator.
The Arbitrator shall render an award and opinion in the form typically
rendered in labor arbitrations.
Arbitration Fees and Costs
The Company and I shall equally share the fees and costs of the
Arbitrator. Each party will deposit funds or post other appropriate security for
its share of the Arbitrator's fee, in an amount and manner determined by the
Arbitrator, 10 days before the first day of hearing. Each party shall pay for
its own costs and attorneys' fees, if any. However, if any party prevails on a
statutory claim which affords the prevailing party attorneys' fees, or if there
is a written agreement providing for fees, the Arbitrator may award reasonable
fees to the prevailing party.
Judicial Review
Either party may bring an action in any court of competent jurisdiction
to compel arbitration under this Agreement and to enforce an arbitration award.
A party opposing enforcement of an award may not do so in an enforcement
proceeding, but must bring a separate action in any court of competent
jurisdiction to set aside the award, where the standard of review will be the
same as that applied by an appellate court reviewing a decision of a trial court
sitting without a jury.
B-3
<PAGE> 18
Interstate Commerce
I understand and agree that the Company is engaged in transactions
involving interstate commerce and that my employment involves such commerce.
Requirements for Modification or Revocation
This Agreement to arbitrate shall survive the termination of my
employment. It can only be revoked or modified by a writing signed by the
parties which specifically states an intent to revoke or modify this Agreement.
Sole and Entire Agreement
This is the complete agreement of the parties on the subject of
arbitration of disputes, except for any arbitration agreement in connection with
any pension or benefit plan. This Agreement supersedes any prior or
contemporaneous oral or written understanding on the subject. No party is
relying on any representations, oral or written, on the subject of the effect,
enforceability or meaning of this Agreement, except as specifically set forth in
this Agreement.
Construction
If any provision of this Agreement is adjudged to be void or otherwise
unenforceable, in whole or in part, such adjudication shall not affect the
validity of the remainder of the Agreement.
Consideration
The promises by the Company and by me to arbitrate differences, rather
than litigate them before courts or other bodies, provide consideration for each
other.
Employment Agreement
This Agreement is not, and shall not be construed to create, any
contract of employment, express or implied. Nor does this agreement in any way
alter the "at-will" status of my employment.
Voluntary Agreement
I ACKNOWLEDGE THAT I HAVE CAREFULLY READ THIS AGREEMENT, THAT I
UNDERSTAND ITS TERMS, THAT ALL UNDERSTANDINGS AND AGREEMENTS BETWEEN THE COMPANY
AND ME RELATING TO THE SUBJECTS COVERED IN THE AGREEMENT ARE CONTAINED IN IT,
AND THAT I HAVE ENTERED INTO THE AGREEMENT VOLUNTARILY AND NOT IN RELIANCE ON
ANY PROMISES OR REPRESENTATIONS BY THE COMPANY OTHER THAN THOSE CONTAINED IN
THIS AGREEMENT ITSELF.
B-4
<PAGE> 19
I FURTHER ACKNOWLEDGE THAT I HAVE BEEN GIVEN THE OPPORTUNITY TO DISCUSS
THIS AGREEMENT WITH MY PRIVATE LEGAL COUNSEL AND HAVE AVAILED MYSELF OF THAT
OPPORTUNITY TO THE EXTENT I WISH TO DO SO.
B-5
<PAGE> 1
EXHIBIT 10.8
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "AGREEMENT") is made and entered into
as of April 15, 1997, by and between LONG BEACH FINANCIAL CORPORATION, a
Delaware corporation ("LBFC"), and LONG BEACH MORTGAGE COMPANY, a Delaware
corporation, currently named Ameriquest Mortgage Corporation ("LBMC")
(collectively, the "COMPANY"), and EDWARD RESENDEZ ("EXECUTIVE").
I.
EMPLOYMENT
1.1 POSITION AND DUTIES. The Company hereby engages and employs
Executive in the following capacities at LBFC and LBMC:
LBFC: President, Director
LBMC: President, Director
The Company's Boards of Directors (collectively, the "BOARDS") may
provide such additional designations of title to Executive as the Boards, in
their discretion, may deem appropriate. Executive shall perform the executive
duties and functions related to the above positions, subject to the limitations
of authority set forth from time to time in any resolution of the Boards or
applicable law.
1.2 BEST EFFORTS. Executive agrees to devote his full time and
attention to the Company, to use his best efforts to advance the business and
welfare of the Company, to render his services under this Agreement fully,
faithfully, diligently, competently and to the best of his ability, and not to
engage in any other employment activities. Notwithstanding anything herein to
the contrary, Executive shall not be precluded from (a) engaging in charitable
activities and community affairs and managing his personal investments and
affairs, provided that such activities do not materially interfere with the
proper performance of his duties and responsibilities under this Agreement; or
(b) owning up to 1% of a publicly-held company engaged in the same or similar
business as the Company.
II.
COMPENSATION AND BENEFITS
2.1 BASE SALARY. For all services to be rendered by Executive under
this Agreement, the Company agrees to pay Executive an annual base salary of
$200,000 (subject to adjustment upward as recommended by the Compensation
Committee of the Board of LBFC), less deductions required by law, payable in
accordance with the normal payroll practices of the Company.
2.2 ANNUAL PERFORMANCE BONUS. On or before each April 15 following
each December 31 during the term of this Agreement, the Company shall pay to
Executive a bonus of
<PAGE> 2
up to 100% of Executive's base salary, as determined by the Boards based on
Executive's performance and the performance of the Company during the prior
calendar year. All bonus calculations shall be based upon the Company's audited
financial statements through the end of the applicable calendar year.
2.3 OTHER BENEFITS. The Company shall further provide to Executive the
following other benefits:
(a) An automobile (to be owned or leased by the Company at its
option and expense) of Executive's choice with a negotiated purchase price of no
more than $60,000, and reimbursement of all reasonable operating costs,
insurance and repairs;
(b) An annual vacation leave of a minimum of three (3) weeks per
calendar year at full pay;
(c) Full participation, on a basis commensurate with his position
with the Company, in all plans of life, accident, disability and health
insurance that generally are made available to senior executives of the Company;
and
(d) A complete annual physical examination by the doctor of
Executive's choice, with the cost of such examination to be borne by the
Company.
(e) Stock options (which shall be incentive stock options to the
extent permissible) for 500,000 shares of Company Common Stock concurrent with
the pricing of an initial public offering of the Company's Common Stock, such
options to vest 20% per year for five (5) years. Executive acknowledges that
such option grant is intended to cover the three (3) year term of this Agreement
and that the Company has no commitment to issue additional options to Executive
during the term of this Agreement or thereafter.
2.4 EXPENSE REIMBURSEMENT. The Company shall promptly reimburse
Executive for all reasonable business expenses incurred by Executive in
promoting the business of the Company, including expenditures for entertainment,
travel, or other expenses, provided that (a) such expenditures are of a nature
qualifying them as legitimate business deductions and (b) Executive furnishes to
the Company adequate records and other documentary evidence reasonably required
by the Company to substantiate such expenditures in accordance with the
Company's policies and procedures.
III.
TERMINATION AND SEVERANCE PAY
3.1 AT WILL. Executive and the Company acknowledge and agree that
Executive's employment with the Company is expressly "at will" both during and
after the term of this Agreement. This means that either party may terminate
Executive's employment with or without cause. Any termination of Executive's
employment is, however, subject to the terms and provisions of this Agreement as
to severance pay and other obligations.
2
<PAGE> 3
3.2 INVOLUNTARY TERMINATION.
(a) SEVERANCE PAYMENTS. In the event that Executive's employment
with the Company is terminated by the Company for Cause (as defined in Section
3.2(c)), Executive shall be entitled to no severance pay or other benefits. In
the event that Executive's employment with the Company is terminated by the
Company other than for Cause, then in consideration of Executive's compliance
with his obligations under Article V and Article VI and Executive's execution of
a general release in favor of the Company and its affiliates, Executive shall be
entitled to severance payments in the form of (i) monthly payments to Executive
in the amount of Executive's monthly base salary as in effect on the date of
termination, payable in accordance with customary payroll practices, for twelve
(12) months following such termination; plus (ii) for each full calendar month
Executive was employed during the year of termination of employment, 1/12th of
the bonus to which Executive would have been entitled had he been employed the
entire year, payable at the time specified in Section 2.2 hereof; 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. Executive acknowledges and agrees that in the event Executive breaches
any provision of Article V or Article VI or the general release, his right to
receive severance payments under this Section 3.2(a) shall automatically
terminate and Executive shall repay all severance payments received.
(b) BENEFITS. Following the notification of termination, Executive
shall cease to be a Company employee and shall not be entitled to any employee
benefits. This shall not preclude Executive from exercising his rights under
COBRA to pay for the continuation of benefits previously provided by the
Company. In the event that Executive's employment is terminated by the Company
other than for Cause, all Company stock options granted pursuant to Section
2.3(e) shall be deemed vested as of the date of termination.
(c) CAUSE. For purposes of this Agreement, "CAUSE" shall mean (i)
an act or acts of personal dishonesty by Executive that were intended to result
in substantial personal enrichment of Executive at the expense of the Company;
(ii) Executive's conviction of any felony; or (iii) Executive's gross
negligence, gross incompetence, willful insubordination or misconduct,
intentional or persistent failure to perform stated duties or abide by the
Company's policies, or material breach of any provision of this Agreement,
including without limitation any representation or covenant contained in Article
V or Article VI of this Agreement.
3.3 VOLUNTARY TERMINATION.
(a) SEVERANCE PAY. In the event Executive voluntarily terminates
his employment with the Company without Good Reason (as defined in Section
3.3(b)), Executive shall be entitled to no severance pay or other benefits. In
the event Executive voluntarily terminates his employment with the Company for
Good Reason (as defined in Section 3.3(b)), Executive shall be entitled to the
severance pay and stock option vesting set forth in Sections 3.2(a) and (b) if
(i) Executive gives written notice of his resignation within ninety (90) days of
the occurrence of such Good Reason and advises, as part of such resignation,
that he is resigning because of the Good Reason, and (ii) the Good Reason was
other than for Cause.
3
<PAGE> 4
For purposes of this Agreement, a resignation tendered by
Executive pursuant to a direct request of the Boards (or either of them) or
another officer with higher executive status shall, for purposes of this
Agreement, be treated as an involuntary termination, entitling Executive to
severance payments in accordance with the provisions of Section 3.2(a) so long
as the request was not based on Cause (as defined in Section 3.2(c)).
(b) GOOD REASON. For purposes of this Agreement, "GOOD REASON"
shall include (i) the material reduction or material adverse modification of
Executive's authority or duties (i.e., the substantial diminution or adverse
modification in Executive's title, status, overall position, responsibilities,
reporting relationship or general working environment); (ii) any reduction in
Executive's base compensation or bonus potential or any material reduction in
employee benefits; or (iii) any requirement to move Executive's principal place
of employment from Orange County, California, in each case without Executive's
prior written consent.
3.4 DEATH. In the event of Executive's death, this Agreement shall
automatically terminate and shall be of no further force and effect. Termination
of Executive's employment as a result of his death shall not result in any
obligation by the Company to pay severance pay or other benefits to Executive's
estate or heirs, but Executive's estate or heirs shall be entitled to a pro-rata
bonus through the date of termination at the time specified in Section 2.2.
3.5 DISABILITY. In the event of Executive's Disability (as defined
below) during the term of this Agreement for any period of at least three (3)
consecutive months, the Company shall have the right, which may be exercised in
its sole discretion, to terminate this Agreement. In the event the Company does
elect to terminate this Agreement, Executive shall not be entitled to any
severance pay at any time but shall be entitled to normal disability benefits in
accordance with the policies established from time to time by the Company. For
purposes of this Agreement, "DISABILITY" shall mean the inability of Executive
to perform his employment services hereunder by reason of physical or mental
illness or incapacity as determined by a physician chosen by the Company and
reasonably satisfactory to Executive or his legal representative.
IV.
TERM
TERM. The term of this Agreement shall commence on April 15, 1997 and
shall continue for a period of three (3) years thereafter, as such period may be
extended in writing from time to time. In the event an initial public offering
of LBFC's common stock is not successfully completed on or before December 31,
1997, this Agreement shall be null and void and the parties hereto shall have no
rights or obligations with respect hereto.
V.
NONDISCLOSURE OF INFORMATION
AND NON-SOLICITATION OF EMPLOYEES
5.1 NONDISCLOSURE OF CONFIDENTIAL INFORMATION. Except in the
performance of his duties hereunder, Executive shall not disclose to any person
or entity or use for his own direct or indirect benefit any Confidential
Information (as defined below). For purposes of this Agreement,
4
<PAGE> 5
"CONFIDENTIAL INFORMATION" shall include the Company's products, reports,
studies, services, processes, suppliers, customers, customers' account
executives, financial, sales and distribution information, price lists, identity
and list of actual and potential customers, trade secrets, technical
information, business plans and strategies to the extent that such information
has not been publicly disseminated by the Company or otherwise made available to
the public, other than through a breach hereof.
5.2 RETURN OF INFORMATION AND PROPERTY. Upon termination of
Executive's employment, Executive will deliver to the Company all customer
lists, proposals, reports, memoranda, computer software and programming, budgets
and other financial information, and other materials or records or writings of
any type (including any copies thereof and regardless of the medium in which the
information exists) made, used or obtained by Executive in connection with his
employment by the Company and all Company property.
5.3 EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT.
Executive shall be subject to the provisions of the Company's Employee
Proprietary Information and Inventions Agreement, a copy of which is attached
hereto as Exhibit A and incorporated herein by this reference.
5.4 NON-SOLICITATION. Executive agrees that, so long as he is employed
by the Company and for a period of one (1) year after termination of his
employment for any reason, he shall not (a) directly or indirectly solicit,
induce or attempt to solicit or induce any Company employee to discontinue his
or her employment with the Company, (b) usurp any opportunity of the Company
that Executive became aware of during his tenure at the Company or which is made
available to him on the basis of the belief that Executive is still employed by
the Company, or (c) directly or indirectly solicit or induce or attempt to
influence any person or business that is an account, customer or client of the
Company to restrict or cancel the business of any such account, customer or
client with the Company.
VI.
NON-COMPETITION
So long as Executive is employed by the Company and for a period of one
(1) year after termination of his employment for any reason, Executive shall
not, without the prior written consent of the Company, either directly or
indirectly, including without limitation through a partnership, joint venture,
corporation or other entity or as a consultant, director or employee, engage in
the business engaged in by the Company as of the date hereof within those
geographical areas in which the Company currently conducts active business
operations. The parties hereto agree that both the scope and nature of the
covenant and the duration and area for which the covenant not to compete set
forth in this Article VI is to be effective are reasonable in light of all facts
and circumstances.
5
<PAGE> 6
VII.
MISCELLANEOUS
7.1 SUCCESSORS AND ASSIGNS; BINDING AGREEMENT. This Agreement shall
inure to the benefit of and shall be binding upon the Company, its successors
and assigns. The obligations and duties of the Executive hereunder are personal
and otherwise not assignable. This Agreement shall inure to the benefit of and
be enforceable by the Executive's legal representatives. This Agreement shall
not be terminated by the voluntary or involuntary dissolution of the Company or
by any merger or consolidation, whether or not the Company is the surviving or
resulting corporation, or upon any transfer of all or substantially all of the
assets of the Company. In the event of any such merger, consolidation or
transfer of assets, the provisions of this Agreement shall bind and inure to the
benefit of the surviving or resulting corporation, or the corporation to which
such assets shall have been transferred, as the case may be; provided, however,
that the Company will require any successor to all or substantially all of the
business and/or assets of the Company, by agreement in form and substance
satisfactory to Executive, to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place.
7.2 ARBITRATION. Other than with respect to Articles V and VI hereof,
any and all disputes arising out of the interpretation, application or breach of
this Agreement shall be subject to arbitration pursuant to the Company's Mutual
Agreement to Arbitrate Claims, a copy of which is attached hereto as Exhibit B
and incorporated herein by this reference.
7.3 NO WAIVER. The waiver by either party of a breach of any provision
of this Agreement shall not operate as or be construed as a waiver of any
subsequent breach thereof.
7.4 GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws and decisions of the State of California.
7.5 AMENDMENTS. No amendment or modification of the terms of this
Agreement shall be valid unless made by written agreement executed by the
parties hereto or their respective successors and legal representative.
7.6 SEVERABILITY. In the event that any provision of this Agreement,
including without limitation any provision of Article VI, shall to any extent be
held invalid, unreasonable or unenforceable, in any circumstances, the parties
hereto agree that the remainder of this Agreement and the application of such
provision of this Agreement to other circumstances shall be valid and
enforceable to the fullest extent permitted by law. If any provision, or any
part thereof, is held to be unenforceable because of the scope or duration of or
the area covered by such provision, the parties hereto agree that the court
making such determination shall have the power, and is hereby asked by the
parties, to reduce the scope, duration and/or area of such provisions (and to
substitute appropriate provisions for any such unenforceable provisions) in
order to make such provisions enforceable to the fullest extent permitted by
law, and/or to delete specific words and phrases, and such modified provisions
shall then be enforceable and shall be enforced.
6
<PAGE> 7
7.7 ENTIRE AGREEMENT; NO OTHER CLAIMS. This Agreement constitutes the
entire agreement between the parties regarding the subject matter hereof, and
supersedes all prior or contemporaneous negotiations, understandings or
agreements of the parties, whether written or oral, with respect to such subject
matter. Executive acknowledges that all compensation and benefits of any nature
due to Executive from the Company's predecessor, Long Beach Mortgage Company,
and its affiliates (collectively "Old Long Beach"), have been paid in full and
Executive waives any and all claims relating thereto for the benefit of Old Long
Beach and the Company.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the day and year first above written.
The "Company":
LONG BEACH FINANCIAL CORPORATION,
a Delaware corporation
By: /s/ M. JACK MAYESH
------------------------------
Its: Chief Executive Officer
LONG BEACH MORTGAGE COMPANY,
a Delaware corporation, currently named
Ameriquest Mortgage Corporation
By: /s/ JAMES H. LEONETTI
------------------------------
Its: Senior Vice President,
Chief Financial Officer
"Executive":
/s/ EDWARD RESENDEZ
-----------------------------------
EDWARD RESENDEZ
7
<PAGE> 8
LONG BEACH FINANCIAL CORPORATION
EMPLOYEE PROPRIETARY INFORMATION
AND INVENTIONS AGREEMENT
I understand that as part of my employment ("Employment"), by Long
Beach Financial Corporation (the "Company") I am (or may be) expected to make
new contributions and discoveries of value to the Company. I further understand
that my Employment by the Company creates in me a duty of trust and
confidentiality to the Company with respect to any information (1) related,
applicable or useful to the business of the Company, including the Company's
anticipated research and development assigned to me by the Company; or (3)
resulting from the use of equipment, supplies or facilities owned, leased or
contracted for by the Company; or (4) related, applicable or useful to the
business of any client of the Company, which may be made known to me by the
Company or by any client of the Company, or learned by me during the period of
my Employment.
As part of the consideration for my Employment or continued Employment,
as the case may be, by the Company, and the compensation received by me from the
Company (including bonuses and benefits) from time to time, I hereby agree as
follows:
1. All Proprietary Information (as defined on Exhibit A hereto) and
Inventions (as defined on Exhibit A hereto) shall be the sole propriety of the
Company and its assigns, and the Company and its assigns shall be the sole owner
of all patents, trademarks, service marks and copyrights, and other rights
(collectively referred to herein as "Rights") pertaining to Proprietary
Information and Inventions. I hereby assign to the Company any rights I may have
or acquire in Proprietary Information or Inventions or Rights pertaining to the
Proprietary Information or Inventions. I further agree as to all Proprietary
Information or Inventions to assist the Company or any person designed by it in
every proper way (but at the Company's expense) to obtain and from time to time
enforce Rights relating to said Proprietary Information or Inventions in any and
all countries. I will execute all documents for use in applying for, obtaining
and enforcing such Rights on such Proprietary Information or Inventions as
thereof to the Company or persons designated by it. My obligation to assist the
Company or any person designated by it in obtaining and enforcing Rights
relating to Proprietary Information or Inventions shall continue beyond the
cessation of my Employment ("Cessation of my Employment"), but the Company shall
compensate me at a reasonable rate after the Cessation of my Employment for time
actually spent by me upon the Company's request for such assistance. In the
event the Company is unable, after reasonable effort, to secure my signature on
any document or documents needed to apply for or enforce any Right relating to
Proprietary Information or to an Invention, whether because of my physical or
mental incapacity or for any other reason whatsoever, I hereby irrevocably
designate and appoint the Company and its duly authorized officers and agents as
my agents and attorneys-in-fact to act for and in my behalf and stead in the
execution and filing of any such application and in furthering the application
for an enforcement of Rights with the same legal force and effect as if such
acts were performed by me. I hereby acknowledge that all original works of
authorship which are made by me (solely or jointly with others) within the scope
of my Employment and
EXHIBIT A
<PAGE> 9
which are protectable by copyright are "works for hire" as that term is defined
in the United States Copyright Act (17 USCA, Section 101).
2. I will promptly disclose to the Company, and the Company hereby
agrees to receive such disclosures in confidence, all discoveries, developments,
designs, improvements, inventions, formulas, software programs, processes,
techniques, know-how, negative know-how and data, whether or not patentable or
registrable under patent, copyright or similar statutes or reduced to practice,
made or conceived or reduced to practice or learned by me, either alone or
jointly with others during the period of my Employment, for the purpose of
permitting the Company to determine whether they constitute Inventions. In order
to facilitate the complete and accurate disclosures described above, I agree to
maintain complete written records of all Inventions, and of all work, study and
investigation related thereto done by me during my Employment, which records
shall be the property of the Company.
3. At all times, both during my Employment and after the Cessation of
my Employment, whether the cessation is voluntary or involuntary, for any reason
or no reason, or by disability, I will keep in strictest confidence and trust
all Proprietary Information, and I will not disclose, use, or induce or assist
in the use or disclosure of any Proprietary Information or Rights pertaining to
Proprietary Information, or anything related thereto, without the prior express
written consent of the Company, except as may be necessary in the ordinary
course of performing my duties as an employee of the Company. I recognize that
the Company has received and in the future will receive from third parties their
confidential or proprietary information subject to a duty of the Company's part
to maintain the confidentiality of such information and to use it only for
certain limited purposes. I agree that I owe the Company and such third parties,
during my Employment and thereafter, a duty to hold all such confidential or
proprietary information in the strictest confidence, and I will not disclose,
use, or induce or assist in the use or disclosure of any such confidential or
proprietary information without the prior express written consent of the
Company, except as may be necessary in the ordinary course of performing my
duties as an employee of the Company consistent with the Company's agreement
with such third party.
4. During the period of my Employment, I will not directly or
indirectly engage in any activity which the Company shall determine in good
faith to be in competition with the Company. During my Employment and for a
period of one (1) year after the Cessation of my Employment, I will not, either
directly or indirectly, either alone or in concert with others, solicit or
entice any employee of or consultant to the Company to leave the Company to work
for anyone in competition with the Company. Also, during my Employment and after
the Cessation of my Employment, I will not, alone or in concert with others, in
any way use or disclose Proprietary Information in order to solicit, entice or
in any way divert any client to do business with any business entity in
competition with the Company. During my Employment, I agree not to plan or
otherwise take any preliminary steps, either alone or in concert with others, to
set up or engage in any business enterprise that would be in competition with
the Company.
5. In the event of the Cessation of my Employment, I will deliver to
the Company all devices, records, sketches, reports, proposals, client
information, lists, correspondence, equipment, software, documents, photographs,
photostats, negatives, undeveloped film, notes, drawings, specifications, tape
recordings or other electronic recordings, programs, data and other
A-2
<PAGE> 10
materials or property of any nature belonging to the Company or pertaining to my
work with the Company, and I will not take with me, or allow a third party to
take, any of the foregoing or any reproduction of any of the foregoing.
6. Any provision in this Agreement requiring me to assign my rights in
any invention shall not apply to an invention that qualifies fully under the
provisions of Section 2870 of the California Labor Code, the terms of which have
been set forth on Exhibit A to this Agreement. I understand that I bear the full
burden of proving to the Company that an invention qualifies fully under Section
2870. By signing this Agreement, I acknowledge receipt of a copy of this
Agreement and of written notification of the provisions of Section 2870.
Notwithstanding the foregoing, I also assign to the Company (or as directed by
it) any rights I may have or acquire in any Invention, full title to which is
required to be in the United States by a contract between the Company and the
United States or any of its agencies.
7. As a matter of record I have listed in Item 1 of Exhibit B attached
hereto all inventions or improvements relevant to the subject matter of my
Employment which have been made or conceived of or first reduced to practice by
me alone or jointly with others prior to my Employment and which I desire to
remove from the operation of this Agreement. I represent and warrant that such
list is complete. If there is no such list in Item 1 of Exhibit B, I represent
that I have made no such inventions or improvements prior to my Employment with
the Company.
8. I represent that my performance of all the terms of this Agreement
and as an employee of the Company does not and will not breach any agreement to
keep in confidence proprietary information acquired by me in confidence or in
trust prior to my Employment with the Company. I have not entered into, and I
agree that I will not enter into, any agreement, either written or oral, in
conflict herewith.
9. I represent and warrant to and covenant with the Company that I
will not bring to the Company, as of this date, any materials or documents of a
former employer (which term, for purposes of this paragraph 9, shall also
include persons, firms, corporations and other entities for which I have acted
as an independent contractor or consultant) that are not generally available to
the public, unless I have obtained express written authorization from any such
former employer for their possession and use. The materials or documents of a
former employer that are not generally available to the public that I will bring
to the Company for use in my Employment are identified in Item 2 of Exhibit B
attached hereto, and as to each such item, I represent and warrant that I have
obtained prior to the effective date of my Employment express written
authorization for their possession and use in my service to the Company. I also
understand that, in my service to the Company, I am not to breach any obligation
of confidentiality that I have to former employers, and I have fulfilled all
such obligations during my Employment.
10. I acknowledge that irreparable injury will result to the Company
from my violation or continued violation of the terms of this Agreement, and I
expressly agree that the Company shall be entitled, in addition to damages and
any other remedies provided by law, to an injunction or other equitable remedy
respecting such violation or continued violation by me.
A-3
<PAGE> 11
11. The terms and conditions of this Agreement shall apply to any
period, if any, during which I perform services for the Company as a consultant
or independent contractor, as well as any time during which I am employed
directly by the Company. Upon the Cessation of my Employment, I agree to sign
and deliver the "Termination Certificate" attached hereto as Exhibit C. My
failure to sign such Termination Certificate, however, shall not affect my
obligations under the Agreement.
12. This Agreement shall be governed by and construed under and
according to the internal substantive laws, and not the laws of conflicts, of
the State of California. If any provision of this Agreement shall be determined
by any court of competent jurisdiction to be unenforceable or otherwise invalid
as written, the same shall be enforced and validated to the extent permitted by
law. All provisions of this Agreement are severable, and the enforceability or
invalidity of any single provision hereof shall not affect the remaining
provisions. Nothing in this Agreement shall obligate the Company to continue to
retain me as an employee. I understand that this means that the Company has and
will continue to have the absolute and unconditional right to terminate my
Employment for any reason or no reason, with or without cause or prior notice,
provided that such termination shall not relieve the Company of any obligations
it may have to make payments to me pursuant to that certain letter agreement of
even date herewith. No implied waiver by the Company of any provision within
this Agreement shall arise in the absence of a waiver in writing signed by the
Company and no waiver by the Company with respect to a specific circumstances,
event or occasion shall be construed as a continuing waiver as to similar
circumstances, events or occasions. This Agreement contains the sole and entire
agreement and understanding between the Company and me with respect to the
subject matter hereof, and supersedes and replaces any prior agreements to the
extent any such agreement is inconsistent herewith. This Agreement can be
amended, modified, released or changed in whole or in part only by a written
agreement executed by the Company and myself. This Agreement shall be binding
upon me, my heirs, executors, assigns and administrators, and shall inure to the
benefit of the Company and its successors or assigns.
13. To the extent that I perform services for subsidiaries or
affiliates of the Company, my obligations and undertakings hereunder with
respect to the Company shall be deemed to include such subsidiaries and
affiliates also.
A-4
<PAGE> 12
EXHIBIT A
"PROPRIETARY INFORMATION" DEFINED:
For purposes of this Agreement, "Proprietary Information" shall mean
information generally unavailable to the public that has been created,
discovered, developed, or otherwise become known to the Company or in which
property rights have been assigned or otherwise conveyed to the Company, which
information has material economic value or potential material economic value to
the business in which the Company is or will be engaged. Proprietary Information
shall include, but not be limited to trade secrets, processes, formulas, data,
know-how, negative know-how, improvements, discoveries, developments, designs,
inventions, techniques, all technical data, proposals, reports, and client
information compiled by the Company, and any modifications or enhancements
thereto, software, programs, and information (whether or not necessarily in
writing) which has actual or potential economic value to the Company.
"INVENTIONS" DEFINED:
For purposes of this Agreement, "Inventions" shall mean all
discoveries, developments, designs, improvements, inventions, formulas,
software, programs, processes, techniques, know-how, negative know-how, and
data, whether or not patentable or registrable under patent, copyright or
similar statutes, that are related to or useful in the business or future
business of the Company or result from use of premises or other property owned,
leased or contracted for by the Company. Without limiting the generality of the
foregoing, Inventions shall also include anything that derives actual or
potential economic value from not being generally known to the public or to
other persons who can obtain economic value from its disclosure or use.
CALIFORNIA LABOR CODE SECTION 2870:
(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer.
(2) Result from any work performed by the employee for the
employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
A-5
<PAGE> 13
EXHIBIT B
ITEM 1:
The following is a complete list of all inventions or improvements
relevant to the subject matter of my employment with the Company that have been
made or conceived of or first reduced to practice by me alone or jointly with
others prior to my employment with the Company:
ITEM 2:
The following is a complete list of all materials and documents of a
former employer that are not generally available to the public that I will bring
or have brought to the Company or have used or will use in my employment:
A-6
<PAGE> 14
EXHIBIT C
LONG BEACH FINANCIAL CORPORATION
EMPLOYEE PROPRIETARY INFORMATION
AND INVENTIONS AGREEMENT
TERMINATION CERTIFICATION
I hereby certify as follows:
1. When I signed the attached Employee Proprietary Information and
Inventions Agreement (the "Agreement"), I read and understood the terms of the
Agreement.
2. I hereby acknowledge that I have fully complied with the terms of
the Agreement, including, without limitation, the disclosure and assignment to
Long Beach Financial Corporation, its subsidiaries and affiliates (the
"Company") of any Inventions covered by that Agreement, and the return of any
documents and other materials of any nature pertaining to my employment with the
Company.
3. I hereby acknowledge and agree to comply with my continuing
obligations under the Agreement, including, without limitation, my obligation
not to use for personal benefit or disclose to others any Proprietary
Information of the Company.
4. I understand and acknowledge that should I fail to comply with my
obligations under the Agreement, the Company shall have the right to obtain an
injunction against me, including, without limitation, an injunction prohibiting
me from disclosing Proprietary Information to a third party.
Dated: ____________
____________________________________
Signature of Employee
____________________________________
Print Name
A-7
<PAGE> 15
MUTUAL AGREEMENT TO ARBITRATE CLAIMS
I recognize that differences may arise between Long Beach Financial
Corporation and its subsidiaries and affiliates (collectively, "the Company")
and me during or following my employment with the Company, and that those
differences may or may not be related to my employment. I understand and agree
that by entering into this Agreement to Arbitrate Claims ("Agreement"), I
anticipate gaining the benefits of a speedy, impartial dispute-resolution
procedure.
I understand that any reference in this Agreement to the Company will
be a reference also to all subsidiary and affiliated entities; all benefit
plans; the benefit plans' sponsors, fiduciaries, administrators, affiliates; and
all successors and assigns of any of them.
Claims Covered by the Agreement
The Company and I mutually consent to the resolution by arbitration of
all claims ("claims"), whether or not arising out of my employment (or its
termination), that the Company may have against me or that I may have against
the Company or against its officers, directors, employees or agents in their
capacity as such or otherwise. The claims covered by this Agreement include, but
are not limited to, claims for wages or other compensation due; claims for
breach of any contract or covenant (express or implied); tort claims; claims for
discrimination (including, but not limited to, race, sex, religion, national
origin, age, marital status, medical condition, or disability); claims for
benefits (except where an employee benefit or pension plan specifies that its
claims procedure shall culminate in an arbitration procedure different from this
one), and claims for violation of any federal, state, or other governmental law,
statute, regulation, or ordinance, except claims excluded in the Claims Not
Covered section below.
Except as otherwise provided in this Agreement, both the Company and I
agree that neither of us shall initiate or prosecute any lawsuit or
administrative action (other than an administrative charge of discrimination) in
any way related to any claim covered by this Agreement.
Claims Not Covered by the Agreement
Claims I may have for workers' compensation or unemployment
compensation benefits are not covered by this Agreement.
Also not covered are claims by the Company for injunctive and/or other
equitable relief for unfair competition and/or the use and/or unauthorized
disclosure of trade secrets or confidential information, as to which I
understand and agree that the Company may seek and obtain relief from a court of
competent jurisdiction.
EXHIBIT B
<PAGE> 16
Required Notice of All Claims and Statute of Limitations
The Company and I agree that the aggrieved party must give written
notice of any claim to the other party within one (1) year of the date the
aggrieved party first has knowledge of the event giving rise to the claim;
otherwise the claim shall be void and deemed waived even if there is a federal
or state statute of limitations which would have given more time to pursue the
claim.
Written notice to the Company, or its officers, directors, employees or
agents, shall be sent to its Chief Executive Officer at the Company's
then-current address. I will be given written notice at the last address
recorded in my personnel file.
The written notice shall identify and describe the nature of all claims
asserted and the facts upon which such claims are based. The notice shall be
sent to the other party by certified or registered mail, return receipt
requested.
Discovery
Each party shall have the right to take the deposition of one
individual and any expert witness designated by another party. Each party also
shall have the right to propound requests for production of documents to any
party. The subpoena right specified below shall be applicable to discovery
pursuant to this paragraph. Additional discovery may be had only where the
Arbitrator selected pursuant to this Agreement so orders, upon a showing of
substantial need.
Designation of Witnesses
At least 30 days before the arbitration, the parties must exchange
lists of witnesses, including any expert, and copies of all exhibits intended to
be used at the arbitration.
Subpoenas
Each party shall have the right to subpoena witnesses and documents for
the arbitration.
Arbitration Procedures
The Company and I agree that, except as provided in this Agreement, any
arbitration shall be in accordance with the then-current Model Employment
Arbitration Procedures of the American Arbitration Association ("AAA") before an
Arbitrator who is licensed to practice law in the state of California
("Arbitrator"). The arbitration shall take place in or near the city in which I
am or was last employed by the Company, if I am or was employed in the State of
California. If I am or was employed outside the State of California, then at the
Company's headquarters in Orange, California.
The Arbitrator shall be selected as follows. The AAA shall give each
party a list of 11 arbitrators drawn from its panel of labor-management dispute
arbitrators. Each party may strike all names on the list it deems unacceptable.
If only one common name remains on the lists of all parties, that individual
shall be designated as the Arbitrator. If more than one common name remains on
the lists of all parties, the parties shall strike names alternately until only
one remains.
B-2
<PAGE> 17
The party who did not initiate the claim shall strike first. If no common name
remains on the lists of all parties, the AAA shall furnish an additional list or
lists until the Arbitrator is selected.
The Arbitrator shall apply the substantive law (and the law of
remedies, if applicable) of the state in which the claim arose, or federal law,
or both, as applicable to the claim(s) asserted. The Federal Rules of Evidence
shall apply. The Arbitrator, and not any federal, state, or local court or
agency, shall have exclusive authority to resolve any dispute relating to the
interpretation, applicability, enforceability or formation of this Agreement,
including but not limited to any claim that all or any part of this Agreement is
void or voidable. The arbitration shall be final and binding upon the parties.
The Arbitrator shall have jurisdiction to hear and rule on pre-hearing
disputes and is authorized to hold pre-hearing conferences by telephone or in
person as the Arbitrator deems necessary. The Arbitrator shall have the
authority to entertain a motion to dismiss and/or a motion for summary judgment
by any party and shall apply the standards governing such motions under the
Federal Rules of Civil Procedure.
Either party, at its expense, may arrange for and pay the cost of a
court reporter to provide a stenographic record of proceedings.
Either party, upon request at the close of hearing, shall be given
leave to file a post-hearing brief. The time for filing such a brief shall be
set by the Arbitrator.
The Arbitrator shall render an award and opinion in the form typically
rendered in labor arbitrations.
Arbitration Fees and Costs
The Company and I shall equally share the fees and costs of the
Arbitrator. Each party will deposit funds or post other appropriate security for
its share of the Arbitrator's fee, in an amount and manner determined by the
Arbitrator, 10 days before the first day of hearing. Each party shall pay for
its own costs and attorneys' fees, if any. However, if any party prevails on a
statutory claim which affords the prevailing party attorneys' fees, or if there
is a written agreement providing for fees, the Arbitrator may award reasonable
fees to the prevailing party.
Judicial Review
Either party may bring an action in any court of competent jurisdiction
to compel arbitration under this Agreement and to enforce an arbitration award.
A party opposing enforcement of an award may not do so in an enforcement
proceeding, but must bring a separate action in any court of competent
jurisdiction to set aside the award, where the standard of review will be the
same as that applied by an appellate court reviewing a decision of a trial court
sitting without a jury.
B-3
<PAGE> 18
Interstate Commerce
I understand and agree that the Company is engaged in transactions
involving interstate commerce and that my employment involves such commerce.
Requirements for Modification or Revocation
This Agreement to arbitrate shall survive the termination of my
employment. It can only be revoked or modified by a writing signed by the
parties which specifically states an intent to revoke or modify this Agreement.
Sole and Entire Agreement
This is the complete agreement of the parties on the subject of
arbitration of disputes, except for any arbitration agreement in connection with
any pension or benefit plan. This Agreement supersedes any prior or
contemporaneous oral or written understanding on the subject. No party is
relying on any representations, oral or written, on the subject of the effect,
enforceability or meaning of this Agreement, except as specifically set forth in
this Agreement.
Construction
If any provision of this Agreement is adjudged to be void or otherwise
unenforceable, in whole or in part, such adjudication shall not affect the
validity of the remainder of the Agreement.
Consideration
The promises by the Company and by me to arbitrate differences, rather
than litigate them before courts or other bodies, provide consideration for each
other.
Employment Agreement
This Agreement is not, and shall not be construed to create, any
contract of employment, express or implied. Nor does this agreement in any way
alter the "at-will" status of my employment.
Voluntary Agreement
I ACKNOWLEDGE THAT I HAVE CAREFULLY READ THIS AGREEMENT, THAT I
UNDERSTAND ITS TERMS, THAT ALL UNDERSTANDINGS AND AGREEMENTS BETWEEN THE COMPANY
AND ME RELATING TO THE SUBJECTS COVERED IN THE AGREEMENT ARE CONTAINED IN IT,
AND THAT I HAVE ENTERED INTO THE AGREEMENT VOLUNTARILY AND NOT IN RELIANCE ON
ANY PROMISES OR REPRESENTATIONS BY THE COMPANY OTHER THAN THOSE CONTAINED IN
THIS AGREEMENT ITSELF.
B-4
<PAGE> 19
I FURTHER ACKNOWLEDGE THAT I HAVE BEEN GIVEN THE OPPORTUNITY TO DISCUSS
THIS AGREEMENT WITH MY PRIVATE LEGAL COUNSEL AND HAVE AVAILED MYSELF OF THAT
OPPORTUNITY TO THE EXTENT I WISH TO DO SO.
B-5
<PAGE> 1
EXHIBIT 10.9
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "AGREEMENT") is made and entered into
as of April 15, 1997, by and between LONG BEACH FINANCIAL CORPORATION, a
Delaware corporation ("LBFC"), and LONG BEACH MORTGAGE COMPANY, a Delaware
corporation, currently named Ameriquest Mortgage Corporation ("LBMC")
(collectively, the "COMPANY"), and FRANK J. CURRY ("EXECUTIVE").
I.
EMPLOYMENT
1.1 POSITION AND DUTIES. The Company hereby engages and employs
Executive in the following capacities at LBFC and LBMC:
LBFC: Executive Vice President
LBMC: Executive Vice President
The Company's Boards of Directors (collectively, the "BOARDS") may
provide such additional designations of title to Executive as the Boards, in
their discretion, may deem appropriate. Executive shall perform the executive
duties and functions related to the above positions, subject to the limitations
of authority set forth from time to time in any resolution of the Boards or
applicable law.
1.2 BEST EFFORTS. Executive agrees to devote his full time and
attention to the Company, to use his best efforts to advance the business and
welfare of the Company, to render his services under this Agreement fully,
faithfully, diligently, competently and to the best of his ability, and not to
engage in any other employment activities. Notwithstanding anything herein to
the contrary, Executive shall not be precluded from (a) engaging in charitable
activities and community affairs and managing his personal investments and
affairs, provided that such activities do not materially interfere with the
proper performance of his duties and responsibilities under this Agreement; or
(b) owning up to 1% of a publicly-held company engaged in the same or similar
business as the Company.
II.
COMPENSATION AND BENEFITS
2.1 BASE SALARY. For all services to be rendered by Executive under
this Agreement, the Company agrees to pay Executive an annual base salary of
$200,000 (subject to upward adjustment as recommended by the Compensation
Committee of the Board of LBFC), less deductions required by law, payable in
accordance with the normal payroll practices of the Company.
2.2 ANNUAL PERFORMANCE BONUS. On or before each April 15 following
each December 31 during the term of this Agreement, the Company shall pay to
Executive a bonus of
<PAGE> 2
up to 100% of Executive's base salary, as determined by the Boards based on
Executive's performance and the performance of the Company during the prior
calendar year. All bonus calculations shall be based upon the Company's audited
financial statements through the end of the applicable calendar year.
2.3 OTHER BENEFITS. The Company shall further provide to Executive the
following other benefits:
(a) An automobile (to be owned or leased by the Company at its
option and expense) of Executive's choice with a negotiated purchase price of no
more than $60,000, and reimbursement of all reasonable operating costs,
insurance and repairs;
(b) An annual vacation leave of a minimum of three (3) weeks per
calendar year at full pay;
(c) Full participation, on a basis commensurate with his position
with the Company, in all plans of life, accident, disability and health
insurance that generally are made available to senior executives of the Company;
and
(d) A complete annual physical examination by the doctor of
Executive's choice, with the cost of such examination to be borne by the
Company.
(e) Stock options (which shall be incentive stock options to the
extent permissible) for 500,000 shares of Company Common Stock concurrent with
the pricing of an initial public offering of the Company's Common Stock, such
options to vest 20% per year for five (5) years. Executive acknowledges that
such option grant is intended to cover the three (3) year term of this Agreement
and that the Company has no commitment to issue additional options to Executive
during the term of this Agreement or thereafter.
2.4 EXPENSE REIMBURSEMENT. The Company shall promptly reimburse
Executive for all reasonable business expenses incurred by Executive in
promoting the business of the Company, including expenditures for entertainment,
travel, or other expenses, provided that (a) such expenditures are of a nature
qualifying them as legitimate business deductions and (b) Executive furnishes to
the Company adequate records and other documentary evidence reasonably required
by the Company to substantiate such expenditures in accordance with the
Company's policies and procedures.
III.
TERMINATION AND SEVERANCE PAY
3.1 AT WILL. Executive and the Company acknowledge and agree that
Executive's employment with the Company is expressly "at will" both during and
after the term of this Agreement. This means that either party may terminate
Executive's employment with or without cause. Any termination of Executive's
employment is, however, subject to the terms and provisions of this Agreement as
to severance pay and other obligations.
2
<PAGE> 3
3.2 INVOLUNTARY TERMINATION.
(a) SEVERANCE PAYMENTS. In the event that Executive's employment
with the Company is terminated by the Company for Cause (as defined in Section
3.2(c)), Executive shall be entitled to no severance pay or other benefits. In
the event that Executive's employment with the Company is terminated by the
Company other than for Cause, then in consideration of Executive's compliance
with his obligations under Article V and Article VI and Executive's execution of
a general release in favor of the Company and its affiliates, Executive shall be
entitled to severance payments in the form of (i) monthly payments to Executive
in the amount of Executive's monthly base salary as in effect on the date of
termination, payable in accordance with customary payroll practices, for twelve
(12) months following such termination; plus (ii) for each full calendar month
Executive was employed during the year of termination of employment, 1/12th of
the bonus to which Executive would have been entitled had he been employed the
entire year, payable at the time specified in Section 2.2 hereof; 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. Executive acknowledges and agrees that in the event Executive breaches
any provision of Article V or Article VI or the general release, his right to
receive severance payments under this Section 3.2(a) shall automatically
terminate and Executive shall repay all severance payments received.
(b) BENEFITS. Following the notification of termination, Executive
shall cease to be a Company employee and shall not be entitled to any employee
benefits. This shall not preclude Executive from exercising his rights under
COBRA to pay for the continuation of benefits previously provided by the
Company. In the event that Executive's employment is terminated by the Company
other than for Cause, all Company stock options granted pursuant to Section
2.3(e) shall be deemed vested as of the date of termination.
(c) CAUSE. For purposes of this Agreement, "CAUSE" shall mean (i)
an act or acts of personal dishonesty by Executive that were intended to result
in substantial personal enrichment of Executive at the expense of the Company;
(ii) Executive's conviction of any felony; or (iii) Executive's gross
negligence, gross incompetence, willful insubordination or misconduct,
intentional or persistent failure to perform stated duties or abide by the
Company's policies, or material breach of any provision of this Agreement,
including without limitation any representation or covenant contained in Article
V or Article VI of this Agreement.
3.3 VOLUNTARY TERMINATION.
(a) SEVERANCE PAY. In the event Executive voluntarily terminates
his employment with the Company without Good Reason (as defined in Section
3.3(b)), Executive shall be entitled to no severance pay or other benefits. In
the event Executive voluntarily terminates his employment with the Company for
Good Reason (as defined in Section 3.3(b)), Executive shall be entitled to the
severance pay and stock option vesting set forth in Sections 3.2(a) and (b) if
(i) Executive gives written notice of his resignation within ninety (90) days of
the occurrence of such Good Reason and advises, as part of such resignation,
that he is resigning because of the Good Reason, and (ii) the Good Reason was
other than for Cause.
3
<PAGE> 4
For purposes of this Agreement, a resignation tendered by Executive
pursuant to a direct request of the Boards (or either of them) or another
officer with higher executive status shall, for purposes of this Agreement, be
treated as an involuntary termination, entitling Executive to severance payments
in accordance with the provisions of Section 3.2(a) so long as the request was
not based on Cause (as defined in Section 3.2(c)).
(b) GOOD REASON. For purposes of this Agreement, "GOOD REASON"
shall include (i) the material reduction or material adverse modification of
Executive's authority or duties (i.e., the substantial diminution or adverse
modification in Executive's title, status, overall position, responsibilities,
reporting relationship or general working environment); (ii) any reduction in
Executive's base compensation or bonus potential or any material reduction in
employee benefits; or (iii) any requirement to move Executive's principal place
of employment from Orange County, California, in each case without Executive's
prior written consent.
3.4 DEATH. In the event of Executive's death, this Agreement shall
automatically terminate and shall be of no further force and effect. Termination
of Executive's employment as a result of his death shall not result in any
obligation by the Company to pay severance pay or other benefits to Executive's
estate or heirs, but Executive's estate or heirs shall be entitled to a pro-rata
bonus through the date of termination at the time specified in Section 2.2.
3.5 DISABILITY. In the event of Executive's Disability (as defined
below) during the term of this Agreement for any period of at least three (3)
consecutive months, the Company shall have the right, which may be exercised in
its sole discretion, to terminate this Agreement. In the event the Company does
elect to terminate this Agreement, Executive shall not be entitled to any
severance pay at any time but shall be entitled to normal disability benefits in
accordance with the policies established from time to time by the Company. For
purposes of this Agreement, "DISABILITY" shall mean the inability of Executive
to perform his employment services hereunder by reason of physical or mental
illness or incapacity as determined by a physician chosen by the Company and
reasonably satisfactory to Executive or his legal representative.
IV.
TERM
TERM. The term of this Agreement shall commence on April 15, 1997 and
shall continue for a period of three (3) years thereafter, as such period may be
extended in writing from time to time. In the event an initial public offering
of LBFC's common stock is not successfully completed on or before December 31,
1997, this Agreement shall be null and void and the parties hereto shall have no
rights or obligations with respect hereto.
V.
NONDISCLOSURE OF INFORMATION
AND NON-SOLICITATION OF EMPLOYEES
5.1 NONDISCLOSURE OF CONFIDENTIAL INFORMATION. Except in the
performance of his duties hereunder, Executive shall not disclose to any person
or entity or use for his own direct or indirect benefit any Confidential
Information (as defined below). For purposes of this Agreement,
4
<PAGE> 5
"CONFIDENTIAL INFORMATION" shall include the Company's products, reports,
studies, services, processes, suppliers, customers, customers' account
executives, financial, sales and distribution information, price lists, identity
and list of actual and potential customers, trade secrets, technical
information, business plans and strategies to the extent that such information
has not been publicly disseminated by the Company or otherwise made available to
the public, other than through a breach hereof.
5.2 RETURN OF INFORMATION AND PROPERTY. Upon termination of
Executive's employment, Executive will deliver to the Company all customer
lists, proposals, reports, memoranda, computer software and programming, budgets
and other financial information, and other materials or records or writings of
any type (including any copies thereof and regardless of the medium in which the
information exists) made, used or obtained by Executive in connection with his
employment by the Company and all Company property.
5.3 EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT.
Executive shall be subject to the provisions of the Company's Employee
Proprietary Information and Inventions Agreement, a copy of which is attached
hereto as Exhibit A and incorporated herein by this reference.
5.4 NON-SOLICITATION. Executive agrees that, so long as he is employed
by the Company and for a period of one (1) year after termination of his
employment for any reason, he shall not (a) directly or indirectly solicit,
induce or attempt to solicit or induce any Company employee to discontinue his
or her employment with the Company, (b) usurp any opportunity of the Company
that Executive became aware of during his tenure at the Company or which is made
available to him on the basis of the belief that Executive is still employed by
the Company, or (c) directly or indirectly solicit or induce or attempt to
influence any person or business that is an account, customer or client of the
Company to restrict or cancel the business of any such account, customer or
client with the Company.
VI.
NON-COMPETITION
So long as Executive is employed by the Company and for a period of one
(1) year after termination of his employment for any reason, Executive shall
not, without the prior written consent of the Company, either directly or
indirectly, including without limitation through a partnership, joint venture,
corporation or other entity or as a consultant, director or employee, engage in
the business engaged in by the Company as of the date hereof within those
geographical areas in which the Company currently conducts active business
operations. The parties hereto agree that both the scope and nature of the
covenant and the duration and area for which the covenant not to compete set
forth in this Article VI is to be effective are reasonable in light of all facts
and circumstances.
5
<PAGE> 6
VII.
MISCELLANEOUS
7.1 SUCCESSORS AND ASSIGNS; BINDING AGREEMENT. This Agreement shall
inure to the benefit of and shall be binding upon the Company, its successors
and assigns. The obligations and duties of the Executive hereunder are personal
and otherwise not assignable. This Agreement shall inure to the benefit of and
be enforceable by the Executive's legal representatives. This Agreement shall
not be terminated by the voluntary or involuntary dissolution of the Company or
by any merger or consolidation, whether or not the Company is the surviving or
resulting corporation, or upon any transfer of all or substantially all of the
assets of the Company. In the event of any such merger, consolidation or
transfer of assets, the provisions of this Agreement shall bind and inure to the
benefit of the surviving or resulting corporation, or the corporation to which
such assets shall have been transferred, as the case may be; provided, however,
that the Company will require any successor to all or substantially all of the
business and/or assets of the Company, by agreement in form and substance
satisfactory to Executive, to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place.
7.2 ARBITRATION. Other than with respect to Articles V and VI hereof,
any and all disputes arising out of the interpretation, application or breach of
this Agreement shall be subject to arbitration pursuant to the Company's Mutual
Agreement to Arbitrate Claims, a copy of which is attached hereto as Exhibit B
and incorporated herein by this reference.
7.3 NO WAIVER. The waiver by either party of a breach of any provision
of this Agreement shall not operate as or be construed as a waiver of any
subsequent breach thereof.
7.4 GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws and decisions of the State of California.
7.5 AMENDMENTS. No amendment or modification of the terms of this
Agreement shall be valid unless made by written agreement executed by the
parties hereto or their respective successors and legal representative.
7.6 SEVERABILITY. In the event that any provision of this Agreement,
including without limitation any provision of Article VI, shall to any extent be
held invalid, unreasonable or unenforceable, in any circumstances, the parties
hereto agree that the remainder of this Agreement and the application of such
provision of this Agreement to other circumstances shall be valid and
enforceable to the fullest extent permitted by law. If any provision, or any
part thereof, is held to be unenforceable because of the scope or duration of or
the area covered by such provision, the parties hereto agree that the court
making such determination shall have the power, and is hereby asked by the
parties, to reduce the scope, duration and/or area of such provisions (and to
substitute appropriate provisions for any such unenforceable provisions) in
order to make such provisions enforceable to the fullest extent permitted by
law, and/or to delete specific words and phrases, and such modified provisions
shall then be enforceable and shall be enforced.
6
<PAGE> 7
7.7 ENTIRE AGREEMENT; NO OTHER CLAIMS. This Agreement constitutes the
entire agreement between the parties regarding the subject matter hereof, and
supersedes all prior or contemporaneous negotiations, understandings or
agreements of the parties, whether written or oral, with respect to such subject
matter. Executive acknowledges that all compensation and benefits of any nature
due to Executive from the Company's predecessor, Long Beach Mortgage Company,
and its affiliates (collectively "Old Long Beach"), have been paid in full and
Executive waives any and all claims relating thereto for the benefit of Old Long
Beach and the Company.
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the day and year first above written.
The "Company":
LONG BEACH FINANCIAL CORPORATION,
a Delaware corporation
By: /s/ JAMES H. LEONETTI
-------------------------------
Its: Senior Vice President,
Chief Financial Officer
LONG BEACH MORTGAGE COMPANY,
a Delaware corporation, currently named
Ameriquest Mortgage Corporation
By: /s/ JAMES H. LEONETTI
-------------------------------
Its: Senior Vice President,
Chief Executive Officer
"Executive":
/s/ FRANK J. CURRY
------------------------------------
FRANK J. CURRY
<PAGE> 8
LONG BEACH FINANCIAL CORPORATION
EMPLOYEE PROPRIETARY INFORMATION
AND INVENTIONS AGREEMENT
I understand that as part of my employment ("Employment"), by Long
Beach Financial Corporation (the "Company") I am (or may be) expected to make
new contributions and discoveries of value to the Company. I further understand
that my Employment by the Company creates in me a duty of trust and
confidentiality to the Company with respect to any information (1) related,
applicable or useful to the business of the Company, including the Company's
anticipated research and development assigned to me by the Company; or (3)
resulting from the use of equipment, supplies or facilities owned, leased or
contracted for by the Company; or (4) related, applicable or useful to the
business of any client of the Company, which may be made known to me by the
Company or by any client of the Company, or learned by me during the period of
my Employment.
As part of the consideration for my Employment or continued Employment,
as the case may be, by the Company, and the compensation received by me from the
Company (including bonuses and benefits) from time to time, I hereby agree as
follows:
1. All Proprietary Information (as defined on Exhibit A hereto) and
Inventions (as defined on Exhibit A hereto) shall be the sole propriety of the
Company and its assigns, and the Company and its assigns shall be the sole owner
of all patents, trademarks, service marks and copyrights, and other rights
(collectively referred to herein as "Rights") pertaining to Proprietary
Information and Inventions. I hereby assign to the Company any rights I may have
or acquire in Proprietary Information or Inventions or Rights pertaining to the
Proprietary Information or Inventions. I further agree as to all Proprietary
Information or Inventions to assist the Company or any person designed by it in
every proper way (but at the Company's expense) to obtain and from time to time
enforce Rights relating to said Proprietary Information or Inventions in any and
all countries. I will execute all documents for use in applying for, obtaining
and enforcing such Rights on such Proprietary Information or Inventions as
thereof to the Company or persons designated by it. My obligation to assist the
Company or any person designated by it in obtaining and enforcing Rights
relating to Proprietary Information or Inventions shall continue beyond the
cessation of my Employment ("Cessation of my Employment"), but the Company shall
compensate me at a reasonable rate after the Cessation of my Employment for time
actually spent by me upon the Company's request for such assistance. In the
event the Company is unable, after reasonable effort, to secure my signature on
any document or documents needed to apply for or enforce any Right relating to
Proprietary Information or to an Invention, whether because of my physical or
mental incapacity or for any other reason whatsoever, I hereby irrevocably
designate and appoint the Company and its duly authorized officers and agents as
my agents and attorneys-in-fact to act for and in my behalf and stead in the
execution and filing of any such application and in furthering the application
for an enforcement of Rights with the same legal force and effect as if such
acts were performed by me. I hereby acknowledge that all original works of
authorship which are made by me (solely or jointly with others) within the scope
of my Employment and
EXHIBIT A
<PAGE> 9
which are protectable by copyright are "works for hire" as that term is defined
in the United States Copyright Act (17 USCA, Section 101).
2. I will promptly disclose to the Company, and the Company hereby
agrees to receive such disclosures in confidence, all discoveries, developments,
designs, improvements, inventions, formulas, software programs, processes,
techniques, know-how, negative know-how and data, whether or not patentable or
registrable under patent, copyright or similar statutes or reduced to practice,
made or conceived or reduced to practice or learned by me, either alone or
jointly with others during the period of my Employment, for the purpose of
permitting the Company to determine whether they constitute Inventions. In order
to facilitate the complete and accurate disclosures described above, I agree to
maintain complete written records of all Inventions, and of all work, study and
investigation related thereto done by me during my Employment, which records
shall be the property of the Company.
3. At all times, both during my Employment and after the Cessation of
my Employment, whether the cessation is voluntary or involuntary, for any reason
or no reason, or by disability, I will keep in strictest confidence and trust
all Proprietary Information, and I will not disclose, use, or induce or assist
in the use or disclosure of any Proprietary Information or Rights pertaining to
Proprietary Information, or anything related thereto, without the prior express
written consent of the Company, except as may be necessary in the ordinary
course of performing my duties as an employee of the Company. I recognize that
the Company has received and in the future will receive from third parties their
confidential or proprietary information subject to a duty of the Company's part
to maintain the confidentiality of such information and to use it only for
certain limited purposes. I agree that I owe the Company and such third parties,
during my Employment and thereafter, a duty to hold all such confidential or
proprietary information in the strictest confidence, and I will not disclose,
use, or induce or assist in the use or disclosure of any such confidential or
proprietary information without the prior express written consent of the
Company, except as may be necessary in the ordinary course of performing my
duties as an employee of the Company consistent with the Company's agreement
with such third party.
4. During the period of my Employment, I will not directly or
indirectly engage in any activity which the Company shall determine in good
faith to be in competition with the Company. During my Employment and for a
period of one (1) year after the Cessation of my Employment, I will not, either
directly or indirectly, either alone or in concert with others, solicit or
entice any employee of or consultant to the Company to leave the Company to work
for anyone in competition with the Company. Also, during my Employment and after
the Cessation of my Employment, I will not, alone or in concert with others, in
any way use or disclose Proprietary Information in order to solicit, entice or
in any way divert any client to do business with any business entity in
competition with the Company. During my Employment, I agree not to plan or
otherwise take any preliminary steps, either alone or in concert with others, to
set up or engage in any business enterprise that would be in competition with
the Company.
5. In the event of the Cessation of my Employment, I will deliver to
the Company all devices, records, sketches, reports, proposals, client
information, lists, correspondence, equipment, software, documents, photographs,
photostats, negatives, undeveloped film, notes, drawings, specifications, tape
recordings or other electronic recordings, programs, data and other
A-2
<PAGE> 10
materials or property of any nature belonging to the Company or pertaining to my
work with the Company, and I will not take with me, or allow a third party to
take, any of the foregoing or any reproduction of any of the foregoing.
6. Any provision in this Agreement requiring me to assign my rights in
any invention shall not apply to an invention that qualifies fully under the
provisions of Section 2870 of the California Labor Code, the terms of which have
been set forth on Exhibit A to this Agreement. I understand that I bear the full
burden of proving to the Company that an invention qualifies fully under Section
2870. By signing this Agreement, I acknowledge receipt of a copy of this
Agreement and of written notification of the provisions of Section 2870.
Notwithstanding the foregoing, I also assign to the Company (or as directed by
it) any rights I may have or acquire in any Invention, full title to which is
required to be in the United States by a contract between the Company and the
United States or any of its agencies.
7. As a matter of record I have listed in Item 1 of Exhibit B attached
hereto all inventions or improvements relevant to the subject matter of my
Employment which have been made or conceived of or first reduced to practice by
me alone or jointly with others prior to my Employment and which I desire to
remove from the operation of this Agreement. I represent and warrant that such
list is complete. If there is no such list in Item 1 of Exhibit B, I represent
that I have made no such inventions or improvements prior to my Employment with
the Company.
8. I represent that my performance of all the terms of this Agreement
and as an employee of the Company does not and will not breach any agreement to
keep in confidence proprietary information acquired by me in confidence or in
trust prior to my Employment with the Company. I have not entered into, and I
agree that I will not enter into, any agreement, either written or oral, in
conflict herewith.
9. I represent and warrant to and covenant with the Company that I
will not bring to the Company, as of this date, any materials or documents of a
former employer (which term, for purposes of this paragraph 9, shall also
include persons, firms, corporations and other entities for which I have acted
as an independent contractor or consultant) that are not generally available to
the public, unless I have obtained express written authorization from any such
former employer for their possession and use. The materials or documents of a
former employer that are not generally available to the public that I will bring
to the Company for use in my Employment are identified in Item 2 of Exhibit B
attached hereto, and as to each such item, I represent and warrant that I have
obtained prior to the effective date of my Employment express written
authorization for their possession and use in my service to the Company. I also
understand that, in my service to the Company, I am not to breach any obligation
of confidentiality that I have to former employers, and I have fulfilled all
such obligations during my Employment.
10. I acknowledge that irreparable injury will result to the Company
from my violation or continued violation of the terms of this Agreement, and I
expressly agree that the Company shall be entitled, in addition to damages and
any other remedies provided by law, to an injunction or other equitable remedy
respecting such violation or continued violation by me.
A-3
<PAGE> 11
11. The terms and conditions of this Agreement shall apply to any period,
if any, during which I perform services for the Company as a consultant or
independent contractor, as well as any time during which I am employed directly
by the Company. Upon the Cessation of my Employment, I agree to sign and deliver
the "Termination Certificate" attached hereto as Exhibit C. My failure to sign
such Termination Certificate, however, shall not affect my obligations under the
Agreement.
12. This Agreement shall be governed by and construed under and according
to the internal substantive laws, and not the laws of conflicts, of the State of
California. If any provision of this Agreement shall be determined by any court
of competent jurisdiction to be unenforceable or otherwise invalid as written,
the same shall be enforced and validated to the extent permitted by law. All
provisions of this Agreement are severable, and the enforceability or invalidity
of any single provision hereof shall not affect the remaining provisions.
Nothing in this Agreement shall obligate the Company to continue to retain me as
an employee. I understand that this means that the Company has and will continue
to have the absolute and unconditional right to terminate my Employment for any
reason or no reason, with or without cause or prior notice, provided that such
termination shall not relieve the Company of any obligations it may have to make
payments to me pursuant to that certain letter agreement of even date herewith.
No implied waiver by the Company of any provision within this Agreement shall
arise in the absence of a waiver in writing signed by the Company and no waiver
by the Company with respect to a specific circumstances, event or occasion shall
be construed as a continuing waiver as to similar circumstances, events or
occasions. This Agreement contains the sole and entire agreement and
understanding between the Company and me with respect to the subject matter
hereof, and supersedes and replaces any prior agreements to the extent any such
agreement is inconsistent herewith. This Agreement can be amended, modified,
released or changed in whole or in part only by a written agreement executed by
the Company and myself. This Agreement shall be binding upon me, my heirs,
executors, assigns and administrators, and shall inure to the benefit of the
Company and its successors or assigns.
13. To the extent that I perform services for subsidiaries or affiliates
of the Company, my obligations and undertakings hereunder with respect to the
Company shall be deemed to include such subsidiaries and affiliates also.
A-4
<PAGE> 12
EXHIBIT A
"PROPRIETARY INFORMATION" DEFINED:
For purposes of this Agreement, "Proprietary Information" shall mean
information generally unavailable to the public that has been created,
discovered, developed, or otherwise become known to the Company or in which
property rights have been assigned or otherwise conveyed to the Company, which
information has material economic value or potential material economic value to
the business in which the Company is or will be engaged. Proprietary Information
shall include, but not be limited to trade secrets, processes, formulas, data,
know-how, negative know-how, improvements, discoveries, developments, designs,
inventions, techniques, all technical data, proposals, reports, and client
information compiled by the Company, and any modifications or enhancements
thereto, software, programs, and information (whether or not necessarily in
writing) which has actual or potential economic value to the Company.
"INVENTIONS" DEFINED:
For purposes of this Agreement, "Inventions" shall mean all
discoveries, developments, designs, improvements, inventions, formulas,
software, programs, processes, techniques, know-how, negative know-how, and
data, whether or not patentable or registrable under patent, copyright or
similar statutes, that are related to or useful in the business or future
business of the Company or result from use of premises or other property owned,
leased or contracted for by the Company. Without limiting the generality of the
foregoing, Inventions shall also include anything that derives actual or
potential economic value from not being generally known to the public or to
other persons who can obtain economic value from its disclosure or use.
CALIFORNIA LABOR CODE SECTION 2870:
(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer.
(2) Result from any work performed by the employee for the
employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
A-5
<PAGE> 13
EXHIBIT B
ITEM 1:
The following is a complete list of all inventions or improvements
relevant to the subject matter of my employment with the Company that have been
made or conceived of or first reduced to practice by me alone or jointly with
others prior to my employment with the Company:
ITEM 2:
The following is a complete list of all materials and documents of a
former employer that are not generally available to the public that I will bring
or have brought to the Company or have used or will use in my employment:
A-6
<PAGE> 14
EXHIBIT C
LONG BEACH FINANCIAL CORPORATION
EMPLOYEE PROPRIETARY INFORMATION
AND INVENTIONS AGREEMENT
TERMINATION CERTIFICATION
I hereby certify as follows:
1. When I signed the attached Employee Proprietary Information and
Inventions Agreement (the "Agreement"), I read and understood the terms of the
Agreement.
2. I hereby acknowledge that I have fully complied with the terms of
the Agreement, including, without limitation, the disclosure and assignment to
Long Beach Financial Corporation, its subsidiaries and affiliates (the
"Company") of any Inventions covered by that Agreement, and the return of any
documents and other materials of any nature pertaining to my employment with the
Company.
3. I hereby acknowledge and agree to comply with my continuing
obligations under the Agreement, including, without limitation, my obligation
not to use for personal benefit or disclose to others any Proprietary
Information of the Company.
4. I understand and acknowledge that should I fail to comply with my
obligations under the Agreement, the Company shall have the right to obtain an
injunction against me, including, without limitation, an injunction prohibiting
me from disclosing Proprietary Information to a third party.
Dated: ____________
____________________________________
Signature of Employee
____________________________________
Print Name
A-7
<PAGE> 15
MUTUAL AGREEMENT TO ARBITRATE CLAIMS
I recognize that differences may arise between Long Beach Financial
Corporation and its subsidiaries and affiliates (collectively, "the Company")
and me during or following my employment with the Company, and that those
differences may or may not be related to my employment. I understand and agree
that by entering into this Agreement to Arbitrate Claims ("Agreement"), I
anticipate gaining the benefits of a speedy, impartial dispute-resolution
procedure.
I understand that any reference in this Agreement to the Company will
be a reference also to all subsidiary and affiliated entities; all benefit
plans; the benefit plans' sponsors, fiduciaries, administrators, affiliates; and
all successors and assigns of any of them.
Claims Covered by the Agreement
The Company and I mutually consent to the resolution by arbitration of
all claims ("claims"), whether or not arising out of my employment (or its
termination), that the Company may have against me or that I may have against
the Company or against its officers, directors, employees or agents in their
capacity as such or otherwise. The claims covered by this Agreement include, but
are not limited to, claims for wages or other compensation due; claims for
breach of any contract or covenant (express or implied); tort claims; claims for
discrimination (including, but not limited to, race, sex, religion, national
origin, age, marital status, medical condition, or disability); claims for
benefits (except where an employee benefit or pension plan specifies that its
claims procedure shall culminate in an arbitration procedure different from this
one), and claims for violation of any federal, state, or other governmental law,
statute, regulation, or ordinance, except claims excluded in the Claims Not
Covered section below.
Except as otherwise provided in this Agreement, both the Company and I
agree that neither of us shall initiate or prosecute any lawsuit or
administrative action (other than an administrative charge of discrimination) in
any way related to any claim covered by this Agreement.
Claims Not Covered by the Agreement
Claims I may have for workers' compensation or unemployment
compensation benefits are not covered by this Agreement.
Also not covered are claims by the Company for injunctive and/or other
equitable relief for unfair competition and/or the use and/or unauthorized
disclosure of trade secrets or confidential information, as to which I
understand and agree that the Company may seek and obtain relief from a court of
competent jurisdiction.
EXHIBIT B
<PAGE> 16
Required Notice of All Claims and Statute of Limitations
The Company and I agree that the aggrieved party must give written
notice of any claim to the other party within one (1) year of the date the
aggrieved party first has knowledge of the event giving rise to the claim;
otherwise the claim shall be void and deemed waived even if there is a federal
or state statute of limitations which would have given more time to pursue the
claim.
Written notice to the Company, or its officers, directors, employees or
agents, shall be sent to its Chief Executive Officer at the Company's
then-current address. I will be given written notice at the last address
recorded in my personnel file.
The written notice shall identify and describe the nature of all claims
asserted and the facts upon which such claims are based. The notice shall be
sent to the other party by certified or registered mail, return receipt
requested.
Discovery
Each party shall have the right to take the deposition of one
individual and any expert witness designated by another party. Each party also
shall have the right to propound requests for production of documents to any
party. The subpoena right specified below shall be applicable to discovery
pursuant to this paragraph. Additional discovery may be had only where the
Arbitrator selected pursuant to this Agreement so orders, upon a showing of
substantial need.
Designation of Witnesses
At least 30 days before the arbitration, the parties must exchange
lists of witnesses, including any expert, and copies of all exhibits intended to
be used at the arbitration.
Subpoenas
Each party shall have the right to subpoena witnesses and documents for
the arbitration.
Arbitration Procedures
The Company and I agree that, except as provided in this Agreement, any
arbitration shall be in accordance with the then-current Model Employment
Arbitration Procedures of the American Arbitration Association ("AAA") before an
Arbitrator who is licensed to practice law in the state of California
("Arbitrator"). The arbitration shall take place in or near the city in which I
am or was last employed by the Company, if I am or was employed in the State of
California. If I am or was employed outside the State of California, then at the
Company's headquarters in Orange, California.
The Arbitrator shall be selected as follows. The AAA shall give each
party a list of 11 arbitrators drawn from its panel of labor-management dispute
arbitrators. Each party may strike all names on the list it deems unacceptable.
If only one common name remains on the lists of all parties, that individual
shall be designated as the Arbitrator. If more than one common name remains on
the lists of all parties, the parties shall strike names alternately until only
one remains.
B-2
<PAGE> 17
The party who did not initiate the claim shall strike first. If no common name
remains on the lists of all parties, the AAA shall furnish an additional list or
lists until the Arbitrator is selected.
The Arbitrator shall apply the substantive law (and the law of
remedies, if applicable) of the state in which the claim arose, or federal law,
or both, as applicable to the claim(s) asserted. The Federal Rules of Evidence
shall apply. The Arbitrator, and not any federal, state, or local court or
agency, shall have exclusive authority to resolve any dispute relating to the
interpretation, applicability, enforceability or formation of this Agreement,
including but not limited to any claim that all or any part of this Agreement is
void or voidable. The arbitration shall be final and binding upon the parties.
The Arbitrator shall have jurisdiction to hear and rule on pre-hearing
disputes and is authorized to hold pre-hearing conferences by telephone or in
person as the Arbitrator deems necessary. The Arbitrator shall have the
authority to entertain a motion to dismiss and/or a motion for summary judgment
by any party and shall apply the standards governing such motions under the
Federal Rules of Civil Procedure.
Either party, at its expense, may arrange for and pay the cost of a
court reporter to provide a stenographic record of proceedings.
Either party, upon request at the close of hearing, shall be given
leave to file a post-hearing brief. The time for filing such a brief shall be
set by the Arbitrator.
The Arbitrator shall render an award and opinion in the form typically
rendered in labor arbitrations.
Arbitration Fees and Costs
The Company and I shall equally share the fees and costs of the
Arbitrator. Each party will deposit funds or post other appropriate security for
its share of the Arbitrator's fee, in an amount and manner determined by the
Arbitrator, 10 days before the first day of hearing. Each party shall pay for
its own costs and attorneys' fees, if any. However, if any party prevails on a
statutory claim which affords the prevailing party attorneys' fees, or if there
is a written agreement providing for fees, the Arbitrator may award reasonable
fees to the prevailing party.
Judicial Review
Either party may bring an action in any court of competent jurisdiction
to compel arbitration under this Agreement and to enforce an arbitration award.
A party opposing enforcement of an award may not do so in an enforcement
proceeding, but must bring a separate action in any court of competent
jurisdiction to set aside the award, where the standard of review will be the
same as that applied by an appellate court reviewing a decision of a trial court
sitting without a jury.
B-3
<PAGE> 18
Interstate Commerce
I understand and agree that the Company is engaged in transactions
involving interstate commerce and that my employment involves such commerce.
Requirements for Modification or Revocation
This Agreement to arbitrate shall survive the termination of my
employment. It can only be revoked or modified by a writing signed by the
parties which specifically states an intent to revoke or modify this Agreement.
Sole and Entire Agreement
This is the complete agreement of the parties on the subject of
arbitration of disputes, except for any arbitration agreement in connection with
any pension or benefit plan. This Agreement supersedes any prior or
contemporaneous oral or written understanding on the subject. No party is
relying on any representations, oral or written, on the subject of the effect,
enforceability or meaning of this Agreement, except as specifically set forth in
this Agreement.
Construction
If any provision of this Agreement is adjudged to be void or otherwise
unenforceable, in whole or in part, such adjudication shall not affect the
validity of the remainder of the Agreement.
Consideration
The promises by the Company and by me to arbitrate differences, rather
than litigate them before courts or other bodies, provide consideration for each
other.
Employment Agreement
This Agreement is not, and shall not be construed to create, any
contract of employment, express or implied. Nor does this agreement in any way
alter the "at-will" status of my employment.
Voluntary Agreement
I ACKNOWLEDGE THAT I HAVE CAREFULLY READ THIS AGREEMENT, THAT I
UNDERSTAND ITS TERMS, THAT ALL UNDERSTANDINGS AND AGREEMENTS BETWEEN THE COMPANY
AND ME RELATING TO THE SUBJECTS COVERED IN THE AGREEMENT ARE CONTAINED IN IT,
AND THAT I HAVE ENTERED INTO THE AGREEMENT VOLUNTARILY AND NOT IN RELIANCE ON
ANY PROMISES OR REPRESENTATIONS BY THE COMPANY OTHER THAN THOSE CONTAINED IN
THIS AGREEMENT ITSELF.
B-4
<PAGE> 19
I FURTHER ACKNOWLEDGE THAT I HAVE BEEN GIVEN THE OPPORTUNITY TO DISCUSS
THIS AGREEMENT WITH MY PRIVATE LEGAL COUNSEL AND HAVE AVAILED MYSELF OF THAT
OPPORTUNITY TO THE EXTENT I WISH TO DO SO.
B-5
<PAGE> 1
EXHIBIT 10.10
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "AGREEMENT") is made and entered into
as of April 15, 1997, by and between LONG BEACH FINANCIAL CORPORATION, a
Delaware corporation ("LBFC"), and LONG BEACH MORTGAGE COMPANY, a Delaware
corporation, currently named Ameriquest Mortgage Corporation ("LBMC")
(collectively, the "COMPANY"), and JAMES H. LEONETTI ("EXECUTIVE").
I.
EMPLOYMENT
1.1 POSITION AND DUTIES. The Company hereby engages and employs
Executive in the following capacities at LBFC and LBMC:
LBFC: Senior Vice President and Chief Financial Officer
LBMC: Senior Vice President and Chief Financial Officer
The Company's Boards of Directors (collectively, the "BOARDS") may
provide such additional designations of title to Executive as the Boards, in
their discretion, may deem appropriate. Executive shall perform the executive
duties and functions related to the above positions, subject to the limitations
of authority set forth from time to time in any resolution of the Boards or
applicable law.
1.2 BEST EFFORTS. Executive agrees to devote his full time and
attention to the Company, to use his best efforts to advance the business and
welfare of the Company, to render his services under this Agreement fully,
faithfully, diligently, competently and to the best of his ability, and not to
engage in any other employment activities. Notwithstanding anything herein to
the contrary, Executive shall not be precluded from (a) engaging in charitable
activities and community affairs and managing his personal investments and
affairs, provided that such activities do not materially interfere with the
proper performance of his duties and responsibilities under this Agreement; or
(b) owning up to 1% of a publicly-held company engaged in the same or similar
business as the Company.
II.
COMPENSATION AND BENEFITS
2.1 BASE SALARY. For all services to be rendered by Executive under
this Agreement, the Company agrees to pay Executive an annual base salary of
$175,000 (subject to adjustment upward as recommended by the Compensation
Committee of the Board of LBFC), less deductions required by law, payable in
accordance with the normal payroll practices of the Company.
2.2 ANNUAL PERFORMANCE BONUS. On or before each April 15 following
each December 31 during the term of this Agreement, the Company shall pay to
Executive a bonus of
<PAGE> 2
up to 75% of Executive's base salary, as determined by the Boards based on
Executive's performance and the performance of the Company during the prior
calendar year. All bonus calculations shall be based upon the Company's audited
financial statements through the end of the applicable calendar year.
2.3 OTHER BENEFITS. The Company shall further provide to Executive the
following other benefits:
(a) An automobile (to be owned or leased by the Company at its
option and expense) of Executive's choice with a negotiated purchase price of no
more than $50,000, and reimbursement of all reasonable operating costs,
insurance and repairs;
(b) An annual vacation leave of a minimum of three (3) weeks per
calendar year at full pay;
(c) Full participation, on a basis commensurate with his position
with the Company, in all plans of life, accident, disability and health
insurance that generally are made available to senior executives of the Company;
and
(d) A complete annual physical examination by the doctor of
Executive's choice, with the cost of such examination to be borne by the
Company.
(e) Stock options (which shall be incentive stock options to the
extent permissible) for 100,000 shares of Company Common Stock concurrent with
the pricing of an initial public offering of the Company's Common Stock, such
options to vest 20% per year for five (5) years. Executive acknowledges that
such option grant is intended to cover the three (3) year term of this Agreement
and that the Company has no commitment to issue additional options to Executive
during the term of this Agreement or thereafter.
2.4 EXPENSE REIMBURSEMENT. The Company shall promptly reimburse
Executive for all reasonable business expenses incurred by Executive in
promoting the business of the Company, including expenditures for entertainment,
travel, or other expenses, provided that (a) such expenditures are of a nature
qualifying them as legitimate business deductions and (b) Executive furnishes to
the Company adequate records and other documentary evidence reasonably required
by the Company to substantiate such expenditures in accordance with the
Company's policies and procedures.
III.
TERMINATION AND SEVERANCE PAY
3.1 AT WILL. Executive and the Company acknowledge and agree that
Executive's employment with the Company is expressly "at will" both during and
after the term of this Agreement. This means that either party may terminate
Executive's employment with or without cause. Any termination of Executive's
employment is, however, subject to the terms and provisions of this Agreement as
to severance pay and other obligations.
2
<PAGE> 3
3.2 INVOLUNTARY TERMINATION.
(a) SEVERANCE PAYMENTS. In the event that Executive's employment
with the Company is terminated by the Company for Cause (as defined in Section
3.2(c)), Executive shall be entitled to no severance pay or other benefits. In
the event that Executive's employment with the Company is terminated by the
Company other than for Cause, then in consideration of Executive's compliance
with his obligations under Article V and Executive's execution of a general
release in favor of the Company and its affiliates, Executive shall be entitled
to severance payments in the form of (i) monthly payments to Executive in the
amount of Executive's monthly base salary as in effect on the date of
termination, payable in accordance with customary payroll practices, for twelve
(12) months following such termination; plus (ii) for each full calendar month
Executive was employed during the year of termination of employment, 1/12th of
the bonus to which Executive would have been entitled had he been employed the
entire year, payable at the time specified in Section 2.2 hereof; 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. Executive acknowledges and agrees that in the event Executive breaches
any provision of Article V or the general release, his right to receive
severance payments under this Section 3.2(a) shall automatically terminate and
Executive shall repay all severance payments received.
(b) BENEFITS. Following the notification of termination, Executive
shall cease to be a Company employee and shall not be entitled to any employee
benefits. This shall not preclude Executive from exercising his rights under
COBRA to pay for the continuation of benefits previously provided by the
Company. In the event that Executive's employment is terminated by the Company
other than for Cause, all Company stock options which would vest within twelve
(12) months of the date of termination shall be deemed vested as of the date of
termination.
(c) CAUSE. For purposes of this Agreement, "CAUSE" shall mean (i)
an act or acts of personal dishonesty by Executive that were intended to result
in substantial personal enrichment of Executive at the expense of the Company;
(ii) Executive's conviction of any felony; or (iii) Executive's gross
negligence, gross incompetence, willful insubordination or misconduct,
intentional or persistent failure to perform stated duties or abide by the
Company's policies, or material breach of any provision of this Agreement,
including without limitation any representation or covenant contained in Article
V of this Agreement.
3.3 VOLUNTARY TERMINATION.
(a) SEVERANCE PAY. In the event Executive voluntarily terminates
his employment with the Company without Good Reason (as defined in Section
3.3(b)), Executive shall be entitled to no severance pay or other benefits. In
the event Executive voluntarily terminates his employment with the Company for
Good Reason (as defined in Section 3.3(b)), Executive shall be entitled to the
severance pay and stock option vesting set forth in Sections 3.2(a) and (b) if
(i) Executive gives written notice of his resignation within ninety (90) days of
the occurrence of such Good Reason and advises, as part of such resignation,
that he is resigning because of the Good Reason, and (ii) the Good Reason was
other than for Cause.
3
<PAGE> 4
For purposes of this Agreement, a resignation tendered by
Executive pursuant to a direct request of the Boards (or either of them) or
another officer with higher executive status shall, for purposes of this
Agreement, be treated as an involuntary termination, entitling Executive to
severance payments in accordance with the provisions of Section 3.2(a) so long
as the request was not based on Cause (as defined in Section 3.2(c)).
(b) GOOD REASON. For purposes of this Agreement, "GOOD REASON"
shall include (i) the material reduction or material adverse modification of
Executive's authority or duties (i.e., the substantial diminution or adverse
modification in Executive's title, status, overall position, responsibilities,
reporting relationship or general working environment); (ii) any reduction in
Executive's base compensation or bonus potential or any material reduction in
employee benefits; or (iii) any requirement to move Executive's principal place
of employment from Orange County, California, in each case without Executive's
prior written consent.
3.4 DEATH. In the event of Executive's death, this Agreement shall
automatically terminate and shall be of no further force and effect. Termination
of Executive's employment as a result of his death shall not result in any
obligation by the Company to pay severance pay or other benefits to Executive's
estate or heirs, but Executive's estate or heirs shall be entitled to a pro-rata
bonus through the date of termination at the time specified in Section 2.2.
3.5 DISABILITY. In the event of Executive's Disability (as defined
below) during the term of this Agreement for any period of at least three (3)
consecutive months, the Company shall have the right, which may be exercised in
its sole discretion, to terminate this Agreement. In the event the Company does
elect to terminate this Agreement, Executive shall not be entitled to any
severance pay at any time but shall be entitled to normal disability benefits in
accordance with the policies established from time to time by the Company. For
purposes of this Agreement, "DISABILITY" shall mean the inability of Executive
to perform his employment services hereunder by reason of physical or mental
illness or incapacity as determined by a physician chosen by the Company and
reasonably satisfactory to Executive or his legal representative.
IV.
TERM
TERM. The term of this Agreement shall commence on April 15, 1997 and
shall continue for a period of three (3) years thereafter, as such period may be
extended in writing from time to time. In the event an initial public offering
of LBFC's common stock is not successfully completed on or before December 31,
1997, this Agreement shall be null and void and the parties hereto shall have no
rights or obligations with respect hereto.
V.
NONDISCLOSURE OF INFORMATION
AND NON-SOLICITATION OF EMPLOYEES
5.1 NONDISCLOSURE OF CONFIDENTIAL INFORMATION. Except in the
performance of his duties hereunder, Executive shall not disclose to any person
or entity or use for his own direct or indirect benefit any Confidential
Information (as defined below). For purposes of this Agreement,
4
<PAGE> 5
"CONFIDENTIAL INFORMATION" shall include the Company's products, reports,
studies, services, processes, suppliers, customers, customers' account
executives, financial, sales and distribution information, price lists, identity
and list of actual and potential customers, trade secrets, technical
information, business plans and strategies to the extent that such information
has not been publicly disseminated by the Company or otherwise made available to
the public, other than through a breach hereof.
5.2 RETURN OF INFORMATION AND PROPERTY. Upon termination of
Executive's employment, Executive will deliver to the Company all customer
lists, proposals, reports, memoranda, computer software and programming, budgets
and other financial information, and other materials or records or writings of
any type (including any copies thereof and regardless of the medium in which the
information exists) made, used or obtained by Executive in connection with his
employment by the Company and all Company property.
5.3 EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT.
Executive shall be subject to the provisions of the Company's Employee
Proprietary Information and Inventions Agreement, a copy of which is attached
hereto as Exhibit A and incorporated herein by this reference.
5.4 NON-SOLICITATION. Executive agrees that, so long as he is employed
by the Company and for a period of one (1) year after termination of his
employment for any reason, he shall not (a) directly or indirectly solicit,
induce or attempt to solicit or induce any Company employee to discontinue his
or her employment with the Company, (b) usurp any opportunity of the Company
that Executive became aware of during his tenure at the Company or which is made
available to him on the basis of the belief that Executive is still employed by
the Company, or (c) directly or indirectly solicit or induce or attempt to
influence any person or business that is an account, customer or client of the
Company to restrict or cancel the business of any such account, customer or
client with the Company.
VI.
MISCELLANEOUS
6.1 SUCCESSORS AND ASSIGNS; BINDING AGREEMENT. This Agreement shall
inure to the benefit of and shall be binding upon the Company, its successors
and assigns. The obligations and duties of the Executive hereunder are personal
and otherwise not assignable. This Agreement shall inure to the benefit of and
be enforceable by the Executive's legal representatives. This Agreement shall
not be terminated by the voluntary or involuntary dissolution of the Company or
by any merger or consolidation, whether or not the Company is the surviving or
resulting corporation, or upon any transfer of all or substantially all of the
assets of the Company. In the event of any such merger, consolidation or
transfer of assets, the provisions of this Agreement shall bind and inure to the
benefit of the surviving or resulting corporation, or the corporation to which
such assets shall have been transferred, as the case may be; provided, however,
that the Company will require any successor to all or substantially all of the
business and/or assets of the Company, by agreement in form and substance
satisfactory to Executive, to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place.
5
<PAGE> 6
6.2 ARBITRATION. Other than with respect to Article V hereof, any and
all disputes arising out of the interpretation, application or breach of this
Agreement shall be subject to arbitration pursuant to the Company's Mutual
Agreement to Arbitrate Claims, a copy of which is attached hereto as Exhibit B
and incorporated herein by this reference.
6.3 NO WAIVER. The waiver by either party of a breach of any provision
of this Agreement shall not operate as or be construed as a waiver of any
subsequent breach thereof.
6.4 GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws and decisions of the State of California.
6.5 AMENDMENTS. No amendment or modification of the terms of this
Agreement shall be valid unless made by written agreement executed by the
parties hereto or their respective successors and legal representative.
6.6 SEVERABILITY. In the event that any provision of this Agreement
shall to any extent be held invalid, unreasonable or unenforceable, in any
circumstances, the parties hereto agree that the remainder of this Agreement and
the application of such provision of this Agreement to other circumstances shall
be valid and enforceable to the fullest extent permitted by law. If any
provision, or any part thereof, is held to be unenforceable because of the scope
or duration of or the area covered by such provision, the parties hereto agree
that the court making such determination shall have the power, and is hereby
asked by the parties, to reduce the scope, duration and/or area of such
provisions (and to substitute appropriate provisions for any such unenforceable
provisions) in order to make such provisions enforceable to the fullest extent
permitted by law, and/or to delete specific words and phrases, and such modified
provisions shall then be enforceable and shall be enforced.
6.7 ENTIRE AGREEMENT; NO OTHER CLAIMS. This Agreement constitutes the
entire agreement between the parties regarding the subject matter hereof, and
supersedes all prior or contemporaneous negotiations, understandings or
agreements of the parties, whether written or oral, with respect to such subject
matter. Executive acknowledges that all compensation and benefits of any nature
due to Executive from the Company's predecessor, Long Beach Mortgage Company,
and its affiliates (collectively "Old Long Beach"), have been paid in full and
Executive waives any and all claims relating thereto for the benefit of Old Long
Beach and the Company.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the day and year first above written.
The "Company":
LONG BEACH FINANCIAL CORPORATION,
a Delaware corporation
By: /s/ JAMES J. SULLIVAN
------------------------------------
Its: Senior Vice President,
General Counsel, Secretary
LONG BEACH MORTGAGE COMPANY,
a Delaware corporation, currently named
Ameriquest Mortgage Corporation
By: /s/ JAMES J. SULLIVAN
------------------------------------
Its: Senior Vice President,
General Counsel, Secretary
"Executive":
/s/ JAMES H. LEONETTI
-----------------------------------------
JAMES H. LEONETTI
7
<PAGE> 8
LONG BEACH FINANCIAL CORPORATION
EMPLOYEE PROPRIETARY INFORMATION
AND INVENTIONS AGREEMENT
I understand that as part of my employment ("Employment"), by Long
Beach Financial Corporation (the "Company") I am (or may be) expected to make
new contributions and discoveries of value to the Company. I further understand
that my Employment by the Company creates in me a duty of trust and
confidentiality to the Company with respect to any information (1) related,
applicable or useful to the business of the Company, including the Company's
anticipated research and development assigned to me by the Company; or (3)
resulting from the use of equipment, supplies or facilities owned, leased or
contracted for by the Company; or (4) related, applicable or useful to the
business of any client of the Company, which may be made known to me by the
Company or by any client of the Company, or learned by me during the period of
my Employment.
As part of the consideration for my Employment or continued Employment,
as the case may be, by the Company, and the compensation received by me from the
Company (including bonuses and benefits) from time to time, I hereby agree as
follows:
1. All Proprietary Information (as defined on Exhibit A hereto) and
Inventions (as defined on Exhibit A hereto) shall be the sole propriety of the
Company and its assigns, and the Company and its assigns shall be the sole owner
of all patents, trademarks, service marks and copyrights, and other rights
(collectively referred to herein as "Rights") pertaining to Proprietary
Information and Inventions. I hereby assign to the Company any rights I may have
or acquire in Proprietary Information or Inventions or Rights pertaining to the
Proprietary Information or Inventions. I further agree as to all Proprietary
Information or Inventions to assist the Company or any person designed by it in
every proper way (but at the Company's expense) to obtain and from time to time
enforce Rights relating to said Proprietary Information or Inventions in any and
all countries. I will execute all documents for use in applying for, obtaining
and enforcing such Rights on such Proprietary Information or Inventions as
thereof to the Company or persons designated by it. My obligation to assist the
Company or any person designated by it in obtaining and enforcing Rights
relating to Proprietary Information or Inventions shall continue beyond the
cessation of my Employment ("Cessation of my Employment"), but the Company shall
compensate me at a reasonable rate after the Cessation of my Employment for time
actually spent by me upon the Company's request for such assistance. In the
event the Company is unable, after reasonable effort, to secure my signature on
any document or documents needed to apply for or enforce any Right relating to
Proprietary Information or to an Invention, whether because of my physical or
mental incapacity or for any other reason whatsoever, I hereby irrevocably
designate and appoint the Company and its duly authorized officers and agents as
my agents and attorneys-in-fact to act for and in my behalf and stead in the
execution and filing of any such application and in furthering the application
for an enforcement of Rights with the same legal force and effect as if such
acts were performed by me. I hereby acknowledge that all original works of
authorship which are made by me (solely or jointly with others) within the scope
of my Employment and
EXHIBIT A
<PAGE> 9
which are protectable by copyright are "works for hire" as that term is defined
in the United States Copyright Act (17 USCA, Section 101).
2. I will promptly disclose to the Company, and the Company hereby
agrees to receive such disclosures in confidence, all discoveries, developments,
designs, improvements, inventions, formulas, software programs, processes,
techniques, know-how, negative know-how and data, whether or not patentable or
registrable under patent, copyright or similar statutes or reduced to practice,
made or conceived or reduced to practice or learned by me, either alone or
jointly with others during the period of my Employment, for the purpose of
permitting the Company to determine whether they constitute Inventions. In order
to facilitate the complete and accurate disclosures described above, I agree to
maintain complete written records of all Inventions, and of all work, study and
investigation related thereto done by me during my Employment, which records
shall be the property of the Company.
3. At all times, both during my Employment and after the Cessation of
my Employment, whether the cessation is voluntary or involuntary, for any reason
or no reason, or by disability, I will keep in strictest confidence and trust
all Proprietary Information, and I will not disclose, use, or induce or assist
in the use or disclosure of any Proprietary Information or Rights pertaining to
Proprietary Information, or anything related thereto, without the prior express
written consent of the Company, except as may be necessary in the ordinary
course of performing my duties as an employee of the Company. I recognize that
the Company has received and in the future will receive from third parties their
confidential or proprietary information subject to a duty of the Company's part
to maintain the confidentiality of such information and to use it only for
certain limited purposes. I agree that I owe the Company and such third parties,
during my Employment and thereafter, a duty to hold all such confidential or
proprietary information in the strictest confidence, and I will not disclose,
use, or induce or assist in the use or disclosure of any such confidential or
proprietary information without the prior express written consent of the
Company, except as may be necessary in the ordinary course of performing my
duties as an employee of the Company consistent with the Company's agreement
with such third party.
4. During the period of my Employment, I will not directly or
indirectly engage in any activity which the Company shall determine in good
faith to be in competition with the Company. During my Employment and for a
period of one (1) year after the Cessation of my Employment, I will not, either
directly or indirectly, either alone or in concert with others, solicit or
entice any employee of or consultant to the Company to leave the Company to work
for anyone in competition with the Company. Also, during my Employment and after
the Cessation of my Employment, I will not, alone or in concert with others, in
any way use or disclose Proprietary Information in order to solicit, entice or
in any way divert any client to do business with any business entity in
competition with the Company. During my Employment, I agree not to plan or
otherwise take any preliminary steps, either alone or in concert with others, to
set up or engage in any business enterprise that would be in competition with
the Company.
5. In the event of the Cessation of my Employment, I will deliver to
the Company all devices, records, sketches, reports, proposals, client
information, lists, correspondence, equipment, software, documents, photographs,
photostats, negatives, undeveloped film, notes, drawings, specifications, tape
recordings or other electronic recordings, programs, data and other
A-2
<PAGE> 10
materials or property of any nature belonging to the Company or pertaining to my
work with the Company, and I will not take with me, or allow a third party to
take, any of the foregoing or any reproduction of any of the foregoing.
6. Any provision in this Agreement requiring me to assign my rights in
any invention shall not apply to an invention that qualifies fully under the
provisions of Section 2870 of the California Labor Code, the terms of which have
been set forth on Exhibit A to this Agreement. I understand that I bear the full
burden of proving to the Company that an invention qualifies fully under Section
2870. By signing this Agreement, I acknowledge receipt of a copy of this
Agreement and of written notification of the provisions of Section 2870.
Notwithstanding the foregoing, I also assign to the Company (or as directed by
it) any rights I may have or acquire in any Invention, full title to which is
required to be in the United States by a contract between the Company and the
United States or any of its agencies.
7. As a matter of record I have listed in Item 1 of Exhibit B attached
hereto all inventions or improvements relevant to the subject matter of my
Employment which have been made or conceived of or first reduced to practice by
me alone or jointly with others prior to my Employment and which I desire to
remove from the operation of this Agreement. I represent and warrant that such
list is complete. If there is no such list in Item 1 of Exhibit B, I represent
that I have made no such inventions or improvements prior to my Employment with
the Company.
8. I represent that my performance of all the terms of this Agreement
and as an employee of the Company does not and will not breach any agreement to
keep in confidence proprietary information acquired by me in confidence or in
trust prior to my Employment with the Company. I have not entered into, and I
agree that I will not enter into, any agreement, either written or oral, in
conflict herewith.
9. I represent and warrant to and covenant with the Company that I
will not bring to the Company, as of this date, any materials or documents of a
former employer (which term, for purposes of this paragraph 9, shall also
include persons, firms, corporations and other entities for which I have acted
as an independent contractor or consultant) that are not generally available to
the public, unless I have obtained express written authorization from any such
former employer for their possession and use. The materials or documents of a
former employer that are not generally available to the public that I will bring
to the Company for use in my Employment are identified in Item 2 of Exhibit B
attached hereto, and as to each such item, I represent and warrant that I have
obtained prior to the effective date of my Employment express written
authorization for their possession and use in my service to the Company. I also
understand that, in my service to the Company, I am not to breach any obligation
of confidentiality that I have to former employers, and I have fulfilled all
such obligations during my Employment.
10. I acknowledge that irreparable injury will result to the Company
from my violation or continued violation of the terms of this Agreement, and I
expressly agree that the Company shall be entitled, in addition to damages and
any other remedies provided by law, to an injunction or other equitable remedy
respecting such violation or continued violation by me.
A-3
<PAGE> 11
11. The terms and conditions of this Agreement shall apply to any
period, if any, during which I perform services for the Company as a consultant
or independent contractor, as well as any time during which I am employed
directly by the Company. Upon the Cessation of my Employment, I agree to sign
and deliver the "Termination Certificate" attached hereto as Exhibit C. My
failure to sign such Termination Certificate, however, shall not affect my
obligations under the Agreement.
12. This Agreement shall be governed by and construed under and
according to the internal substantive laws, and not the laws of conflicts, of
the State of California. If any provision of this Agreement shall be determined
by any court of competent jurisdiction to be unenforceable or otherwise invalid
as written, the same shall be enforced and validated to the extent permitted by
law. All provisions of this Agreement are severable, and the enforceability or
invalidity of any single provision hereof shall not affect the remaining
provisions. Nothing in this Agreement shall obligate the Company to continue to
retain me as an employee. I understand that this means that the Company has and
will continue to have the absolute and unconditional right to terminate my
Employment for any reason or no reason, with or without cause or prior notice,
provided that such termination shall not relieve the Company of any obligations
it may have to make payments to me pursuant to that certain letter agreement of
even date herewith. No implied waiver by the Company of any provision within
this Agreement shall arise in the absence of a waiver in writing signed by the
Company and no waiver by the Company with respect to a specific circumstances,
event or occasion shall be construed as a continuing waiver as to similar
circumstances, events or occasions. This Agreement contains the sole and entire
agreement and understanding between the Company and me with respect to the
subject matter hereof, and supersedes and replaces any prior agreements to the
extent any such agreement is inconsistent herewith. This Agreement can be
amended, modified, released or changed in whole or in part only by a written
agreement executed by the Company and myself. This Agreement shall be binding
upon me, my heirs, executors, assigns and administrators, and shall inure to the
benefit of the Company and its successors or assigns.
13. To the extent that I perform services for subsidiaries or
affiliates of the Company, my obligations and undertakings hereunder with
respect to the Company shall be deemed to include such subsidiaries and
affiliates also.
A-4
<PAGE> 12
EXHIBIT A
"PROPRIETARY INFORMATION" DEFINED:
For purposes of this Agreement, "Proprietary Information" shall mean
information generally unavailable to the public that has been created,
discovered, developed, or otherwise become known to the Company or in which
property rights have been assigned or otherwise conveyed to the Company, which
information has material economic value or potential material economic value to
the business in which the Company is or will be engaged. Proprietary Information
shall include, but not be limited to trade secrets, processes, formulas, data,
know-how, negative know-how, improvements, discoveries, developments, designs,
inventions, techniques, all technical data, proposals, reports, and client
information compiled by the Company, and any modifications or enhancements
thereto, software, programs, and information (whether or not necessarily in
writing) which has actual or potential economic value to the Company.
"INVENTIONS" DEFINED:
For purposes of this Agreement, "Inventions" shall mean all
discoveries, developments, designs, improvements, inventions, formulas,
software, programs, processes, techniques, know-how, negative know-how, and
data, whether or not patentable or registrable under patent, copyright or
similar statutes, that are related to or useful in the business or future
business of the Company or result from use of premises or other property owned,
leased or contracted for by the Company. Without limiting the generality of the
foregoing, Inventions shall also include anything that derives actual or
potential economic value from not being generally known to the public or to
other persons who can obtain economic value from its disclosure or use.
CALIFORNIA LABOR CODE SECTION 2870:
(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer.
(2) Result from any work performed by the employee for the
employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
A-5
<PAGE> 13
EXHIBIT B
ITEM 1:
The following is a complete list of all inventions or improvements
relevant to the subject matter of my employment with the Company that have been
made or conceived of or first reduced to practice by me alone or jointly with
others prior to my employment with the Company:
ITEM 2:
The following is a complete list of all materials and documents of a
former employer that are not generally available to the public that I will bring
or have brought to the Company or have used or will use in my employment:
A-6
<PAGE> 14
EXHIBIT C
LONG BEACH FINANCIAL CORPORATION
EMPLOYEE PROPRIETARY INFORMATION
AND INVENTIONS AGREEMENT
TERMINATION CERTIFICATION
I hereby certify as follows:
1. When I signed the attached Employee Proprietary Information and
Inventions Agreement (the "Agreement"), I read and understood the terms of the
Agreement.
2. I hereby acknowledge that I have fully complied with the terms of
the Agreement, including, without limitation, the disclosure and assignment to
Long Beach Financial Corporation, its subsidiaries and affiliates (the
"Company") of any Inventions covered by that Agreement, and the return of any
documents and other materials of any nature pertaining to my employment with the
Company.
3. I hereby acknowledge and agree to comply with my continuing
obligations under the Agreement, including, without limitation, my obligation
not to use for personal benefit or disclose to others any Proprietary
Information of the Company.
4. I understand and acknowledge that should I fail to comply with my
obligations under the Agreement, the Company shall have the right to obtain an
injunction against me, including, without limitation, an injunction prohibiting
me from disclosing Proprietary Information to a third party.
Dated: ____________
____________________________________
Signature of Employee
____________________________________
Print Name
A-7
<PAGE> 15
MUTUAL AGREEMENT TO ARBITRATE CLAIMS
I recognize that differences may arise between Long Beach Financial
Corporation and its subsidiaries and affiliates (collectively, "the Company")
and me during or following my employment with the Company, and that those
differences may or may not be related to my employment. I understand and agree
that by entering into this Agreement to Arbitrate Claims ("Agreement"), I
anticipate gaining the benefits of a speedy, impartial dispute-resolution
procedure.
I understand that any reference in this Agreement to the Company will
be a reference also to all subsidiary and affiliated entities; all benefit
plans; the benefit plans' sponsors, fiduciaries, administrators, affiliates; and
all successors and assigns of any of them.
Claims Covered by the Agreement
The Company and I mutually consent to the resolution by arbitration of
all claims ("claims"), whether or not arising out of my employment (or its
termination), that the Company may have against me or that I may have against
the Company or against its officers, directors, employees or agents in their
capacity as such or otherwise. The claims covered by this Agreement include, but
are not limited to, claims for wages or other compensation due; claims for
breach of any contract or covenant (express or implied); tort claims; claims for
discrimination (including, but not limited to, race, sex, religion, national
origin, age, marital status, medical condition, or disability); claims for
benefits (except where an employee benefit or pension plan specifies that its
claims procedure shall culminate in an arbitration procedure different from this
one), and claims for violation of any federal, state, or other governmental law,
statute, regulation, or ordinance, except claims excluded in the Claims Not
Covered section below.
Except as otherwise provided in this Agreement, both the Company and I
agree that neither of us shall initiate or prosecute any lawsuit or
administrative action (other than an administrative charge of discrimination) in
any way related to any claim covered by this Agreement.
Claims Not Covered by the Agreement
Claims I may have for workers' compensation or unemployment
compensation benefits are not covered by this Agreement.
Also not covered are claims by the Company for injunctive and/or other
equitable relief for unfair competition and/or the use and/or unauthorized
disclosure of trade secrets or confidential information, as to which I
understand and agree that the Company may seek and obtain relief from a court of
competent jurisdiction.
EXHIBIT B
<PAGE> 16
Required Notice of All Claims and Statute of Limitations
The Company and I agree that the aggrieved party must give written
notice of any claim to the other party within one (1) year of the date the
aggrieved party first has knowledge of the event giving rise to the claim;
otherwise the claim shall be void and deemed waived even if there is a federal
or state statute of limitations which would have given more time to pursue the
claim.
Written notice to the Company, or its officers, directors, employees or
agents, shall be sent to its Chief Executive Officer at the Company's
then-current address. I will be given written notice at the last address
recorded in my personnel file.
The written notice shall identify and describe the nature of all claims
asserted and the facts upon which such claims are based. The notice shall be
sent to the other party by certified or registered mail, return receipt
requested.
Discovery
Each party shall have the right to take the deposition of one
individual and any expert witness designated by another party. Each party also
shall have the right to propound requests for production of documents to any
party. The subpoena right specified below shall be applicable to discovery
pursuant to this paragraph. Additional discovery may be had only where the
Arbitrator selected pursuant to this Agreement so orders, upon a showing of
substantial need.
Designation of Witnesses
At least 30 days before the arbitration, the parties must exchange
lists of witnesses, including any expert, and copies of all exhibits intended to
be used at the arbitration.
Subpoenas
Each party shall have the right to subpoena witnesses and documents for
the arbitration.
Arbitration Procedures
The Company and I agree that, except as provided in this Agreement, any
arbitration shall be in accordance with the then-current Model Employment
Arbitration Procedures of the American Arbitration Association ("AAA") before an
Arbitrator who is licensed to practice law in the state of California
("Arbitrator"). The arbitration shall take place in or near the city in which I
am or was last employed by the Company, if I am or was employed in the State of
California. If I am or was employed outside the State of California, then at the
Company's headquarters in Orange, California.
The Arbitrator shall be selected as follows. The AAA shall give each
party a list of 11 arbitrators drawn from its panel of labor-management dispute
arbitrators. Each party may strike all names on the list it deems unacceptable.
If only one common name remains on the lists of all parties, that individual
shall be designated as the Arbitrator. If more than one common name remains on
the lists of all parties, the parties shall strike names alternately until only
one remains.
B-2
<PAGE> 17
The party who did not initiate the claim shall strike first. If no common name
remains on the lists of all parties, the AAA shall furnish an additional list or
lists until the Arbitrator is selected.
The Arbitrator shall apply the substantive law (and the law of
remedies, if applicable) of the state in which the claim arose, or federal law,
or both, as applicable to the claim(s) asserted. The Federal Rules of Evidence
shall apply. The Arbitrator, and not any federal, state, or local court or
agency, shall have exclusive authority to resolve any dispute relating to the
interpretation, applicability, enforceability or formation of this Agreement,
including but not limited to any claim that all or any part of this Agreement is
void or voidable. The arbitration shall be final and binding upon the parties.
The Arbitrator shall have jurisdiction to hear and rule on pre-hearing
disputes and is authorized to hold pre-hearing conferences by telephone or in
person as the Arbitrator deems necessary. The Arbitrator shall have the
authority to entertain a motion to dismiss and/or a motion for summary judgment
by any party and shall apply the standards governing such motions under the
Federal Rules of Civil Procedure.
Either party, at its expense, may arrange for and pay the cost of a
court reporter to provide a stenographic record of proceedings.
Either party, upon request at the close of hearing, shall be given
leave to file a post-hearing brief. The time for filing such a brief shall be
set by the Arbitrator.
The Arbitrator shall render an award and opinion in the form typically
rendered in labor arbitrations.
Arbitration Fees and Costs
The Company and I shall equally share the fees and costs of the
Arbitrator. Each party will deposit funds or post other appropriate security for
its share of the Arbitrator's fee, in an amount and manner determined by the
Arbitrator, 10 days before the first day of hearing. Each party shall pay for
its own costs and attorneys' fees, if any. However, if any party prevails on a
statutory claim which affords the prevailing party attorneys' fees, or if there
is a written agreement providing for fees, the Arbitrator may award reasonable
fees to the prevailing party.
Judicial Review
Either party may bring an action in any court of competent jurisdiction
to compel arbitration under this Agreement and to enforce an arbitration award.
A party opposing enforcement of an award may not do so in an enforcement
proceeding, but must bring a separate action in any court of competent
jurisdiction to set aside the award, where the standard of review will be the
same as that applied by an appellate court reviewing a decision of a trial court
sitting without a jury.
B-3
<PAGE> 18
Interstate Commerce
I understand and agree that the Company is engaged in transactions
involving interstate commerce and that my employment involves such commerce.
Requirements for Modification or Revocation
This Agreement to arbitrate shall survive the termination of my
employment. It can only be revoked or modified by a writing signed by the
parties which specifically states an intent to revoke or modify this Agreement.
Sole and Entire Agreement
This is the complete agreement of the parties on the subject of
arbitration of disputes, except for any arbitration agreement in connection with
any pension or benefit plan. This Agreement supersedes any prior or
contemporaneous oral or written understanding on the subject. No party is
relying on any representations, oral or written, on the subject of the effect,
enforceability or meaning of this Agreement, except as specifically set forth in
this Agreement.
Construction
If any provision of this Agreement is adjudged to be void or otherwise
unenforceable, in whole or in part, such adjudication shall not affect the
validity of the remainder of the Agreement.
Consideration
The promises by the Company and by me to arbitrate differences, rather
than litigate them before courts or other bodies, provide consideration for each
other.
Employment Agreement
This Agreement is not, and shall not be construed to create, any
contract of employment, express or implied. Nor does this agreement in any way
alter the "at-will" status of my employment.
Voluntary Agreement
I ACKNOWLEDGE THAT I HAVE CAREFULLY READ THIS AGREEMENT, THAT I
UNDERSTAND ITS TERMS, THAT ALL UNDERSTANDINGS AND AGREEMENTS BETWEEN THE COMPANY
AND ME RELATING TO THE SUBJECTS COVERED IN THE AGREEMENT ARE CONTAINED IN IT,
AND THAT I HAVE ENTERED INTO THE AGREEMENT VOLUNTARILY AND NOT IN RELIANCE ON
ANY PROMISES OR REPRESENTATIONS BY THE COMPANY OTHER THAN THOSE CONTAINED IN
THIS AGREEMENT ITSELF.
B-4
<PAGE> 19
I FURTHER ACKNOWLEDGE THAT I HAVE BEEN GIVEN THE OPPORTUNITY TO DISCUSS
THIS AGREEMENT WITH MY PRIVATE LEGAL COUNSEL AND HAVE AVAILED MYSELF OF THAT
OPPORTUNITY TO THE EXTENT I WISH TO DO SO.
B-5
<PAGE> 1
EXHIBIT 10.11
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT (this "AGREEMENT") is made and entered into
as of April 15, 1997, by and between LONG BEACH FINANCIAL CORPORATION, a
Delaware corporation ("LBFC"), and LONG BEACH MORTGAGE COMPANY, a Delaware
corporation, currently named Ameriquest Mortgage Corporation ("LBMC")
(collectively, the "COMPANY"), and JAMES J. SULLIVAN ("EXECUTIVE").
I.
EMPLOYMENT
1.1 POSITION AND DUTIES. The Company hereby engages and employs
Executive in the following capacities at LBFC and LBMC:
LBFC: Senior Vice President, General Counsel and Secretary
LBMC: Senior Vice President, General Counsel and Secretary
The Company's Boards of Directors (collectively, the "BOARDS") may
provide such additional designations of title to Executive as the Boards, in
their discretion, may deem appropriate. Executive shall perform the executive
duties and functions related to the above positions, subject to the limitations
of authority set forth from time to time in any resolution of the Boards or
applicable law.
1.2 BEST EFFORTS. Executive agrees to devote his full time and
attention to the Company, to use his best efforts to advance the business and
welfare of the Company, to render his services under this Agreement fully,
faithfully, diligently, competently and to the best of his ability, and not to
engage in any other employment activities. Notwithstanding anything herein to
the contrary, Executive shall not be precluded from (a) engaging in charitable
activities and community affairs and managing his personal investments and
affairs, provided that such activities do not materially interfere with the
proper performance of his duties and responsibilities under this Agreement; or
(b) owning up to 1% of a publicly-held company engaged in the same or similar
business as the Company.
II.
COMPENSATION AND BENEFITS
2.1 BASE SALARY. For all services to be rendered by Executive under
this Agreement, the Company agrees to pay Executive an annual base salary of
$160,000 (subject to adjustment upward as recommended by the Compensation
Committee of the Board of LBFC), less deductions required by law, payable in
accordance with the normal payroll practices of the Company.
2.2 ANNUAL PERFORMANCE BONUS. On or before each April 15 following each
December 31 during the term of this Agreement, the Company shall pay to
Executive a bonus of
<PAGE> 2
up to 50% of Executive's base salary, as determined by the Boards based on
Executive's performance and the performance of the Company during the prior
calendar year. Executive is guaranteed a minimum bonus of 25% of Executive's
base salary. All bonus calculations shall be based upon the Company's audited
financial statements through the end of the applicable calendar year.
2.3 OTHER BENEFITS. The Company shall further provide to Executive the
following other benefits:
(a) An automobile (to be owned or leased by the Company at its
option and expense) of Executive's choice with a negotiated purchase price of no
more than $50,000, and reimbursement of all reasonable operating costs,
insurance and repairs;
(b) An annual vacation leave of a minimum of three (3) weeks per
calendar year at full pay;
(c) Full participation, on a basis commensurate with his position
with the Company, in all plans of life, accident, disability and health
insurance that generally are made available to senior executives of the Company;
and
(d) A complete annual physical examination by the doctor of
Executive's choice, with the cost of such examination to be borne by the
Company.
(e) Stock options (which shall be incentive stock options to the
extent permissible) for 100,000 shares of Company Common Stock concurrent with
the pricing of an initial public offering of the Company's Common Stock, such
options to vest 20% per year for five (5) years. Executive acknowledges that
such option grant is intended to cover the three (3) year term of this Agreement
and that the Company has no commitment to issue additional options to Executive
during the term of this Agreement or thereafter.
2.4 EXPENSE REIMBURSEMENT. The Company shall promptly reimburse
Executive for all reasonable business expenses incurred by Executive in
promoting the business of the Company, including expenditures for entertainment,
travel, or other expenses, provided that (a) such expenditures are of a nature
qualifying them as legitimate business deductions and (b) Executive furnishes to
the Company adequate records and other documentary evidence reasonably required
by the Company to substantiate such expenditures in accordance with the
Company's policies and procedures.
III.
TERMINATION AND SEVERANCE PAY
3.1 AT WILL. Executive and the Company acknowledge and agree that
Executive's employment with the Company is expressly "at will" both during and
after the term of this Agreement. This means that either party may terminate
Executive's employment with or without cause. Any termination of Executive's
employment is, however, subject to the terms and provisions of this Agreement as
to severance pay and other obligations.
2
<PAGE> 3
3.2 INVOLUNTARY TERMINATION.
(a) SEVERANCE PAYMENTS. In the event that Executive's employment
with the Company is terminated by the Company for Cause (as defined in Section
3.2(c)), Executive shall be entitled to no severance pay or other benefits. In
the event that Executive's employment with the Company is terminated by the
Company other than for Cause, then in consideration of Executive's compliance
with his obligations under Article V and Executive's execution of a general
release in favor of the Company and its affiliates, Executive shall be entitled
to severance payments in the form of (i) monthly payments to Executive in the
amount of Executive's monthly base salary as in effect on the date of
termination, payable in accordance with customary payroll practices, for twelve
(12) months following such termination; plus (ii) for each full calendar month
Executive was employed during the year of termination of employment, 1/12th of
the bonus to which Executive would have been entitled had he been employed the
entire year, payable at the time specified in Section 2.2 hereof; 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. Executive acknowledges and agrees that in the event Executive breaches
any provision of Article V or the general release, his right to receive
severance payments under this Section 3.2(a) shall automatically terminate and
Executive shall repay all severance payments received.
(b) BENEFITS. Following the notification of termination, Executive
shall cease to be a Company employee and shall not be entitled to any employee
benefits. This shall not preclude Executive from exercising his rights under
COBRA to pay for the continuation of benefits previously provided by the
Company. In the event that Executive's employment is terminated by the Company
other than for Cause, all Company stock options which would vest within twelve
(12) months of the date of termination shall be deemed vested as of the date of
termination.
(c) CAUSE. For purposes of this Agreement, "CAUSE" shall mean (i)
an act or acts of personal dishonesty by Executive that were intended to result
in substantial personal enrichment of Executive at the expense of the Company;
(ii) Executive's conviction of any felony; or (iii) Executive's gross
negligence, gross incompetence, willful insubordination or misconduct,
intentional or persistent failure to perform stated duties or abide by the
Company's policies, or material breach of any provision of this Agreement,
including without limitation any representation or covenant contained in Article
V of this Agreement.
3.3 VOLUNTARY TERMINATION.
(a) SEVERANCE PAY. In the event Executive voluntarily terminates
his employment with the Company without Good Reason (as defined in Section
3.3(b)), Executive shall be entitled to no severance pay or other benefits. In
the event Executive voluntarily terminates his employment with the Company for
Good Reason (as defined in Section 3.3(b)), Executive shall be entitled to the
severance pay and stock option vesting set forth in Sections 3.2(a) and (b) if
(i) Executive gives written notice of his resignation within ninety (90) days of
the occurrence of such Good Reason and advises, as part of such resignation,
that he is resigning because of the Good Reason, and (ii) the Good Reason was
other than for Cause.
3
<PAGE> 4
For purposes of this Agreement, a resignation tendered by Executive
pursuant to a direct request of the Boards (or either of them) or another
officer with higher executive status shall, for purposes of this Agreement, be
treated as an involuntary termination, entitling Executive to severance payments
in accordance with the provisions of Section 3.2(a) so long as the request was
not based on Cause (as defined in Section 3.2(c)).
(b) GOOD REASON. For purposes of this Agreement, "GOOD REASON"
shall include (i) the material reduction or material adverse modification of
Executive's authority or duties (i.e., the substantial diminution or adverse
modification in Executive's title, status, overall position, responsibilities,
reporting relationship or general working environment); (ii) any reduction in
Executive's base compensation or bonus potential or any material reduction in
employee benefits; or (iii) any requirement to move Executive's principal place
of employment from Orange County, California, in each case without Executive's
prior written consent.
3.4 DEATH. In the event of Executive's death, this Agreement shall
automatically terminate and shall be of no further force and effect. Termination
of Executive's employment as a result of his death shall not result in any
obligation by the Company to pay severance pay or other benefits to Executive's
estate or heirs, but Executive's estate or heirs shall be entitled to a pro-rata
bonus through the date of termination at the time specified in Section 2.2.
3.5 DISABILITY. In the event of Executive's Disability (as defined
below) during the term of this Agreement for any period of at least three (3)
consecutive months, the Company shall have the right, which may be exercised in
its sole discretion, to terminate this Agreement. In the event the Company does
elect to terminate this Agreement, Executive shall not be entitled to any
severance pay at any time but shall be entitled to normal disability benefits in
accordance with the policies established from time to time by the Company. For
purposes of this Agreement, "DISABILITY" shall mean the inability of Executive
to perform his employment services hereunder by reason of physical or mental
illness or incapacity as determined by a physician chosen by the Company and
reasonably satisfactory to Executive or his legal representative.
IV.
TERM
TERM. The term of this Agreement shall commence on April 15, 1997 and
shall continue for a period of three (3) years thereafter, as such period may be
extended in writing from time to time. In the event an initial public offering
of LBFC's common stock is not successfully completed on or before December 31,
1997, this Agreement shall be null and void and the parties hereto shall have no
rights or obligations with respect hereto.
V.
NONDISCLOSURE OF INFORMATION
AND NON-SOLICITATION OF EMPLOYEES
5.1 NONDISCLOSURE OF CONFIDENTIAL INFORMATION. Except in the
performance of his duties hereunder, Executive shall not disclose to any person
or entity or use for his own direct or indirect benefit any Confidential
Information (as defined below). For purposes of this Agreement,
4
<PAGE> 5
"CONFIDENTIAL INFORMATION" shall include the Company's products, reports,
studies, services, processes, suppliers, customers, customers' account
executives, financial, sales and distribution information, price lists, identity
and list of actual and potential customers, trade secrets, technical
information, business plans and strategies to the extent that such information
has not been publicly disseminated by the Company or otherwise made available to
the public, other than through a breach hereof.
5.2 RETURN OF INFORMATION AND PROPERTY. Upon termination of Executive's
employment, Executive will deliver to the Company all customer lists, proposals,
reports, memoranda, computer software and programming, budgets and other
financial information, and other materials or records or writings of any type
(including any copies thereof and regardless of the medium in which the
information exists) made, used or obtained by Executive in connection with his
employment by the Company and all Company property.
5.3 EMPLOYEE PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT.
Executive shall be subject to the provisions of the Company's Employee
Proprietary Information and Inventions Agreement, a copy of which is attached
hereto as Exhibit A and incorporated herein by this reference.
5.4 NON-SOLICITATION. Executive agrees that, so long as he is employed
by the Company and for a period of one (1) year after termination of his
employment for any reason, he shall not (a) directly or indirectly solicit,
induce or attempt to solicit or induce any Company employee to discontinue his
or her employment with the Company, (b) usurp any opportunity of the Company
that Executive became aware of during his tenure at the Company or which is made
available to him on the basis of the belief that Executive is still employed by
the Company, or (c) directly or indirectly solicit or induce or attempt to
influence any person or business that is an account, customer or client of the
Company to restrict or cancel the business of any such account, customer or
client with the Company.
VI.
MISCELLANEOUS
6.1 SUCCESSORS AND ASSIGNS; BINDING AGREEMENT. This Agreement shall
inure to the benefit of and shall be binding upon the Company, its successors
and assigns. The obligations and duties of the Executive hereunder are personal
and otherwise not assignable. This Agreement shall inure to the benefit of and
be enforceable by the Executive's legal representatives. This Agreement shall
not be terminated by the voluntary or involuntary dissolution of the Company or
by any merger or consolidation, whether or not the Company is the surviving or
resulting corporation, or upon any transfer of all or substantially all of the
assets of the Company. In the event of any such merger, consolidation or
transfer of assets, the provisions of this Agreement shall bind and inure to the
benefit of the surviving or resulting corporation, or the corporation to which
such assets shall have been transferred, as the case may be; provided, however,
that the Company will require any successor to all or substantially all of the
business and/or assets of the Company, by agreement in form and substance
satisfactory to Executive, to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place.
5
<PAGE> 6
6.2 ARBITRATION. Other than with respect to Article V hereof, any and
all disputes arising out of the interpretation, application or breach of this
Agreement shall be subject to arbitration pursuant to the Company's Mutual
Agreement to Arbitrate Claims, a copy of which is attached hereto as Exhibit B
and incorporated herein by this reference.
6.3 NO WAIVER. The waiver by either party of a breach of any provision
of this Agreement shall not operate as or be construed as a waiver of any
subsequent breach thereof.
6.4 GOVERNING LAW. This Agreement shall be construed and enforced in
accordance with the laws and decisions of the State of California.
6.5 AMENDMENTS. No amendment or modification of the terms of this
Agreement shall be valid unless made by written agreement executed by the
parties hereto or their respective successors and legal representative.
6.6 SEVERABILITY. In the event that any provision of this Agreement
shall to any extent be held invalid, unreasonable or unenforceable, in any
circumstances, the parties hereto agree that the remainder of this Agreement and
the application of such provision of this Agreement to other circumstances shall
be valid and enforceable to the fullest extent permitted by law. If any
provision, or any part thereof, is held to be unenforceable because of the scope
or duration of or the area covered by such provision, the parties hereto agree
that the court making such determination shall have the power, and is hereby
asked by the parties, to reduce the scope, duration and/or area of such
provisions (and to substitute appropriate provisions for any such unenforceable
provisions) in order to make such provisions enforceable to the fullest extent
permitted by law, and/or to delete specific words and phrases, and such modified
provisions shall then be enforceable and shall be enforced.
6.7 ENTIRE AGREEMENT; NO OTHER CLAIMS. This Agreement constitutes the
entire agreement between the parties regarding the subject matter hereof, and
supersedes all prior or contemporaneous negotiations, understandings or
agreements of the parties, whether written or oral, with respect to such subject
matter. Executive acknowledges that all compensation and benefits of any nature
due to Executive from the Company's predecessor, Long Beach Mortgage Company,
and its affiliates (collectively "Old Long Beach"), have been paid in full and
Executive waives any and all claims relating thereto for the benefit of Old Long
Beach and the Company.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have executed and delivered this
Agreement as of the day and year first above written.
The "Company":
LONG BEACH FINANCIAL CORPORATION,
a Delaware corporation
By: /s/ JAMES H. LEONETTI
-------------------------------
Its: Senior Vice President, Chief
Financial Officer
LONG BEACH MORTGAGE COMPANY,
a Delaware corporation, currently named
Ameriquest Mortgage Corporation
By: /s/ JAMES H. LEONETTI
-------------------------------
Its: Senior Vice President, Chief
Financial Officer
"Executive":
/s/ JAMES J. SULLIVAN
------------------------------------
JAMES J. SULLIVAN
7
<PAGE> 8
LONG BEACH FINANCIAL CORPORATION
EMPLOYEE PROPRIETARY INFORMATION
AND INVENTIONS AGREEMENT
I understand that as part of my employment ("Employment"), by Long
Beach Financial Corporation (the "Company") I am (or may be) expected to make
new contributions and discoveries of value to the Company. I further understand
that my Employment by the Company creates in me a duty of trust and
confidentiality to the Company with respect to any information (1) related,
applicable or useful to the business of the Company, including the Company's
anticipated research and development assigned to me by the Company; or (3)
resulting from the use of equipment, supplies or facilities owned, leased or
contracted for by the Company; or (4) related, applicable or useful to the
business of any client of the Company, which may be made known to me by the
Company or by any client of the Company, or learned by me during the period of
my Employment.
As part of the consideration for my Employment or continued Employment,
as the case may be, by the Company, and the compensation received by me from the
Company (including bonuses and benefits) from time to time, I hereby agree as
follows:
1. All Proprietary Information (as defined on Exhibit A hereto) and
Inventions (as defined on Exhibit A hereto) shall be the sole propriety of the
Company and its assigns, and the Company and its assigns shall be the sole owner
of all patents, trademarks, service marks and copyrights, and other rights
(collectively referred to herein as "Rights") pertaining to Proprietary
Information and Inventions. I hereby assign to the Company any rights I may have
or acquire in Proprietary Information or Inventions or Rights pertaining to the
Proprietary Information or Inventions. I further agree as to all Proprietary
Information or Inventions to assist the Company or any person designed by it in
every proper way (but at the Company's expense) to obtain and from time to time
enforce Rights relating to said Proprietary Information or Inventions in any and
all countries. I will execute all documents for use in applying for, obtaining
and enforcing such Rights on such Proprietary Information or Inventions as
thereof to the Company or persons designated by it. My obligation to assist the
Company or any person designated by it in obtaining and enforcing Rights
relating to Proprietary Information or Inventions shall continue beyond the
cessation of my Employment ("Cessation of my Employment"), but the Company shall
compensate me at a reasonable rate after the Cessation of my Employment for time
actually spent by me upon the Company's request for such assistance. In the
event the Company is unable, after reasonable effort, to secure my signature on
any document or documents needed to apply for or enforce any Right relating to
Proprietary Information or to an Invention, whether because of my physical or
mental incapacity or for any other reason whatsoever, I hereby irrevocably
designate and appoint the Company and its duly authorized officers and agents as
my agents and attorneys-in-fact to act for and in my behalf and stead in the
execution and filing of any such application and in furthering the application
for an enforcement of Rights with the same legal force and effect as if such
acts were performed by me. I hereby acknowledge that all original works of
authorship which are made by me (solely or jointly with others) within the scope
of my Employment and
EXHIBIT A
<PAGE> 9
which are protectable by copyright are "works for hire" as that term is defined
in the United States Copyright Act (17 USCA, Section 101).
2. I will promptly disclose to the Company, and the Company hereby
agrees to receive such disclosures in confidence, all discoveries, developments,
designs, improvements, inventions, formulas, software programs, processes,
techniques, know-how, negative know-how and data, whether or not patentable or
registrable under patent, copyright or similar statutes or reduced to practice,
made or conceived or reduced to practice or learned by me, either alone or
jointly with others during the period of my Employment, for the purpose of
permitting the Company to determine whether they constitute Inventions. In order
to facilitate the complete and accurate disclosures described above, I agree to
maintain complete written records of all Inventions, and of all work, study and
investigation related thereto done by me during my Employment, which records
shall be the property of the Company.
3. At all times, both during my Employment and after the Cessation of
my Employment, whether the cessation is voluntary or involuntary, for any reason
or no reason, or by disability, I will keep in strictest confidence and trust
all Proprietary Information, and I will not disclose, use, or induce or assist
in the use or disclosure of any Proprietary Information or Rights pertaining to
Proprietary Information, or anything related thereto, without the prior express
written consent of the Company, except as may be necessary in the ordinary
course of performing my duties as an employee of the Company. I recognize that
the Company has received and in the future will receive from third parties their
confidential or proprietary information subject to a duty of the Company's part
to maintain the confidentiality of such information and to use it only for
certain limited purposes. I agree that I owe the Company and such third parties,
during my Employment and thereafter, a duty to hold all such confidential or
proprietary information in the strictest confidence, and I will not disclose,
use, or induce or assist in the use or disclosure of any such confidential or
proprietary information without the prior express written consent of the
Company, except as may be necessary in the ordinary course of performing my
duties as an employee of the Company consistent with the Company's agreement
with such third party.
4. During the period of my Employment, I will not directly or
indirectly engage in any activity which the Company shall determine in good
faith to be in competition with the Company. During my Employment and for a
period of one (1) year after the Cessation of my Employment, I will not, either
directly or indirectly, either alone or in concert with others, solicit or
entice any employee of or consultant to the Company to leave the Company to work
for anyone in competition with the Company. Also, during my Employment and after
the Cessation of my Employment, I will not, alone or in concert with others, in
any way use or disclose Proprietary Information in order to solicit, entice or
in any way divert any client to do business with any business entity in
competition with the Company. During my Employment, I agree not to plan or
otherwise take any preliminary steps, either alone or in concert with others, to
set up or engage in any business enterprise that would be in competition with
the Company.
5. In the event of the Cessation of my Employment, I will deliver to
the Company all devices, records, sketches, reports, proposals, client
information, lists, correspondence, equipment, software, documents, photographs,
photostats, negatives, undeveloped film, notes, drawings, specifications, tape
recordings or other electronic recordings, programs, data and other
A-2
<PAGE> 10
materials or property of any nature belonging to the Company or pertaining to my
work with the Company, and I will not take with me, or allow a third party to
take, any of the foregoing or any reproduction of any of the foregoing.
6. Any provision in this Agreement requiring me to assign my rights in
any invention shall not apply to an invention that qualifies fully under the
provisions of Section 2870 of the California Labor Code, the terms of which have
been set forth on Exhibit A to this Agreement. I understand that I bear the full
burden of proving to the Company that an invention qualifies fully under Section
2870. By signing this Agreement, I acknowledge receipt of a copy of this
Agreement and of written notification of the provisions of Section 2870.
Notwithstanding the foregoing, I also assign to the Company (or as directed by
it) any rights I may have or acquire in any Invention, full title to which is
required to be in the United States by a contract between the Company and the
United States or any of its agencies.
7. As a matter of record I have listed in Item 1 of Exhibit B attached
hereto all inventions or improvements relevant to the subject matter of my
Employment which have been made or conceived of or first reduced to practice by
me alone or jointly with others prior to my Employment and which I desire to
remove from the operation of this Agreement. I represent and warrant that such
list is complete. If there is no such list in Item 1 of Exhibit B, I represent
that I have made no such inventions or improvements prior to my Employment with
the Company.
8. I represent that my performance of all the terms of this Agreement
and as an employee of the Company does not and will not breach any agreement to
keep in confidence proprietary information acquired by me in confidence or in
trust prior to my Employment with the Company. I have not entered into, and I
agree that I will not enter into, any agreement, either written or oral, in
conflict herewith.
9. I represent and warrant to and covenant with the Company that I will
not bring to the Company, as of this date, any materials or documents of a
former employer (which term, for purposes of this paragraph 9, shall also
include persons, firms, corporations and other entities for which I have acted
as an independent contractor or consultant) that are not generally available to
the public, unless I have obtained express written authorization from any such
former employer for their possession and use. The materials or documents of a
former employer that are not generally available to the public that I will bring
to the Company for use in my Employment are identified in Item 2 of Exhibit B
attached hereto, and as to each such item, I represent and warrant that I have
obtained prior to the effective date of my Employment express written
authorization for their possession and use in my service to the Company. I also
understand that, in my service to the Company, I am not to breach any obligation
of confidentiality that I have to former employers, and I have fulfilled all
such obligations during my Employment.
10. I acknowledge that irreparable injury will result to the Company
from my violation or continued violation of the terms of this Agreement, and I
expressly agree that the Company shall be entitled, in addition to damages and
any other remedies provided by law, to an injunction or other equitable remedy
respecting such violation or continued violation by me.
A-3
<PAGE> 11
11. The terms and conditions of this Agreement shall apply to any
period, if any, during which I perform services for the Company as a consultant
or independent contractor, as well as any time during which I am employed
directly by the Company. Upon the Cessation of my Employment, I agree to sign
and deliver the "Termination Certificate" attached hereto as Exhibit C. My
failure to sign such Termination Certificate, however, shall not affect my
obligations under the Agreement.
12. This Agreement shall be governed by and construed under and
according to the internal substantive laws, and not the laws of conflicts, of
the State of California. If any provision of this Agreement shall be determined
by any court of competent jurisdiction to be unenforceable or otherwise invalid
as written, the same shall be enforced and validated to the extent permitted by
law. All provisions of this Agreement are severable, and the enforceability or
invalidity of any single provision hereof shall not affect the remaining
provisions. Nothing in this Agreement shall obligate the Company to continue to
retain me as an employee. I understand that this means that the Company has and
will continue to have the absolute and unconditional right to terminate my
Employment for any reason or no reason, with or without cause or prior notice,
provided that such termination shall not relieve the Company of any obligations
it may have to make payments to me pursuant to that certain letter agreement of
even date herewith. No implied waiver by the Company of any provision within
this Agreement shall arise in the absence of a waiver in writing signed by the
Company and no waiver by the Company with respect to a specific circumstances,
event or occasion shall be construed as a continuing waiver as to similar
circumstances, events or occasions. This Agreement contains the sole and entire
agreement and understanding between the Company and me with respect to the
subject matter hereof, and supersedes and replaces any prior agreements to the
extent any such agreement is inconsistent herewith. This Agreement can be
amended, modified, released or changed in whole or in part only by a written
agreement executed by the Company and myself. This Agreement shall be binding
upon me, my heirs, executors, assigns and administrators, and shall inure to the
benefit of the Company and its successors or assigns.
13. To the extent that I perform services for subsidiaries or
affiliates of the Company, my obligations and undertakings hereunder with
respect to the Company shall be deemed to include such subsidiaries and
affiliates also.
A-4
<PAGE> 12
EXHIBIT A
"PROPRIETARY INFORMATION" DEFINED:
For purposes of this Agreement, "Proprietary Information" shall mean
information generally unavailable to the public that has been created,
discovered, developed, or otherwise become known to the Company or in which
property rights have been assigned or otherwise conveyed to the Company, which
information has material economic value or potential material economic value to
the business in which the Company is or will be engaged. Proprietary Information
shall include, but not be limited to trade secrets, processes, formulas, data,
know-how, negative know-how, improvements, discoveries, developments, designs,
inventions, techniques, all technical data, proposals, reports, and client
information compiled by the Company, and any modifications or enhancements
thereto, software, programs, and information (whether or not necessarily in
writing) which has actual or potential economic value to the Company.
"INVENTIONS" DEFINED:
For purposes of this Agreement, "Inventions" shall mean all
discoveries, developments, designs, improvements, inventions, formulas,
software, programs, processes, techniques, know-how, negative know-how, and
data, whether or not patentable or registrable under patent, copyright or
similar statutes, that are related to or useful in the business or future
business of the Company or result from use of premises or other property owned,
leased or contracted for by the Company. Without limiting the generality of the
foregoing, Inventions shall also include anything that derives actual or
potential economic value from not being generally known to the public or to
other persons who can obtain economic value from its disclosure or use.
CALIFORNIA LABOR CODE SECTION 2870:
(a) Any provision in an employment agreement which provides that an
employee shall assign, or offer to assign, any of his or her rights in an
invention to his or her employer shall not apply to an invention that the
employee developed entirely on his or her own time without using the employer's
equipment, supplies, facilities, or trade secret information except for those
inventions that either:
(1) Relate at the time of conception or reduction to practice of
the invention to the employer's business, or actual or demonstrably anticipated
research or development of the employer.
(2) Result from any work performed by the employee for the
employer.
(b) To the extent a provision in an employment agreement purports to
require an employee to assign an invention otherwise excluded from being
required to be assigned under subdivision (a), the provision is against the
public policy of this state and is unenforceable.
A-5
<PAGE> 13
EXHIBIT B
ITEM 1:
The following is a complete list of all inventions or improvements
relevant to the subject matter of my employment with the Company that have been
made or conceived of or first reduced to practice by me alone or jointly with
others prior to my employment with the Company:
ITEM 2:
The following is a complete list of all materials and documents of a
former employer that are not generally available to the public that I will bring
or have brought to the Company or have used or will use in my employment:
A-6
<PAGE> 14
EXHIBIT C
LONG BEACH FINANCIAL CORPORATION
EMPLOYEE PROPRIETARY INFORMATION
AND INVENTIONS AGREEMENT
TERMINATION CERTIFICATION
I hereby certify as follows:
1. When I signed the attached Employee Proprietary Information and
Inventions Agreement (the "Agreement"), I read and understood the terms of the
Agreement.
2. I hereby acknowledge that I have fully complied with the terms of
the Agreement, including, without limitation, the disclosure and assignment to
Long Beach Financial Corporation, its subsidiaries and affiliates (the
"Company") of any Inventions covered by that Agreement, and the return of any
documents and other materials of any nature pertaining to my employment with the
Company.
3. I hereby acknowledge and agree to comply with my continuing
obligations under the Agreement, including, without limitation, my obligation
not to use for personal benefit or disclose to others any Proprietary
Information of the Company.
4. I understand and acknowledge that should I fail to comply with my
obligations under the Agreement, the Company shall have the right to obtain an
injunction against me, including, without limitation, an injunction prohibiting
me from disclosing Proprietary Information to a third party.
Dated:________________
______________________________
Signature of Employee
______________________________
Print Name
A-7
<PAGE> 15
MUTUAL AGREEMENT TO ARBITRATE CLAIMS
I recognize that differences may arise between Long Beach Financial
Corporation and its subsidiaries and affiliates (collectively, "the Company")
and me during or following my employment with the Company, and that those
differences may or may not be related to my employment. I understand and agree
that by entering into this Agreement to Arbitrate Claims ("Agreement"), I
anticipate gaining the benefits of a speedy, impartial dispute-resolution
procedure.
I understand that any reference in this Agreement to the Company will
be a reference also to all subsidiary and affiliated entities; all benefit
plans; the benefit plans' sponsors, fiduciaries, administrators, affiliates; and
all successors and assigns of any of them.
Claims Covered by the Agreement
The Company and I mutually consent to the resolution by arbitration of
all claims ("claims"), whether or not arising out of my employment (or its
termination), that the Company may have against me or that I may have against
the Company or against its officers, directors, employees or agents in their
capacity as such or otherwise. The claims covered by this Agreement include, but
are not limited to, claims for wages or other compensation due; claims for
breach of any contract or covenant (express or implied); tort claims; claims for
discrimination (including, but not limited to, race, sex, religion, national
origin, age, marital status, medical condition, or disability); claims for
benefits (except where an employee benefit or pension plan specifies that its
claims procedure shall culminate in an arbitration procedure different from this
one), and claims for violation of any federal, state, or other governmental law,
statute, regulation, or ordinance, except claims excluded in the Claims Not
Covered section below.
Except as otherwise provided in this Agreement, both the Company and I
agree that neither of us shall initiate or prosecute any lawsuit or
administrative action (other than an administrative charge of discrimination) in
any way related to any claim covered by this Agreement.
Claims Not Covered by the Agreement
Claims I may have for workers' compensation or unemployment
compensation benefits are not covered by this Agreement.
Also not covered are claims by the Company for injunctive and/or other
equitable relief for unfair competition and/or the use and/or unauthorized
disclosure of trade secrets or confidential information, as to which I
understand and agree that the Company may seek and obtain relief from a court of
competent jurisdiction.
EXHIBIT B
<PAGE> 16
Required Notice of All Claims and Statute of Limitations
The Company and I agree that the aggrieved party must give written
notice of any claim to the other party within one (1) year of the date the
aggrieved party first has knowledge of the event giving rise to the claim;
otherwise the claim shall be void and deemed waived even if there is a federal
or state statute of limitations which would have given more time to pursue the
claim.
Written notice to the Company, or its officers, directors, employees or
agents, shall be sent to its Chief Executive Officer at the Company's
then-current address. I will be given written notice at the last address
recorded in my personnel file.
The written notice shall identify and describe the nature of all claims
asserted and the facts upon which such claims are based. The notice shall be
sent to the other party by certified or registered mail, return receipt
requested.
Discovery
Each party shall have the right to take the deposition of one
individual and any expert witness designated by another party. Each party also
shall have the right to propound requests for production of documents to any
party. The subpoena right specified below shall be applicable to discovery
pursuant to this paragraph. Additional discovery may be had only where the
Arbitrator selected pursuant to this Agreement so orders, upon a showing of
substantial need.
Designation of Witnesses
At least 30 days before the arbitration, the parties must exchange
lists of witnesses, including any expert, and copies of all exhibits intended to
be used at the arbitration.
Subpoenas
Each party shall have the right to subpoena witnesses and documents for
the arbitration.
Arbitration Procedures
The Company and I agree that, except as provided in this Agreement, any
arbitration shall be in accordance with the then-current Model Employment
Arbitration Procedures of the American Arbitration Association ("AAA") before an
Arbitrator who is licensed to practice law in the state of California
("Arbitrator"). The arbitration shall take place in or near the city in which I
am or was last employed by the Company, if I am or was employed in the State of
California. If I am or was employed outside the State of California, then at the
Company's headquarters in Orange, California.
The Arbitrator shall be selected as follows. The AAA shall give each
party a list of 11 arbitrators drawn from its panel of labor-management dispute
arbitrators. Each party may strike all names on the list it deems unacceptable.
If only one common name remains on the lists of all parties, that individual
shall be designated as the Arbitrator. If more than one common name remains on
the lists of all parties, the parties shall strike names alternately until only
one remains.
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<PAGE> 17
The party who did not initiate the claim shall strike first. If no common name
remains on the lists of all parties, the AAA shall furnish an additional list or
lists until the Arbitrator is selected.
The Arbitrator shall apply the substantive law (and the law of
remedies, if applicable) of the state in which the claim arose, or federal law,
or both, as applicable to the claim(s) asserted. The Federal Rules of Evidence
shall apply. The Arbitrator, and not any federal, state, or local court or
agency, shall have exclusive authority to resolve any dispute relating to the
interpretation, applicability, enforceability or formation of this Agreement,
including but not limited to any claim that all or any part of this Agreement is
void or voidable. The arbitration shall be final and binding upon the parties.
The Arbitrator shall have jurisdiction to hear and rule on pre-hearing
disputes and is authorized to hold pre-hearing conferences by telephone or in
person as the Arbitrator deems necessary. The Arbitrator shall have the
authority to entertain a motion to dismiss and/or a motion for summary judgment
by any party and shall apply the standards governing such motions under the
Federal Rules of Civil Procedure.
Either party, at its expense, may arrange for and pay the cost of a
court reporter to provide a stenographic record of proceedings.
Either party, upon request at the close of hearing, shall be given
leave to file a post-hearing brief. The time for filing such a brief shall be
set by the Arbitrator.
The Arbitrator shall render an award and opinion in the form typically
rendered in labor arbitrations.
Arbitration Fees and Costs
The Company and I shall equally share the fees and costs of the
Arbitrator. Each party will deposit funds or post other appropriate security for
its share of the Arbitrator's fee, in an amount and manner determined by the
Arbitrator, 10 days before the first day of hearing. Each party shall pay for
its own costs and attorneys' fees, if any. However, if any party prevails on a
statutory claim which affords the prevailing party attorneys' fees, or if there
is a written agreement providing for fees, the Arbitrator may award reasonable
fees to the prevailing party.
Judicial Review
Either party may bring an action in any court of competent jurisdiction
to compel arbitration under this Agreement and to enforce an arbitration award.
A party opposing enforcement of an award may not do so in an enforcement
proceeding, but must bring a separate action in any court of competent
jurisdiction to set aside the award, where the standard of review will be the
same as that applied by an appellate court reviewing a decision of a trial court
sitting without a jury.
B-3
<PAGE> 18
Interstate Commerce
I understand and agree that the Company is engaged in transactions
involving interstate commerce and that my employment involves such commerce.
Requirements for Modification or Revocation
This Agreement to arbitrate shall survive the termination of my
employment. It can only be revoked or modified by a writing signed by the
parties which specifically states an intent to revoke or modify this Agreement.
Sole and Entire Agreement
This is the complete agreement of the parties on the subject of
arbitration of disputes, except for any arbitration agreement in connection with
any pension or benefit plan. This Agreement supersedes any prior or
contemporaneous oral or written understanding on the subject. No party is
relying on any representations, oral or written, on the subject of the effect,
enforceability or meaning of this Agreement, except as specifically set forth in
this Agreement.
Construction
If any provision of this Agreement is adjudged to be void or otherwise
unenforceable, in whole or in part, such adjudication shall not affect the
validity of the remainder of the Agreement.
Consideration
The promises by the Company and by me to arbitrate differences, rather
than litigate them before courts or other bodies, provide consideration for each
other.
Employment Agreement
This Agreement is not, and shall not be construed to create, any
contract of employment, express or implied. Nor does this agreement in any way
alter the "at-will" status of my employment.
Voluntary Agreement
I ACKNOWLEDGE THAT I HAVE CAREFULLY READ THIS AGREEMENT, THAT I
UNDERSTAND ITS TERMS, THAT ALL UNDERSTANDINGS AND AGREEMENTS BETWEEN THE COMPANY
AND ME RELATING TO THE SUBJECTS COVERED IN THE AGREEMENT ARE CONTAINED IN IT,
AND THAT I HAVE ENTERED INTO THE AGREEMENT VOLUNTARILY AND NOT IN RELIANCE ON
ANY PROMISES OR REPRESENTATIONS BY THE COMPANY OTHER THAN THOSE CONTAINED IN
THIS AGREEMENT ITSELF.
B-4
<PAGE> 19
I FURTHER ACKNOWLEDGE THAT I HAVE BEEN GIVEN THE OPPORTUNITY TO DISCUSS
THIS AGREEMENT WITH MY PRIVATE LEGAL COUNSEL AND HAVE AVAILED MYSELF OF THAT
OPPORTUNITY TO THE EXTENT I WISH TO DO SO.
B-5
<PAGE> 1
EXHIBIT 10.12
JANET RENO
Attorney General
DEVAL L. PATRICK
Assistant Attorney General
PAUL F. HANCOCK
Chief, Housing and Civil
Enforcement Section
ALEXANDER C. ROSS
Special Litigation Counsel
JENNIFER C. CASS
GAVIN C. DOWELL
Trial Attorneys
U.S. Department of Justice
Civil Rights Division
P.O. Box 65998
Washington, DC 20035-5998
(202) 514-4713
Attorneys for Plaintiff
United States of America
RICHARD L. THORNBURGH
RONALD W. STEVENS
LAURENCE E. PLATT
THOMAS J. NOTO
Kirkpatrick & Lockhart LLP
Suite 200
1800 Massachusetts Avenue, N.W.
Washington, DC 20036-1800
(202) 778-9000
Attorneys for Defendant
Long Beach Mortgage Company
<PAGE> 2
IN THE UNITED STATES DISTRICT COURT
FOR THE CENTRAL DISTRICT OF CALIFORNIA
DIVISION
------------------
UNITED STATES OF AMERICA, CASE NO. CV-
Plaintiff, SETTLEMENT AGREEMENT
AND ORDER THEREON
v.
LONG BEACH MORTGAGE COMPANY,
Defendant.
The United States of America and Long Beach Mortgage Company have
agreed to enter into this Stipulated Order and Settlement Agreement
("Agreement") simultaneously with the filing by the United States of its
Complaint alleging violations of the Fair Housing Act (42 U.S.C. ss.
3601-3619) and the Equal Credit Opportunity Act (15 U.S.C. ss. 1691-1691f) by
Long Beach Bank FSB (the "Bank"), the predecessor in interest to Long Beach
Mortgage Company ("LBMC"), to resolve fully and finally all claims asserted, or
that could have been asserted, arising out of or relating to the matters
referred to in the Complaint.
I. INTRODUCTION
The Bank operated in what the lending industry calls the "B/C" credit
market (in which market LBMC currently operates), where borrowers, usually
because of their impaired credit, paid prices higher than for "A" residential
mortgage loans to compensate for increased risk to the lender ("B/C" residential
mortgage loans are hereafter referred to as "mortgage loans").
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<PAGE> 3
The Complaint alleges that during the period January 1991 through June 1994, the
Bank engaged in lending practices that constituted unlawful discrimination on
the basis of race, national origin, gender and age. The United States maintains
that evidence, including a statistical analysis, shows (1) that the Bank treated
African-American, Hispanic, female or older borrowers differently from younger,
white male borrowers by charging them higher prices for mortgage loans and (2)
that there is no non-discriminatory explanation for this difference in
treatment. The United States does not claim that the Bank discriminated in
charging borrowers a risk-related premium, but rather in the additional
discretionary amounts that were charged by its loan officer employees and its
wholesale brokers.
The Complaint alleges that a lender is responsible for discriminatory
loan prices in the entirety of its lending operations. The Complaint further
alleges that while "retail" loans were generated through employees of the Bank
and "wholesale" loans were generated through independent third-party mortgage
brokers, the Bank retained the right to determine whether to grant the loan and
to set the terms and conditions of financing, and any resulting credit was
extended by and in the name of the Bank.
LBMC denies all allegations in the Complaint and all claims made by the
United States of discrimination by the Bank. LBMC disputes the validity of the
statistical analysis relied upon by the United States as the principal basis for
its claims and
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<PAGE> 4
further maintains that the United States' theories of liability regarding
wholesale lending are legally unsupportable.
LBMC acknowledges that some borrowers may pay higher prices for
mortgage loans because of limited credit availability or lack of borrower
sophistication and knowledge of alternative credit sources. LBMC asserts that
these problems could be better addressed by intensive national efforts in
consumer education and industry-wide initiatives directed at employee and broker
education and training. Nevertheless, LBMC states that, whatever its differences
with the United States as to the characterization of past events, it shares the
goal of the United States of assuring that considerations such as race, national
origin, gender or age play no role whatsoever in the price of credit, and LBMC
is entering into this Agreement in order to further that goal.
The United States acknowledges that LBMC cooperated fully during the
United States' investigation of this matter. Moreover, LBMC is willing to
further the spirit of the fair lending laws by adopting creative remedies such
as taking a leadership role in the consumer education initiatives described in
this Agreement.
The United States recognizes the important role that consumer education
initiatives can have in complementing the remedial aspects of this Agreement
that directly address the violations alleged in the Complaint and the invaluable
service LBMC can provide by taking a leadership role in these endeavors. It also
commends LBMC for its willingness to commit substantial
4
<PAGE> 5
funds to an ambitious project that is designed to accomplish the objectives of
the fair lending laws.
II. RESOLUTION OF THE DISPUTE
The parties have agreed that to avoid costly litigation this
controversy should be resolved voluntarily. The parties have also agreed that
there should be no evidentiary hearing, trial or other adjudication on the
merits, and that entry of this Agreement is not to be construed as an admission
by LBMC of the validity of the claims asserted against it as successor in
interest to the Bank.
Now, therefore, on the basis of the foregoing, the United States and
LBMC agree, and the Court orders as follows:
III. GENERAL UNDERTAKING
1. LBMC, its officials, employees, and agents, as well as successors,
will not engage in any act or practice that discriminates on the basis of age,
sex, race or national origin in the pricing of mortgage loans as prohibited by
the Fair Housing Act (42 U.S.C. ss. 3601-3619) and the Equal Credit
Opportunity Act (15 U.S.C. ss. 1691-1691f). The parties agree that this
undertaking, and every other undertaking contained in this Agreement, shall be
enforceable by order of this Court upon application therefor by the United
States or LBMC, as the case may be. The party making such application shall have
the burden of proving its entitlement to the order sought.
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<PAGE> 6
IV. SPECIFIC UNDERTAKINGS
2. LBMC has formulated and agreed to implement the following measures
with respect to its retail mortgage lending operations to address the concerns
raised by the United States:
A. TRAINING FOR LBMC RETAIL PERSONNEL
3. Within ninety (90) days after the date of this Agreement, officers,
directors, and LBMC employees involved in retail mortgage loan pricing shall
complete a training course appropriate for the duties and responsibilities of
each such individual. The training courses shall include the following elements:
a. a detailed discussion of LBMC's responsibilities under
this Agreement;
b. a detailed discussion of the purpose of, and
prohibitions contained in, the Fair Housing Act and the
Equal Credit Opportunity Act;
c. a detailed discussion of individual and principal
liability for violations of the Fair Housing Act and
the Equal Credit Opportunity Act;
d. a detailed discussion of LBMC's policies regarding
discrimination, including the policy that it is
unlawful for LBMC personnel to make differing initial
price quotations on the basis of a loan applicant's
race, national origin, sex or age;
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<PAGE> 7
e. a detailed discussion regarding LBMC's disciplinary
policy regarding violations of the Fair Housing Act and
the Equal Credit Opportunity Act by employees; and
f. a detailed discussion of the applicability of fair
lending laws to mortgage loan pricing.
4. Commencing ninety (90) days after the date of this Agreement and
thereafter for the duration of this Agreement, new LBMC employees involved in
retail mortgage loan pricing shall complete the training course described in
Paragraph 3 of this section within thirty (30) days of employment with LBMC.
5. Each person required to complete a training course under Paragraphs 3
or 4 of this Agreement shall execute a form, which shall be maintained by LBMC,
acknowledging:
a. completion of the training course;
b. that they have received, read and understand LBMC's policies
regarding discrimination, including LBMC's disciplinary policy regarding
violations of the Fair Housing Act and the Equal Credit Opportunity Act;
c. that they understand that violations of the Fair Housing Act and the
Equal Credit Opportunity Act may subject them to individual liability, judicial
sanctions, and/or administrative sanctions; and
d. that they understand that violations of the Fair Housing Act and the
Equal Credit Opportunity Act may subject LBMC to liability, judicial sanctions,
and/or administrative sanctions.
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<PAGE> 8
B. ACCURATE RISK CLASSIFICATIONS
6. LBMC relies in part upon risk-based pricing in the pricing of its
mortgage loans. Insofar as LBMC desires to continue to utilize risk-based
pricing, LBMC shall use its best efforts to place mortgage loan applicants in
appropriate risk classifications based on objective credit and risk-related
criteria.
C. RETAIL MORTGAGE LOAN MONITORING SYSTEM
7. Within one hundred eighty (180) days of the date of this Agreement,
LBMC shall develop and implement a system by which it shall use a statistical
model to monitor retail mortgage loan prices on an ongoing basis and shall
submit a written description of the statistical model to the United States in
accordance with the terms and conditions of Appendix A, which is attached hereto
and incorporated herein by reference.
8. The parties understand and agree that, from time to time,
circumstances may require modification of the monitoring system consistent with
the requirements of Paragraph 7 of this Agreement. Any material modification of
the monitoring system shall be documented, and such documentation shall be
provided to the United States prior to implementation of any such changes.
9. LBMC's compliance personnel shall review the results of the monitoring
system on at least a quarterly basis. This quarterly review shall include both a
review of the prior quarter's loan activity and the cumulative loan activity of
LBMC
8
<PAGE> 9
from the date of implementation of the monitoring system. The compliance
personnel shall produce a written report no less often than quarterly
summarizing its findings related to its review of the monitoring system. A
special fair lending compliance committee ("Compliance Committee"), consisting
of senior management, shall review the quarterly findings of LBMC's compliance
personnel. The Compliance Committee shall also issue a quarterly written report
summarizing its review of the monitoring system. This report shall consist of:
a. a general report of LBMC's performance in the pricing of funded retail
mortgage loans to members of protected classes;
b. descriptive statistics of funded retail mortgage loan prices broken
down by age, sex, race and national origin. LBMC shall prepare
reasonable additional statistical analyses of the performance of LBMC
at the request of the United States if the United States deems them
necessary to measure compliance with the terms of this Agreement. If
the parties are unable to reach agreement on the nature of any
follow-up analyses to be conducted, the matter may be submitted to the
Court for resolution; and
c. the written reports of the compliance personnel as described in this
Paragraph.
10. If the retail monitoring system reveals material, unexplained pricing
disparities, the responsible person(s) will be appropriately counseled and
advised that if a material
9
<PAGE> 10
variance is found among loans in the calendar quarter following such counseling,
LBMC will take one or more of the following steps, as appropriate:
a. deduct from future commission payments price-related
commissions contributing to the material variance
during this period;
b. suspend or limit pricing flexibility by the responsible
person(s);
c. institute closer monitoring; and/or
d. suspend or discharge the employee(s) responsible for
the discriminatory conduct.
11. Nothing in this Agreement shall be interpreted to require LBMC, in
analyzing the results from its retail monitoring system, to compare retail
mortgage loans to wholesale mortgage loans or otherwise to compare prices paid
by borrowers who are not similarly situated.
V. CONSUMER EDUCATION PROGRAM
12. LBMC will contribute a total of one million dollars ($1,000,000) to
consumer education programs in conjunction with civil right groups. This amount
will be paid in three equal annual installments commencing ninety (90) days
after the date of this Agreement. A committee made up of representatives from
LBMC and from leading, national civil rights groups chosen by LBMC will
determine the recipients and specific allocation of the foregoing amount. The
consumer education campaign will include
10
<PAGE> 11
the distribution of informative pamphlets or other forms of literature and
sponsorship of educational workshops or forums focusing on:
a. the fact that different residential mortgage loan products carry
different prices, and that different sources may charge different
prices for essentially the same product, and that the same source may
charge different prices for the same product;
b. the importance of shopping among different providers of credit, and
questions to ask while shopping;
c. how to evaluate and compare the ultimate price of competing loan
products; and
d. options available for borrowers with impaired credit.
VI. POLICIES AND PRACTICES RELATED TO WHOLESALE MORTGAGE LOANS
A. EDUCATION OF MORTGAGE BROKERS
13. To promote the objectives of the fair lending laws, in connection with
its wholesale mortgage loan operations, LBMC shall inform all brokers
with which it has an existing contractual arrangement and all brokers
with whom it creates a contractual relationship for the duration of
this Agreement:
a. that LBMC will adhere to the Fair Housing Act and the Equal Credit
Opportunity Act in all aspects of the credit process including the
pricing of mortgage loans;
11
<PAGE> 12
b. that LBMC maintains loan underwriting standards designed to ensure
that loan applicants will be placed at the correct credit risk level
on a non-discriminatory basis;
c. that LBMC's wholesale price sheets reflect the price it seeks to
obtain for mortgage loans at each credit risk level and that the
wholesale broker may charge borrowers such additional amounts as may
be permitted by applicable law;
d. that LBMC reserves the right to reject the broker's proposal or make a
counteroffer when it believes the broker's proposed compensation and
costs are not permitted under the fair lending laws; and
e. that each wholesale broker must provide the proposed borrower with
such disclosures concerning broker compensation as may be required
under applicable law.
14. LBMC shall offer all wholesale brokers with whom it does mortgage loan
business the opportunity to undergo fair lending training similar to
the training described in Paragraphs 3b, 3c and 3d of this Agreement.
B. EXPANDED DOCUMENTATION FOR WHOLESALE LOANS
15. In the event that LBMC agrees to a mortgage broker's request for an
exception to the prices on wholesale mortgage loans set forth on LBMC's rate
sheet, LBMC will ensure that the
12
<PAGE> 13
non-discriminatory reasons for any such price exception is documented in the
loan file.
16. LBMC agrees that it will periodically review the results of its
wholesale lending operations for its compliance with fair lending laws. To the
extent LBMC prepares any statistical analyses or other reports constituting or
relating to such review, such analyses or reports shall be confidential
information and LBMC shall not be obligated to disclose such documents or
information, if any, to the United States or third parties. Furthermore, nothing
in this Agreement shall be interpreted to require LBMC to disclose the
identities of the wholesale brokers with whom it does business.
VII. MONETARY COMPENSATION
17. Within ninety (90) days of the date of this Agreement, LBMC shall
place three million dollars ($3,000,000) into a Long Beach Mortgage Company
Settlement Agreement Compensation Fund ("the Fund"). The Fund shall be
maintained in an interest-bearing account. The purpose of the Fund is to
compensate all those whom the United States alleges were injured by the Bank's
lending practices.
18. It is agreed and understood between the parties that the United States
shall have sole discretion to determine who is entitled to receive compensation
from the Fund. The United States has determined:
13
<PAGE> 14
a. two million dollars ($2,000,000) of the Fund shall be used to
reimburse retail borrowers, and one million dollars ($1,000,000) of
the Fund shall be used to reimburse wholesale borrowers;
b. there is a total of no more than twelve hundred (1,200) borrowers
entitled to reimbursement;
c. the payments provided under the terms of this Agreement shall be full
and adequate compensation to all retail and wholesale borrowers
identified by the United States as having been discriminated against.
19. Within thirty (30) days of the date of this Agreement, the United
States shall provide LBMC with a list of loan numbers for borrowers it believes
should receive compensation. The list shall designate the amount of compensation
payable in connection with each loan.
20. Using a notice in the form set forth in Attachment I ("Notice"), LBMC
shall notify by registered mail, return receipt requested to the last known
address as reflected in LBMC's records, all persons identified by the United
States pursuant to Paragraph 19 of the nature of the settlement and of their
right to receive compensation. The Notice will include a requirement that the
borrower respond within forty-five (45) days of the date of the Notice and
execute a general release, as set forth in Attachment II, of any claims related
to the mortgage loan at issue. LBMC will notify the United States of the names
and addresses of all persons from whom no return receipt has been received
within thirty (30) days of the mailing of the Notice,
14
<PAGE> 15
and the United States shall have an additional sixty (60) days to locate such
borrowers and provide them with a copy of the Notice.
21. If a timely response pursuant to Paragraph 20 is received, LBMC will
issue a check to the borrower, in the amount designated by the United States
pursuant to Paragraph 19, within ten (10) business days of the establishment of
the Fund or receipt of the executed release, whichever is later.
22. The cost of the mailings provided for in Paragraphs 20 and 21 of this
Agreement shall be paid by LBMC. All interest that accrues on the Fund shall be
paid to LBMC to help defray the costs of administering the Fund.
23. Any money left in the Fund after all disbursements to borrowers shall
be used to supplement the second installment of LBMC's contribution to the
consumer education program described in Paragraph 12.
VIII. RECORDKEEPING AND REPORTING REQUIREMENTS
24. For a period of three (3) years from the date of this Agreement, LBMC
agrees to retain all loan application files submitted for mortgage loans and all
loan-related documents and notices relevant to any pricing decisions. During
this period, upon reasonable notice from the United States, LBMC shall make
individual mortgage loan application files and related records available for
inspection and copying by the United States.
25. For a period of three (3) years from the date of this Agreement, LBMC
shall report its compliance with this Agreement
15
<PAGE> 16
to the Civil Rights Division of the United States Department of Justice
semi-annually.(1) The reports shall be submitted to the United States within
ninety (90) days after the last business day of LBMC's second and fourth fiscal
quarters. This reporting shall consist of the written reports of the compliance
personnel and the Compliance Committee as described in Paragraph 9.
XI. RETENTION OF JURISDICTION; MISCELLANEOUS
26. The Court shall retain jurisdiction over the parties and of this
matter for a period of three (3) years from the date this Agreement is entered
by the Court solely for the purpose of enforcing the terms of this Agreement (as
may be hereafter modified by the parties in writing). Except as otherwise
expressly set forth above, either party may object to any aspect of the
interpretation of, implementation of or compliance with this Agreement within
forty-five (45) days of learning of the objectionable aspect. Either party may
bring a matter to the Court for resolution only after the parties have
endeavored in good faith to resolve informally any difference relating to the
interpretation, implementation or compliance with this Agreement. The sole
remedy available to the United States with respect to
- ----------
(1) All notices, correspondence, reports, or documents required to be provided
to the United States shall be mailed to the following address:
Chief, Housing and Civil Enforcement Section
Civil Rights Division
U.S. Department of Justice
P.O. Box 65998
Washington, D.C. 20035
16
<PAGE> 17
any breach by LBMC of any provision of this Agreement, and any modification(s)
thereto, shall be an application to this Court to enforce this Agreement in
accordance with its terms, and in no event may the United States seek to pursue
any claim against LBMC that was or could have been asserted, or that arises out
of or relates to any of the matters referred to, in the Complaint. The United
States hereby agrees that at any time on or after the expiration of 180 days
from the entry of this Agreement by the Court, either party may seek, and shall
be entitled to obtain, an order from the Court dismissing the Complaint with
prejudice. This Agreement shall remain in effect for a period of three (3) years
from the date it is entered by the Court.
27. The terms of this Agreement shall be binding upon LBMC and its
successors.
28. This Agreement may be modified at any time by written agreement of the
parties, and without the need for any Court approval of any such modification.
Any and all such written modifications shall be considered to be part of this
Stipulated Order and Settlement Agreement.
29. For purposes of measuring time periods, the "date of" this Agreement
shall be deemed to be the date of its entry by the Court.
30. Each party to this litigation shall bear its own costs and attorneys'
fees.
It is so agreed by the parties and approved and ordered by the Court as
evidenced by their respective signatures on the attached page.
17
<PAGE> 18
SO ORDERED:
DICKRAN TEVRIZIAN Date: SEP 5, 1996
- ------------------------------ ------------------------------
UNITED STATES DISTRICT
COURT JUDGE
18
<PAGE> 19
Stipulated and agreed to this 3rd day of September, 1996.
FOR THE PLAINTIFF UNITED FOR DEFENDANT LONG BEACH
STATES OF AMERICA: MORTGAGE COMPANY:
/s/ ALEXANDER C. ROSS /s/ RONALD W. STEPHENS/TJN
- ------------------------------ ------------------------------
DEVAL L. PATRICK RICHARD L. THORNBURGH
Assistant Attorney General RONALD W. STEVENS
PAUL F. HANCOCK LAURENCE E. PLATT
Chief, Housing and Civil THOMAS J. NOTO
Enforcement Section Kirkpatrick & Lockhart LLP
ALEXANDER C. ROSS Suite 200
Special Litigation Counsel 1800 Massachusetts Ave., N.W.
JENNIFER C. CASS Washington, DC 20036-1800
GAVIN C. DOWELL (202) 778-9000
Trial Attorney
U.S. Department of Justice
Civil Rights Division
P.O. Box 65998
Washington, DC 20035-5998
(202) 514-4713
19
<PAGE> 20
APPENDIX A
----------
Pursuant to paragraph 7 of the Stipulated Order and Settlement Agreement,
LBMC will provide the United States with a written description of the
statistical model that it intends to use to monitor its retail mortgage loan
prices. LBMC will identify for the United States the variables that LBMC intends
to incorporate in this statistical model. The United States shall notify LBMC in
writing as soon as practicable of any objections it may have to any of the
variables identified by LBMC and the reasons for such objection. It is
understood and agreed that LBMC shall have no liability whatsoever to any person
or entity for any price disparities that are attributable to the good faith use
of any particular variable(s) prior to the date on which LBMC receives written
notification from the United States of its objection to the use of such
variable(s) and its reason(s) for such objection(s).
If the parties are unable to resolve the matter informally within the
thirty (30) day period following the date of LBMC's receipt of the United
States' written objection(s), the United States may petition the Court within
fifteen (15) days of the end of the aforesaid thirty (30)-day period for a
declaration that statistically significant price differences attributable solely
to any variable(s) to which it has objected in writing would violate the Equal
Credit Opportunity Act or the Fair Housing Act. Any findings of fact and law
necessary for such a declaration shall be made by the Court.
A-1
<PAGE> 21
In connection with any proceeding initiated by the United States to obtain
such a declaration, nothing contained in this Agreement shall be deemed to
constitute a waiver by either the United States or LBMC with respect to, or
otherwise estop either of them from presenting to the Court, any argument either
party may otherwise have regarding the validity of any variable or of any other
argument raised by the United States in support of any assertion that LBMC's
conduct with respect to the pricing of mortgage loans has resulted in a
purported violation of the Equal Credit Opportunity Act or the Fair Housing Act.
If and only if the United States both serves a written notice of
objection(s) to the use of any particular variable(s) upon LBMC and subsequently
petitions the Court for a declaration as aforesaid, then, in the event that the
Court rules in favor of the United States, LBMC shall be liable to any borrower
whose actual mortgage loan price materially exceeds the mortgage loan price
predicted for such borrower by a statistical model that does not include the
variable(s) found by the Court to be invalid and to have resulted in a violation
of the Equal Credit Opportunity Act or the Fair Housing Act ("out-of-pocket
expenses"). LBMC's liability to any such borrower shall be determined as of the
date that LBMC received written notice from the United States of its
objection(s) to the variable(s) at issue, and shall be limited to reimbursement
to the borrower(s) of his/her/their out-of-pocket expenses.
In the event that LBMC's use of a model that has been accepted by the
United States reveals that any borrower was
A-2
<PAGE> 22
discriminated against based on a prohibited factor, LBMC shall provide
compensation to such borrower equal to his/her/their actual out-of-pocket
expenses. The intent of the parties is to limit compensation in any and all
cases to actual out-of-pocket amounts paid by any borrower and the United States
agrees not to seek additional damages or penalties in connection with any such
material price differences; provided, however, that the United States may seek
additional damages or penalties if it can demonstrate that LBMC's continued use
of any variable to which the United States objected in writing and which is
subsequently found by the Court to be invalid and to have resulted in a
violation of the Equal Credit Opportunity Act or the Fair Housing Act, was done
in bad faith and without any reasonable basis for believing that such variable
could validly be used in the statistical model. In this respect, the fact that
LBMC continued to use any such variable(s) after receipt of written notice from
the United States of its objection(s) thereto shall not, of itself, be
sufficient to establish that LBMC's continued use of such variable was in bad
faith and/or unreasonable.
A-3
<PAGE> 23
ATTACHMENT I
FORM OF NOTICE
Dear :
-------
Long Beach Mortgage Company ("LBMC") is the successor in interest to Long
Beach Bank ("the Bank"). Our records indicate that during the period January
1991 through June 1994, you obtained a mortgage loan from the Bank (the "Loan").
LBMC and the United States Department of Justice ("United States") recently
settled a lawsuit in which the United States alleged that from January 1991
through June 1994, the policies and practices of the Bank resulted in certain
African American, Hispanic, female and older (persons over the age of 55)
customers paying a higher price on their mortgage loans than similarly situated
younger white male customers of the Bank.
We have denied those allegations and continue to assert that the Bank never
discriminated in its mortgage loan business. Nevertheless, we have agreed with
the government to voluntarily resolve this controversy, in part, through the
payment of money to those persons identified by the United States as allegedly
injured by these practices.
The terms of the settlement between the United States and LBMC are
incorporated in a Stipulated Order and Settlement Agreement ("Agreement") signed
by the parties and signed and approved by the United States District Court for
the Central District of California ("Court"), and which is available upon
written request from the Clerk of the Court at the following address:
[Address]
In addition to the establishment of a $3 million settlement fund ("Fund")
to be used to compensate 1,200 retail and wholesale borrowers, the Agreement
provides that, for a period of three years, LBMC will (1) not engage in any act
or practice that violates any federal fair lending law; (2) conduct training
courses for LBMC's existing and future employees involved in retail mortgage
loan pricing regarding LBMC's obligations under the Agreement, the purpose and
content of federal fair lending laws and LBMC's own policies prohibiting
violations of such laws; (3) use its best efforts to place mortgage loan
applicants in appropriate risk classifications based on objective credit and
risk-related criteria; (4) develop and implement a statistical model to monitor
retail mortgage loan prices on an ongoing basis, which model is subject to
review by the United States; (5) conduct a quarterly review of, and prepare
written reports
I-1
<PAGE> 24
regarding, the results of the retail monitoring system, and if such system
reveals material, unexplained pricing disparities, provide appropriate
counselling to the responsible persons and determine whether to take one or more
additional steps (reduction of commissions, suspension or limitation of pricing
flexibility by the responsible person, closer monitoring and/or suspension or
discharge of the responsible persons); (6) inform all wholesale brokers with
whom it has a contractual relationship that LBMC adheres to the fair lending
laws, will offer to provide training in such laws to brokers, seeks to ensure
that loan applicants are placed in the appropriate credit risk level on a
non-discriminatory basis, uses wholesale price sheets that reflect the price
LBMC seeks to obtain at each credit risk level and that wholesale brokers may
charge such additional amounts as may be permitted by applicable law, LBMC
reserves the right to reject a broker's proposal or make a counteroffer when it
believes the broker's proposed compensation and costs are not permitted under
the fair lending laws and that each broker must provide the proposed borrower
with all disclosures required by law; and (7) periodically review the results of
its wholesale lending operations for its compliance with fair lending laws.
Pursuant to the Court-approved Agreement, the government has determined
that you should receive a payment of $_______ in connection with your Loan. The
United States believes the money you are entitled to receive is full and
adequate compensation for your potential claim. If you desire to receive this
money, you must sign the General Release enclosed with this letter in which you
agree to accept this money in exchange for your full release of LBMC in
connection with the Loan. The release waives your right to sue for any claim you
might have arising out of or relating to the Loan. You must sign this release in
the presence of a notary public, and return the signed release to:
Long Beach Mortgage Company
1100 Town & Country Road
Suite 1100
Orange, California 92668
Attn: Consumer Relations Department
The signed and notarized release must be returned to the above address no later
than _____________, 1996 [forty-five (45) days after the date of this letter].
If LBMC receives the executed release by such date, LBMC will mail a check to
you, in the amount specified above, within ten (10) business days after the Fund
is established and receipt by LBMC of your fully executed release. The method of
delivery of the release is at your option but registered mail, return receipt
requested, is recommended.
I-2
<PAGE> 25
If you do not want to participate in this settlement, you may decline
to do so and thereby give up your right to receive money under the Agreement
while retaining the right to hire your own attorney and proceed on your own.
Sincerely,
I-3
<PAGE> 26
ATTACHMENT II
FORM OF
GENERAL RELEASE
STATE OF CALIFORNIA
COUNTY OF _____________
WHEREAS I/we, ______________________________________ and ____________
______________________ , understand that the United States
Department of Justice ("the United States") has conducted an investigation of
Long Beach Bank, FSB ("the Bank"), and has alleged that with respect to certain
mortgage loans originated during the period January 1, 1991, through June 30,
1994, the Bank violated provisions of the Fair Housing Act and the Equal Credit
Opportunity Act;
WHEREAS, I/we understand that the Bank and its successor in interest
Long Beach Mortgage Company ("LBMC") categorically deny that the Bank violated
any provisions of the Fair Housing Act or the Equal Credit Opportunity Act;
WHEREAS, I/we obtained a mortgage loan with the Bank between January
1, 1991 and June 30, 1994 (the "Loan");
WHEREAS, I/we understand that in order to avoid costly litigation,
LBMC and the United States have resolved the matter by entering into a
Stipulated Order and Settlement Agreement ("Agreement") that has been approved
by the United States District Court for the Central District of California
("Court"), and that I/we will be entitled to a payment from a Settlement Fund
("Fund") established pursuant to the Agreement provided that we execute the
General Release described below;
THEREFORE, I/we agree to the following:
In consideration of ____________________, to be paid to me/us out of
the Fund, I/we hereby agree, effective upon receipt of payment, to release and
forever discharge LBMC and its current, former, and future officers, directors,
employees, agents, parent companies, affiliates, predecessors, and successors
from any and all legal and equitable claims or causes of action, whether or not
known or suspected to exist as of the date of execution of this General Release,
that have been or might have been asserted by me/us or the United States, as of
the date of execution of this General Release, that arise out of or relate to
the Loan.
I/we understand that the payment to be made to me/us does not
constitute an admission by the Bank or LBMC of the
II-1
<PAGE> 27
validity of any claims made by me/us or by the United States on
our behalf.
I/we understand that there will be only one compensation payment even
though there may have been two or more co-applicants and that the
above-designated payment will be the sole and total compensation paid to us
arising out of the Loans.
I/we acknowledge that I/we understand and are waiving my/our right to
pursue my/our own legal action instead of accepting payment from the Fund.
With respect to any and all claims released hereby, the undersigned
stipulate and agree to expressly waive and relinquish, to the fullest extent
permitted by law, the provisions, rights, and benefits of ss. 1542 of the
California Civil Code, which provides:
A general release does not extend to claims which the creditor does
not know or suspect to exist in his favor at the time of executing the
release, which if known by him must have materially affected the
settlement with the debtor.
This General Release constitutes the entire agreement between LBMC and
me/us, without exception or exclusion.
I/we have read this General Release and understand the contents
hereof, and I/we execute this General Release of my/our own free act(s) and
deed(s).
Signed this ___________ day of ___________________ , 1996.
--------------------------------------
Borrower
--------------------------------------
Borrower
II-2
<PAGE> 28
On ___________________, 1996, before me personally appeared
____________________ and _________________, proved to me on the basis of
satisfactory evidence to be the person(s) whose name(s) is/are subscribed to the
within instrument and acknowledged to me that he/she/they executed the same.
WITNESS my hand and official seal.
--------------------------------------
Notary Public
(SEAL)
II-3
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration
Statement No. 333-22013 of Long Beach Financial Corporation on Form S-1 of our
report dated February 14, 1997, appearing in the Prospectus, which is part of
this Registration Statement.
We also consent to the reference to us under the headings "Selected
Consolidated Financial Data" and "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
- ----------------------------
Deloitte & Touche LLP
Costa Mesa, California
April 14, 1997
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement
No. 333-22013 of Long Beach Financial Corporation on Form S-1 of our report
dated February 16, 1997 on the financial statements of Long Beach Mortgage
Company Broker-Sourced Loan Division, appearing in the Prospectus, which is part
of this Registration Statement.
We also consent to the reference to us under the headings "Selected
Consolidated Financial Data" and "Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
- ---------------------------
Deloitte & Touche LLP
Costa Mesa, California
April 14, 1997
