<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 19, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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LONG BEACH FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
6162
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
33-0739843
(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)
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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)
------------------
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.
GIBSON, DUNN & CRUTCHER LLP
4 PARK PLAZA
IRVINE, CALIFORNIA 92614-8557
(714) 451-3800
BRUCE R. HALLETT, ESQ.
BROBECK, PHLEGER & HARRISON LLP
4675 MACARTHUR COURT, SUITE 1000
NEWPORT BEACH, CALIFORNIA 92660
(714) 752-7535
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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. [ ]
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================================================
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
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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.
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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 FEBRUARY 19, 1997
PROSPECTUS
[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"), which prior to the Reorganization (as defined below) operated
LBFC's broker-sourced mortgage loan business under the name "Long Beach Mortgage
Company." 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. LBFC has applied to have the Common Stock approved for quotation
on the Nasdaq National Market under the symbol "LBFC."
SEE "RISK FACTORS" ON PAGES 7 THROUGH 14 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
$ .
(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
<PAGE> 3
[ARTWORK]
<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>
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IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK OF
LBFC AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET.
SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
------------------------
<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
and the operations of the broker-sourced mortgage lending division of Old Long
Beach prior to the Reorganization, 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 under the name "Long Beach Mortgage Company." 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 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 default and
prepayment 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 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 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-." See "Business -- 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 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 Company's originations. The Company
maintains a close working relationship with brokers through its team of
approximately 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."
3
<PAGE> 5
The Company 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 (then operating as a division of
Long Beach Bank, F.S.B.) began to focus on expansion outside of California. To
facilitate this expansion, Long Beach Bank, F.S.B. surrendered its federal
thrift charter in October 1994 and began operating 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."
Substantially all of the loans originated by the Company while it operated
as a division of Old Long Beach are serviced by the servicing division of Old
Long Beach (the "Servicer"). The Servicer and the Company are entering into a
contract pursuant to which the Servicer will sub-service loans originated or
purchased by the Company following the Reorganization. The Servicer is one of
the largest and most experienced sub-prime mortgage servicers in the nation,
with a servicing portfolio of approximately $3.5 billion of sub-prime mortgage
loans at December 31, 1996. Since the servicing procedures of the 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 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 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
4
<PAGE> 6
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."
In connection with this Offering, 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 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 related benefits, which will be used after the Reorganization by a
wholly-owned subsidiary of LBFC 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. 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.
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
Proposed 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 this Offering, the Selling Stockholder (i.e., Old Long Beach), as
the sole stockholder of LBFC, owns 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."
5
<PAGE> 7
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 5,369
------- ------- ------- ----------
Total revenues......................................... 24,178 34,185 53,974 56,363
Expenses:
Compensation and employee benefits......................... 15,496 13,564 22,299 22,899
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 40,918
------- ------- ------- ----------
Income before provision for income taxes..................... 36 9,961 15,972 15,445
Provision for income taxes................................... 14 4,169 6,580 6,363
------- ------- ------- ----------
Net income................................................... $ 22 $ 5,792 $ 9,392 $ 9,082
======= ======= ======= ==========
Pro forma earnings per share(3).............................. $ .36
==========
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 40,000
Total assets....................................................................... 79,750 82,215
Warehouse financing facility....................................................... 72,829 --
Total liabilities.................................................................. 78,613 756
Stockholders' equity............................................................... 1,137 81,459
</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 number of loans(4)......... 43.2% 55.0% 69.2%
Average loan size....................................................... $ 122 $ 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 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................. 8.5% 10.4 9.6
Weighted average interest rate on fixed/adjustable loans................ 9.6 11.3 10.0
Weighted average initial combined loan-to-value ratio................... 69.9 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 $3.0 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.
6
<PAGE> 8
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.
FOCUS ON CREDIT IMPAIRED BORROWERS MAY RESULT IN INCREASED DELINQUENCY RATES,
FORECLOSURES AND LOSSES
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. 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.
IMPAIRMENT OF VALUE OF LOAN SERVICING RIGHTS; DECLINING INTEREST RATES
The Company records gains on sales of loans based in part on the fair value
of retained servicing rights related to such loans. The fair values of such
servicing rights are in turn based in part on projected loan prepayment and
credit loss rates. Higher than anticipated rates of loan prepayments or credit
losses may require the Company to write down the value of such servicing rights
and result in a material adverse impact on the Company's results of operations
and financial condition. Higher than anticipated rates of loan prepayments may
be caused by, among other factors, a material decline in the level of interest
rates.
RELIANCE ON SECONDARY PURCHASERS OF LOANS
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 relies almost entirely on proceeds from loan sales to generate cash for
repayment of borrowings under its $200 million secured revolving line of credit
(the "Warehouse Financing Facility"), which is used by the Company to originate
and purchase additional loans. 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.
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
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<PAGE> 9
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 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."
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's
subsidiary, which, after the Reorganization, will use the name "Long Beach
Mortgage Company" ("New Long Beach"), as a successor to Old Long Beach. Pursuant
to the settlement agreement, 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.
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.
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
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<PAGE> 10
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. See
"Business -- Department of Justice Settlement Agreement."
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 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 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,
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<PAGE> 11
particularly existing direct-sourced lenders which can draw upon existing branch
networks and personnel in seeking to sell products through independent brokers.
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.
Because Old Long Beach was the parent of the Company before the
Reorganization, Old Long Beach is 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 a typical competitor in the sub-prime mortgage loan
industry.
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 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.
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.
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. No assurances can be given, however,
that the Company will be able to effectively function as an independent entity.
See "-- Risk of Contracted Services" and "Certain Transactions."
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<PAGE> 12
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 Servicer (a division of Old
Long Beach) pursuant to which the Servicer will sub-service loans originated or
purchased by the Company after the Reorganization. If the Servicer fails to meet
the servicing performance criteria set forth in the loan purchase agreements,
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 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 Transactions."
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.
LOSS OF FUNDING SOURCES
The Company funds substantially all of the loans which it originates or
purchases through borrowings under the Warehouse Financing Facility. These
borrowings are in turn 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 pricing in the markets for the Company's loans, could have a
material adverse effect on the Company's results of operations and financial
condition. To the extent that the Company is not successful in maintaining or
replacing the Warehouse Financing Facility, 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. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Reorganization."
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.
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<PAGE> 13
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 such 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
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
such increased delinquencies, foreclosures or losses 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."
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<PAGE> 14
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
For income tax purposes LBFC intends to amortize over a 15-year period the
intangible assets acquired from Old Long Beach in the Reorganization. The
intangible assets acquired from Old Long Beach and the anticipated amortization
deductions arising therefrom will be reflected as a deferred income tax asset on
the opening consolidated statement of financial condition of LBFC at an
estimated value of $40 million. Certain provisions of the Internal Revenue Code
of 1986, as amended (the "Code"), could prevent or limit LBFC's ability to claim
amortization deductions attributable to the intangible assets acquired from Old
Long Beach. The $40 million estimated value of the deferred income tax asset
represents an amount that reflects the possible application of such limitations.
However, due to the uncertainty regarding the application of such Code
provisions and the extent to which such provisions could limit the ability of
LBFC to amortize the intangible assets acquired from Old Long Beach, there can
be no assurance as to the ultimate amount of the deferred income tax asset that
LBFC will realize. Any adjustments to increase or decrease the amount ascribed
to the intangible assets will be reflected as an adjustment to LBFC's paid in
capital. See "Reorganization."
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.
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 net
tangible book value of their equity investment in the Company. See "Dilution."
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.
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ANTI-TAKEOVER EFFECT OF DELAWARE LAW
The Company is a Delaware corporation and is subject to the anti-takeover
provisions of Section 203 of the Delaware General Corporation Law. In general,
Section 203 prevents an "interested stockholder" (defined generally as a person
owning 15% or more of the Company's outstanding voting stock) from engaging in a
"business combination" with the Company for three years following the date that
person became an interested stockholder unless the business combination is
approved in a prescribed manner. This statute could make it more difficult for a
third party to acquire control of the Company. See "Description of Capital
Stock -- Certain Provisions of Delaware Law."
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.
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<PAGE> 16
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, Long Beach Bank, F.S.B., voluntarily
surrendered its federal thrift charter in October 1994 and transferred the
broker-sourced business, along with its direct-sourced business and loan
servicing operations, to Old Long Beach, which prior to the Reorganization has
operated under the name "Long Beach Mortgage Company."
In the Reorganization, Old Long Beach is reorganizing its business
operations by transferring to LBFC the assets (including independent broker
lists, 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 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 related benefits and Old
Long Beach will no longer use the name in its business.
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. 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."
In 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 income tax purposes as a taxable sale of
assets. Consistent with this treatment, for income tax purposes LBFC intends to
amortize over a 15-year period the intangible assets acquired from Old Long
Beach. The intangible assets acquired from Old Long Beach and the anticipated
amortization deductions arising therefrom will be reflected as a deferred income
tax asset on the opening consolidated statement of financial condition of LBFC
at an estimated value of $40 million. However, certain provisions of the Code
could prevent or limit LBFC's ability to claim amortization deductions
attributable to the intangible assets acquired from Old Long Beach. See "Risk
Factors -- Income Tax Risk."
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 is obtaining the Warehouse Financing Facility. It is a condition
precedent to the Reorganization and the consummation of this Offering that the
Company obtain the Warehouse Financing Facility. See "Business -- Financing and
Sale of Loans -- Warehouse Financing Facility."
Old Long Beach has entered into a forward loan sale contract under which it
has committed to deliver loans, if any, that will be originated by the Company
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 forward whole loan sales contracts entered into
directly with the purchasers.
The corporate parent of Old Long Beach and the Company are entering into an
agreement allocating certain income tax liabilities. See "Certain
Transactions -- Tax Agreement."
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<PAGE> 17
Following the Reorganization, the Company will not 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 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 Transactions -- Administrative Services Agreements."
Following the Reorganization, the Servicer (a division of Old Long Beach)
will sub-service the loans originated or purchased by the Company. See
"Business -- Servicing" and "Certain Transactions -- Loan Subservicing
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 a specified period following the
Reorganization.
DIVIDENDS
The Company 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 $81.5 million, or $3.26 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 $7.74
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......... $3.26(1)
Increase per share attributable to sale of Common Stock............. --
-----
Pro forma net tangible book value per share after Offering................... 3.26(1)
------
Dilution per share to new investors.......................................... $ 7.74
======
</TABLE>
- ---------------
(1) Includes $1.60 per share attributable to the deferred income tax asset.
See "Reorganization" and "Unaudited Pro Forma Consolidated Financial Data."
16
<PAGE> 18
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...................................... -- 81,434
Retained Earnings............................................... -- --
-------- --------
Total Stockholders' Equity.............................. 1,137 81,459
-------- --------
Total Capitalization.................................... $ 1,137 $ 81,459
======== ========
</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."
17
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
The following table sets forth selected consolidated financial data at 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 5,369
------- ------- ------- ------- ------- ----------
Total revenues....................... 42,123 27,168 24,178 34,185 53,974 56,363
Expenses:
Selling, general and administrative......... 13,498 12,823 22,328 21,912 35,188 37,778
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 40,918
------- ------- ------- ------- ------- ----------
Income before provision for income taxes...... 23,067 11,892 36 9,961 15,972 15,445
Provision for income taxes.................... 12,182 6,280 14 4,169 6,580 6,363
------- ------- ------- ------- ------- ----------
Net income.................................... $10,885 $ 5,612 $ 22 $ 5,792 $ 9,392 $ 9,082
======= ======= ======= ======= ======= ==========
Pro forma earnings per share(3)............... $ .36
==========
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 40,000
Total assets.................................. 20,525 10,887 12,529 24,778 79,750 82,215
Warehouse financing facility.................. -- -- 11,483 20,613 72,829 --
Total liabilities............................. 20,765 11,014 13,391 23,046 78,613 756
Stockholders' equity (deficit)................ (240) (127) (862) 1,732 1,137 81,459
</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.
18
<PAGE> 20
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 Company's 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 financial statements reflect key assumptions regarding the allocation of
certain revenue and expense items and
19
<PAGE> 21
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.
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 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>
20
<PAGE> 22
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. This increase was due
primarily to increased commissions paid during 1996 to the sales force as a
result of the increased loan originations during the year as well as increased
staffing required to support the increase in loan origination and purchase
volume. During 1996, the Company's full time personnel increased to 338 from 175
at December 31, 1995.
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.
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>
21
<PAGE> 23
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
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 to allocate the total cost of loans to the mortgage servicing rights
and the loans based on their relative fair values. As a result, the Company will
recognize a greater amount of revenue at the time a loan is sold and a lesser
amount of revenue during the time that such loan is serviced.
Interest income remained unchanged during 1995 compared to 1994, which was
due to a reduction in the time period between the funding of loans and the
delivery of the loans to the whole loan purchasers, offset by an increase in the
differential between the interest rate on borrowings under the Company'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.
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 decrease was due to (i)
the elimination of several positions that were no longer required after October
1994 when the Company ceased to operate as a division of a thrift, and (ii) a
reduction in the Company's non-production work force in January 1995, partially
offset by an increase in the Company's sales force. The work force reduction was
made possible by the implementation of the Company's new computerized systems in
October 1994, which substantially improved processing efficiency.
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.
22
<PAGE> 24
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 interest rates on borrowings to
fund loans being 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 its 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 under its Warehouse Financing Facility. The Company enters into
forward loan sales 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 the Warehouse Financing Facility, 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.
After the Reorganization, the Company will have in place a $200 million
Warehouse Financing Facility with terms substantially similar to Old Long
Beach's revolving warehouse credit facility. 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 $25 million subline for
servicing advances, as well as principal and interest advances, 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 affirmative, negative and financial covenants
typical of such 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 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
23
<PAGE> 25
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.
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 operating needs and capital expenditures for
the next 12 months.
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 will adopt the new
requirements effective January 1, 1997. Upon implementation, the statement will
not have material impact on the financial statements of the Company.
24
<PAGE> 26
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 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 default and prepayment 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." 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 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-." See "-- Underwriting."
The Company has relationships with approximately 7,500 independent approved
mortgage brokers and 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 Company's originations. The
Company maintains a close working relationship with brokers through its sales
force of approximately 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 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 (then operating as a division of
Long Beach Bank, F.S.B.) began to focus on expansion outside of California. To
facilitate this expansion, Long Beach Bank, F.S.B. surrendered its federal
thrift charter in October 1994 and began operating 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
25
<PAGE> 27
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 are serviced by the Servicer. The Servicer and
the Company are entering into a contract pursuant to which the Servicer will
sub-service loans originated or purchased by the Company following the
Reorganization. The Servicer is one of the largest and most experienced
sub-prime mortgage servicers in the nation, with a servicing portfolio of
approximately $3.5 billion of sub-prime mortgage loans at December 31, 1996.
Since the servicing procedures of the 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 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, and 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 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.
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<PAGE> 28
- 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 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................................... 4,648 6,008 10,041
Average Principal Balance per Loan................ $ 122 $ 99 $ 105
Combined Weighted Average Loan-to-Value(1)(2)..... 69.9% 72.2% 75.0%
Weighted Average Fixed Interest Rate(1)(3)........ N/A 11.3 10.5
Weighted Average Adjustable Interest Rate(1)...... 8.5% 10.4 9.6
Weighted Average Fixed/Adjustable Interest
Rate(1)......................................... 9.6 11.3 10.0
Loans on Single Unit Properties(1)................ $514,956 $551,871 $1,004,398
Loans on Two to Four Unit Properties(1)........... 27,103 34,106 50,488
"A-" and "B+" Loans as a Percentage of Total
Loans(1)(4)..................................... 43.2% 55.0% 69.2%
</TABLE>
- ---------------
(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 $3.0 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.
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<PAGE> 29
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 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
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<PAGE> 30
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 products are
available at different interest rates and with different origination and
application points and fees depending on the particular borrower's risk
classification. 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.
The marketing department designs and produces all 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.
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<PAGE> 31
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 in order 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 on an expansion of the automation of its underwriting process in
order 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 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."
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.
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<PAGE> 32
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 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. Compensating factors may include,
but are not limited to, low loan-to-value ratios, low debt-to-income ratios,
good credit history, stable employment and time in residence at the borrower's
current address. In the year ended December 31, 1996, not more than fifteen
percent 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
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<PAGE> 33
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 prospective borrowers' income is
evaluated based on tax returns, W-2 forms and pay stubs), the limited income
documentation program (pursuant to which prospective borrowers' income is
evaluated based on bank statements and profit and loss statements), the stated
income program (pursuant to which prospective borrowers' employment, rather than
income, is verified) and the no ratio loan program (pursuant to which
prospective borrowers' 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 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")
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<PAGE> 34
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.
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<PAGE> 35
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.
34
<PAGE> 36
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 $3.0 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-............... $168,373,869 31.68% 7.97% 5.33% $207,152,082 43.11% 9.70% 5.80% $ 293,519,071
B+............... 59,494,151 11.20 8.01 5.29 42,810,928 8.91 10.13 5.84 67,306,298
B................ 36,429,036.. 6.85 8.58 5.60 42,050,074 8.75 10.50 6.29 51,769,516
B-............... 104,105,629.. 19.59 8.45 5.54 63,323,882 13.18 10.64 6.29 45,080,472
C................ 119,095,688.. 22.41 9.07 5.85 100,768,358 20.97 11.28 6.58 86,777,574
C-............... 43,931,734.. 8.27 10.01 6.20 24,378,019 5.08 12.33 6.87 22,001,379
------------ ------- ----- ----- ------------ ------- ----- ----- ------------
Totals......... $531,430,107 100.00% 8.52% 5.58% $480,483,343 100.00% 10.40% 6.13% $ 566,454,310
FIXED/ADJUSTABLE
RATE:
A-............... $ 5,564,740 52.35% 9.19% 4.96% $ 11,803,892 42.96% 10.61% 5.24% $ 70,948,782
B+............... 742,375 6.98 9.25 4.78 2,853,825 10.39 10.78 5.35 13,462,405
B................ 653,130 6.15 9.84 5.17 2,877,870 10.47 11.17 5.18 6,648,603
B-............... 1,567,175 14.74 9.85 4.98 3,921,375 14.27 11.57 5.58 1,987,247
C................ 1,700,500 16.00 10.89 5.71 4,826,445 17.56 12.53 5.74 3,521,179
C-............... 401,200 3.78 10.37 6.14 1,195,467 4.35 13.37 6.10 518,050
------------ ------- ----- ----- ------------ ------- ----- ----- ------------
Totals......... $ 10,629,120 100.00% 9.65% 5.13% $ 27,478,874 100.00% 11.28% 5.42% $ 97,086,266
ALL PRODUCTS
A-............... $173,938,609 32.09% $257,852,064 44.01% $ 596,259,664
B+............... 60,236,526 11.11 64,241,551 10.96 133,952,214
B................ 37,082,166 6.84 51,293,171 8.75 94,675,542
B-............... 105,672,804 19.49 71,604,042 12.22 75,766,468
C................ 120,796,188 22.29 115,192,480 19.66 129,892,624
C-............... 44,332,934 8.18 25,792,936 4.40 24,339,659
------------ ------- ------------ ------- ------------
Totals......... $542,059,227 100.00% $585,976,244 100.00% $1,054,886,171
<CAPTION>
1996
-----------------------------
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.
35
<PAGE> 37
FINANCING AND SALE OF LOANS
Warehouse Financing Facility
The Company finances its origination and purchase of loans primarily with
the proceeds of borrowings under its $200 million mortgage Warehouse Financing
Facility (which is being obtained in connection with the Reorganization).
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 $25 million subline for servicing advances, as well as
principal and interest advances, 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
affirmative, negative and financial covenants typical of such 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 balance
of the loan amount). 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. These
commitments are obtained through a competitive bidding process among four to
nine potential purchasers who in most cases have purchased loans from the
Company in the past. 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. The Company continuously
monitors its loan production and purchasing against its unfilled purchase
commitments to identify potential shortfalls or overages in whole loans
available for delivery. As loans are funded, the Company packages them and
delivers them to the purchaser on a periodic basis.
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
36
<PAGE> 38
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 but 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 whole 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 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. 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 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.
Because the Company will not have servicing capabilities after the
Reorganization, the loans originated by the Company will continue to be serviced
by the Servicer, a division of Old Long Beach, the Company's parent company
prior to the completion of this Offering.
37
<PAGE> 39
The Servicer is one of the largest and most experienced sub-prime mortgage
loan servicers in the nation, with a servicing portfolio of approximately $3.5
billion of sub-prime mortgage loans at December 31, 1996. Management of the
Company believes that the Servicer's success is due to the sub-prime experience
of the Servicer's management, the individualized attention the Servicer's loan
counselors pay to borrowers and the streamlined collection procedures the
Servicer has implemented. With nine years of experience in the sub-prime
mortgage loan servicing industry, the Servicer is one of the oldest established
sub-prime mortgage loan servicers in the industry. The 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 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 Servicer's collections
and the possibility of collection of certain high risk debt. In addition, the
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 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 Servicer under
which the Servicer will sub-service loans originated or purchased by the
Company. Sub-servicing will be provided by the Servicer at an agreed-upon rate
and 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 after 18 months upon six months' prior written notice to
the other party. The Company also has the right to terminate earlier in the
event of a material default by the Servicer. The Company may elect to conduct
its own servicing operations or select an alternate servicer following
termination or expiration of the agreement with the Servicer. See "Certain
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.
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
38
<PAGE> 40
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. (the predecessor in
interest to Old Long Beach) 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 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.
39
<PAGE> 41
Pursuant to the settlement agreement, New Long Beach, as a successor to Old
Long Beach, 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.
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.
EMPLOYEES
As of January 31, 1997, the Company had a total of 340 employees, one of
whom was a part-time employee and 339 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 the Company leases approximately 23,000
square feet of office space. The lease expires on May 14, 2001, and the Company
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 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.
The Company believes its facilities are both suitable and adequate for the
current business activities conducted at its corporate headquarters, 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, 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.
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
RESPA. 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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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, 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 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. 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) 40,000
40,000(3)
Prepaid expenses and other assets.................... 914 (732)(2) 182
------- -------- -------
Total assets............................... $79,750 $ 2,465 $82,215
======= ======== =======
Liabilities:
Warehouse financing facility......................... $72,829 $ (72,829)(2) $ --
Accounts payable and accrued liabilities............. 5,784 (5,028)(2) 756
------- -------- -------
Total liabilities.......................... 78,613 (77,857) 756
Stockholders' equity................................. 1,137 40,000(1) 81,459
322(2)
40,000(3)
------- -------- -------
Total liabilities and stockholders'
equity................................... $79,750 $ 2,465 $82,215
======= ======== =======
</TABLE>
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<PAGE> 43
<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 2,094(6) 5,369
------- -------- ----------
Total revenues................................ 53,974 2,389 56,363
Expenses:
Compensation and employee benefits................. 22,299 600(5) 22,899
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 2,916 40,918
Income before provision for income taxes.............. 15,972 (527) 15,445
Provision for income taxes............................ 6,580 (217)(8) 6,363
------- -------- ----------
Net income............................................ $ 9,392 $ (310) $ 9,082
======= ======== ==========
Pro forma earnings per share.......................... $ .36
==========
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, 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 interest income related to the inclusion of cash
proceeds received by the Company pursuant to the Reorganization. See
"Reorganization." The additional interest income was calculated using an
estimated return on United States treasury securities with one-year
maturities of 5.2%.
(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 the
Old Long Beach 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 the tax impact of the reduction in earnings related to the pro
forma adjustments to earnings before taxes as discussed above.
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<PAGE> 44
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
C. Stephen Mansfield............... 57 Director
</TABLE>
The Company intends to hire a Chief Financial Officer and General Counsel
prior to the completion of this Offering and to add two additional
non-management directors to the Board of Directors prior to or shortly 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.
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 three 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
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<PAGE> 45
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 Directors; M. Jack Mayesh is a Class II
Director; and C. Stephen Mansfield is a Class III Director. Two additional
non-management directors will be added to the Board of Directors prior to the
completion of this Offering or soon thereafter. One will be a Class I Director
and the other will be a Class II 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) and the two additional
non-management directors.
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 the three
non-management members of the Board of Directors.
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
All compensation paid prior to the Reorganization to Messrs. Mayesh,
Resendez and Curry, the Company's Chief Executive Officer, President and
Executive Vice President, respectively, was paid by Old Long Beach for services
rendered to Old Long Beach.
Following the Reorganization, the Company will pay compensation to its
Chief Executive Officer and its two other most highly compensated executive
officers pursuant to the terms of their respective employment agreements.
MANAGEMENT COMPENSATION AND EMPLOYMENT AGREEMENTS
The Company expects to enter into employment agreements with each of its
executive officers for a specified term. The employment agreements for Messrs.
Mayesh, Resendez and Curry will provide for an annual salary of not less than
$200,000 per year plus an annual bonus of up to 100% of base salary, specified
benefits and reimbursement of expenses. Under the employment agreements, each
executive officer is entitled
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<PAGE> 46
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 and a percentage of the
bonus to which such officer would have been entitled had he been employed the
entire year. The agreements require each officer to devote his best efforts to
the interests and business of the Company and contain noncompetition 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 at an exercise price equal
to the initial Offering price of the Common Stock. Such options will vest 20%
per year over five years.
The Company has no other employment agreements with any other officers or
employees.
1997 STOCK INCENTIVE PLAN
The Company has established the 1997 Stock Incentive Plan (the "Plan") to
enable directors, executive officers, independent contractors and other key
employees of the Company to participate in the ownership of the Company. The
Plan covers 3,000,000 shares of Common Stock. On the date of this Prospectus,
the Company granted options to acquire an aggregate of shares of
Common Stock to approximately officers and key employees. These options vest
20% each year thereafter until fully vested and 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 the Company and its
stockholders by using investment interests in the Company to attract, retain and
motivate its management and other persons, to encourage and reward their
contributions to the performance of the Company and to align their interests
with the interests of the Company's stockholders. The persons eligible to
receive an Award under the Plan include directors, officers, employees,
consultants, and advisors of the Company and its affiliated entities.
Administration, Amendment and Termination
The administering body for the Plan is the Compensation Committee. As long
as the Company 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 the Company'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
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<PAGE> 47
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
the Company 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 the Company 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
the Company, 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 the Company is reduced by reason of an extraordinary cash dividend, an
appropriate and 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 the Company
(as defined in the Plan), 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
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<PAGE> 48
to qualify as incentive stock options under the Code and granted to certain
holders of significant amounts of the Company'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 the Company for cause, 30 days in the case of
termination without cause, or six months after the termination of the
recipient's employment with the Company by reason of death, permanent disability
or normal retirement. The Committee may accelerate the vesting of any options
and may also extend the period following termination of employment with the
Company 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 Committee deems acceptable, including securities of
the Company surrendered by the Award holder or withheld from the shares
otherwise deliverable upon exercise. The Company 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 until after exercise and subsequent sale of the
underlying Common Stock. Consideration received by the Company 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 the Company and by the recipient or a
confirming memorandum issued by the Company 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 the Company, and the Plan shall not preclude the Company from establishing
any other forms of incentive or other compensation for employees, directors,
advisors or consultants of the Company, 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 the Company in any tax year with respect to
the Chief Executive Officer of the Company 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 the Company 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.
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<PAGE> 49
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.
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.
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<PAGE> 50
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.
Plan Amendment
The 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 effect 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 not be formed until promptly following 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 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 (or its
affiliate) 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, which at that time
will have an ownership interest in the Company of 13% or less, if any.
49
<PAGE> 51
The following is a summary of the principal arrangements and transactions
between the Company and Old Long Beach and its affiliates.
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, finance and accounting technical support,
information services and data processing functions. 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 $ per month for
the services that Old Long Beach provides under the administrative services
agreement. The administrative services agreement will have a one year term,
unless earlier terminated by the Company upon 60 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. Management
believes that the terms of the administrative services agreement are as
favorable to the Company as could be obtained from independent third parties.
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 and provide investor coordination and information
for the existing loan portfolio as well as new loan originations. The
administrative services agreement will have a term of one year, unless earlier
terminated by Old Long Beach upon 60 days' written notice. 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 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 Servicer
will sub-service all of the mortgage loans originated by the Company 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 Servicer a 45 basis point annual servicing fee on the declining
balance of each loan serviced.
The Servicer is required to pay all expenses related to the performance of
its duties under the Loan Sub-servicing Agreement. However, the Company will be
required to make advances on delinquent mortgage
50
<PAGE> 52
payments, taxes and required insurance premiums that are not collected from
borrowers with respect to any mortgage loan, only if the Servicer determines
that such advances are recoverable for the mortgagor, insurance proceeds or
other sources with respect to such mortgage loan.
The Company may terminate 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 Servicer's proper and timely performance of its duties
and obligations under the Loan Sub-Servicing Agreement. Either the Company or
the Servicer may terminate the Loan Sub-Servicing Agreement, without cause at
any time after 18 months upon six months' prior written notice to the other
party. Cancellation by the Servicer may be with respect to loan production after
the termination date or with respect to all loans sub-serviced by the Servicer.
With respect to mortgage loans securitized by the Company or the loan purchaser,
such termination is subject to the approval of the trustee and others for such
securities.
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 from interest earned on
tax and insurance impound funds.
TAX AGREEMENT
In connection with the Reorganization, the Company is entering into an
agreement (the "Tax Agreement") with Long Beach Financial Services Company ("Old
Long Beach Holdings"), a Delaware corporation and the sole stockholder of Old
Long Beach, for the purposes of (1) providing for filing certain tax returns,
(2) allocating certain tax liability and (3) establishing procedures for certain
audits and contests of tax liabilities.
Under the Tax Agreement, Old Long Beach Holdings will agree 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 the appropriate taxing authorities. To the extent that (1) there are
audit adjustments that result in a tax detriment to the Company or (2) the
Company incurs losses that are carried back to an earlier year and any such
adjustment described in (1) or loss described in (2) results in a tax benefit to
Old Long Beach Holdings or its affiliates, Old Long Beach Holdings will pay to
the Company an amount equal to the tax benefit as that benefit is realized. To
the extent there are audit adjustments that result in any tax detriment to Old
Long Beach Holdings or any of its affiliates with respect to any period ending
on or before the consummation of this Offering, and, as a result thereof, the
Company for any taxable period after the consummation of this Offering realizes
a tax benefit, the Company shall pay to Old Long Beach Holdings the amount of
such benefit at such time or times as the Company actually realizes such
benefit.
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 Tax Agreement, Old Long
Beach Holdings will indemnify the Company against any liability incurred by the
Company in connection with such audit.
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 controls all
other audits and administrative and judicial proceedings.
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.
51
<PAGE> 53
BENEFICIAL OWNERSHIP OF SECURITIES AND SELLING STOCKHOLDER
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of February 5, 1997, 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>
Long Beach Mortgage Company
(i.e., 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...................... -- -- -- -- --
C. Stephen Mansfield................ -- -- -- -- --
All Directors and Officers as a
Group (four 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) Old Long Beach is a wholly-owned subsidiary of Old Long Beach Holdings.
(4) Certain officers and directors of the Company are being offered the
opportunity to purchase shares of Common Stock at the Offering price. See
"Underwriting." 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."
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<PAGE> 54
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of (i) 25,000,000
shares of preferred stock, $.001 par value ("Preferred Stock"), and (ii)
150,000,000 shares of common stock, $.001 par value (the "Common Stock").
COMMON STOCK
As of the date hereof, there are 25,000,000 shares of Common Stock
outstanding. 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 the Company. 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 the Company'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
the Company 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.
The Company'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 the Company written notice of the nomination
at least 90 days before the meeting (or, if later, the seventh day after the
first public announcement of the date of such meeting), which notice must
contain specified information about the stockholder and the nominee.
The Company has applied to have the Common Stock approved for quotation on
the Nasdaq National Market under the symbol "LBFC."
PREFERRED STOCK
Pursuant to the Company'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 the Company's Common Stock. In the event of issuance, the
Preferred Stock could be utilized, under certain circumstances, as a way of
discouraging, delaying or preventing an acquisition or change in control of the
Company. The Company currently has no plans to issue any shares of its Preferred
Stock.
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<PAGE> 55
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
the Company's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with the Company for three years
following the date that person became an interested stockholder unless: (i)
before that person became an interested stockholder, the Board 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 the Company outstanding at the time the transaction
commenced (excluding stock held by directors who are also officers of the
Company and by employee stock plans that do not provide employees with the right
to determine confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer); or (iii) on or following the date on
which that person became an interested stockholder, the business combination is
approved by the Company's Board 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 the Company not owned by the interested stockholder.
Under Section 203, these restrictions also do not apply to certain business
combinations proposed by an interested stockholder following the announcement or
notification of one of certain extraordinary transactions involving the Company
and a person who was not an interested stockholder during the previous three
years or who became an interested stockholder with the approval of a majority of
the Company's directors, if that extraordinary transaction is approved or not
opposed by a majority of the directors (but not less than one) who were
directors before any person became an interested stockholder in the previous
three years or who were recommended for election or elected to succeed such
directors by a majority of such directors then in office.
Pursuant to Section 162 of the Delaware General Corporation Law, the Board
of Directors of the Company can, without stockholder approval, issue shares of
capital stock, which may have the effect of delaying, deferring or preventing a
change of control of the Company. The Company has no plan or arrangement for the
issuance of any shares of capital stock other than in the ordinary course
pursuant to the 1997 Stock Incentive Plan.
CERTAIN CHARTER AND BYLAW PROVISIONS
The Company'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.
The Company'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 the Company contains certain provisions
permitted under the Delaware General Corporation Law relating to the liability
of directors. These provisions eliminate the directors' liability for monetary
damages for a breach of fiduciary duty, except in certain circumstances
involving wrongful acts, including the breach of a director's duty of loyalty or
acts or omissions which involve intentional misconduct or a knowing violation of
a law. The Company's Certificate of Incorporation also contains provisions to
indemnify its directors and officers to the fullest extent permitted by the
Delaware General Corporation Law.
TRANSFER AGENT
The transfer agent and registrar for the Common Stock is
.
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<PAGE> 56
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company 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, the Company 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.
55
<PAGE> 57
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 % of the 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 Selling Stockholder has agreed to indemnify the Underwriters against
certain liabilities including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). The Selling Stockholder has been advised that in
the opinion of the Securities and Exchange Commission (the "Commission") such
56
<PAGE> 58
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, 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.
Prior to this Offering, there has been no public 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 Company has applied to have the Common Stock approved for quotation 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.
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.
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<PAGE> 59
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (File No. 333- ) 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.
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<PAGE> 60
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> 61
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> 62
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> 63
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 contributed 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. 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 Long Beach Mortgage
Company Broker-Sourced Loan Division as described above.
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 all of the mortgage loans originated by LBFC after the
Reorganization.
Tax Agreement -- In connection with the Reorganization, LBFC is entering
into an agreement (the "Tax Agreement") with Long Beach Financial Services
Company ("Old Long Beach Holdings"), the sole stockholder of Old Long Beach.
Under the Tax Agreement, Old Long Beach Holdings will agree to indemnify
and hold LBFC 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, LBFC will pay its tax liability directly to the
appropriate taxing authorities. To the extent that (1) there are audit
adjustments that result in a tax detriment
F-4
<PAGE> 64
to LBFC or (2) LBFC incurs losses that are carried back to an earlier year and
any such adjustment described in (1) or loss described in (2) results in a tax
benefit to Old Long Beach Holdings or its affiliates, Old Long Beach Holdings
will pay to LBFC an amount equal to the tax benefit as that benefit is realized.
To the extent there are audit adjustments that result in any tax detriment to
Old Long Beach Holdings or any of its affiliates with respect to any period
ending on or before the consummation of this Offering, and, as a result thereof,
LBFC for any taxable period after the consummation of this Offering realizes a
tax benefit, LBFC shall pay to Old Long Beach Holdings the amount of such
benefit at such time or times as LBFC actually realizes such benefit.
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> 65
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> 66
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> 67
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> 68
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> 69
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> 70
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.
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 year ended December 31, 1995.
The Company capitalized $9.2 million in mortgage servicing rights during the
F-11
<PAGE> 71
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, 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> 72
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 to the Company by Old Long Beach
and its related accrued interest. 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 Old Long Beach voluntarily surrendering its federal thrift
charter and the concurrent establishment of the warehouse financing
facility (see Note 5) in October 1994, interest expense was recorded as if
Old Long Beach provided warehouse financing bearing interest at a rate
equal to its internal cost of funds.
F-13
<PAGE> 73
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
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 facility contains certain covenants such as minimum net worth,
restrictions on asset acquisitions and leverage ratio requirements. Old Long
Beach was in compliance with all covenants at December 31, 1995 and 1996.
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> 74
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.
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.
F-15
<PAGE> 75
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 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 by the Company 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. (the predecessor in
interest to Old Long Beach) 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 Reorganization, the Company is
not assuming any liabilities that may arise out of any lending activities of Old
Long Beach, including liabilities related to the broker-sourced mortgage loan
operations, nor is the Company
F-16
<PAGE> 76
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
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.
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
F-17
<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
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 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
F-18
<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
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 all of the mortgage loans
originated by the Company after the Reorganization.
Tax Agreement -- In connection with the Reorganization, the Company is
entering into an agreement (the "Tax Agreement") with Long Beach Financial
Services Company ("Old Long Beach Holdings"), the sole stockholder of Old Long
Beach.
Under the Tax Agreement, Old Long Beach Holdings will agree 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. To the extent that (1) there are
audit adjustments that result in a tax detriment to the Company or (2) the
Company incurs losses that are carried back to an earlier year and any such
adjustment described in (1) or loss described in (2) results in a tax benefit to
Old Long Beach Holdings or its affiliates, Old Long Beach Holdings will pay to
the Company an amount equal to the tax benefit as that benefit is realized. To
the extent there are audit adjustments that result in any tax detriment to Old
Long Beach Holdings or any of its affiliates with respect to any period ending
on or before the consummation of the Offering, and, as a result thereof, the
Company for any taxable period after the consummation of the Offering realizes a
tax benefit, the Company shall pay to Old Long Beach Holdings the amount of such
benefit at such time or times as the Company actually realizes such benefit.
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> 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
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> 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
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> 81
======================================================
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.............................. 7
Reorganization............................ 15
Dividends................................. 16
Dilution.................................. 16
Capitalization............................ 17
Selected Consolidated Financial Data...... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.............................. 19
Business.................................. 25
Unaudited Pro Forma Consolidated Financial
Data.................................... 41
Management................................ 43
Certain Transactions...................... 49
Beneficial Ownership of Securities and
Selling Stockholder..................... 52
Description of Capital Stock.............. 53
Shares Eligible for Future Sale........... 55
Underwriting.............................. 56
Legal Matters............................. 57
Experts................................... 57
Available Information..................... 58
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 OFFERING HEREBY, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
21,750,000 SHARES
LONG BEACH FINANCIAL
CORPORATION
COMMON STOCK
-----------------
PROSPECTUS
-----------------
FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.
, 1997
======================================================
<PAGE> 82
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The estimated expenses in connection with the offering 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................................................ *
Printing Expenses................................................. *
Legal Fees and Expenses........................................... *
Transfer Agent and Registrar Fees................................. *
Accounting Fees and Expenses...................................... *
Blue Sky Fees and Expenses........................................ *
Miscellaneous Expenses............................................ *
--------
Total................................................... $ *
========
</TABLE>
- ---------------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
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
II-1
<PAGE> 83
capacity or arising out of his or her status as such, whether or not the
corporation would have the power to indemnify him or her against such
liabilities under Section 145.
As permitted by Section 102(b)(7) of the GCL, the Company's Certificate of
Incorporation provides that a director shall not be liable to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director.
However, such provision does not eliminate or limit the liability of a director
for acts or omissions not in good faith or for breaching his or her duty of
loyalty, engaging in intentional misconduct or knowingly violating a law, paying
a dividend or approving a stock repurchase which was illegal, or obtaining an
improper personal benefit. A provision of this type has no effect on the
availability of equitable remedies, such as injunction or rescission, for breach
of fiduciary duty.
The Company's 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.
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 has entered 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
II-2
<PAGE> 84
attorneys' fees), judgments, fines and amounts paid in settlement of such
action, suit or proceeding. The 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. 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
may be permitted to directors, officers and controlling persons of the Company
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Commission such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Company of expenses incurred or paid
by a director, officer or controlling person of the Company in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been settled
by controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Company issued one share of its common stock to Long Beach Mortgage
Company ("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> 85
ITEM 16. EXHIBITS.
(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
*5.1 Opinion of Gibson, Dunn & Crutcher LLP
*5.2 Opinion of Gibson, Dunn & Crutcher LLP
*10.1 Form of Administrative Services Agreement, between Long Beach Mortgage Company and
Long Beach Financial Corporation
*10.2 Form of Administrative Services Agreement, between Long Beach Mortgage Company and
Long Beach Financial Corporation
*10.3 Form of Loan Sub-Servicing Agreement, between Long Beach Mortgage Company and Long
Beach Financial Corporation
*10.4 Form of Warehouse Financing Facility, among Long Beach Financial Corporation and
Texas Commerce Bank, as Agent
*10.5 Form of Tax Sharing Agreement, between Long Beach Financial Corporation and Long
Beach Financial Services Corporation
10.6 1997 Stock Incentive Plan
*10.7 Form of Employment Agreement, between Long Beach Financial Corporation and certain
executive officers
*10.8 Contribution and Assumption Agreement, dated , between Long Beach
Financial Corporation and Long Beach Mortgage Company
*10.9 Contribution and Assumption Agreement, dated , between Long Beach
Financial Corporation and Ameriquest Mortgage Corporation
*10.10 Department of Justice Settlement Agreement, dated September 3, 1996
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)
24.1 Power of Attorney (included on signature page)
27 Financial Data Schedule
</TABLE>
- ---------------
* 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> 86
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> 87
SIGNATURES AND POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Orange, State of
California, on February 19, 1997.
LONG BEACH FINANCIAL CORPORATION
By: /s/ M. JACK MAYESH
--------------------------------------
M. Jack Mayesh
Chairman of the Board of Directors
and Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints M. Jack Mayesh and Edward Resendez his
true and lawful attorneys-in-fact and agents, each with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments to this Registration
Statement, and to file the same, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or their substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ------------------------------- ------------------
<S> <C> <C>
/s/ M. JACK MAYESH Chairman of the Board of February 19, 1997
- ------------------------------------------ Directors and Chief Executive
M. Jack Mayesh Officer (Principal Executive
Officer)
/s/ BRETT ATKINSON Controller February 19, 1997
- ------------------------------------------ (Principal Financial and
Brett Atkinson Accounting Officer)
/s/ EDWARD RESENDEZ President, Director February 19, 1997
- ------------------------------------------
Edward Resendez
/s/ C. STEPHEN MANSFIELD Director February 19, 1997
- ------------------------------------------
C. Stephen Mansfield
</TABLE>
II-6
<PAGE> 88
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...............................
*5.1 Opinion of Gibson, Dunn & Crutcher LLP...................................
*5.2 Opinion of Gibson, Dunn & Crutcher LLP...................................
*10.1 Form of Administrative Services Agreement, between Long Beach Mortgage
Company and Long Beach Financial Corporation.............................
*10.2 Form of Administrative Services Agreement, between Long Beach Mortgage
Company and Long Beach Financial Corporation.............................
*10.3 Form of Loan Sub-Servicing Agreement, between Long Beach Mortgage Company
and Long Beach Financial Corporation.....................................
*10.4 Form of Warehouse Financing Facility, among Long Beach Financial
Corporation and Texas Commerce Bank, as Agent............................
*10.5 Form of Tax Sharing Agreement, between Long Beach Financial Corporation
and Long Beach Financial Services Corporation............................
10.6 1997 Stock Incentive Plan................................................
*10.7 Form of Employment Agreement, between Long Beach Financial Corporation
and certain executive officers...........................................
*10.8 Contribution and Assumption Agreement, dated , between Long
Beach Financial Corporation and Long Beach Mortgage Company..............
*10.9 Contribution and Assumption Agreement, dated , between Long
Beach Financial Corporation and Ameriquest Mortgage Corporation..........
*10.10 Department of Justice Settlement Agreement, dated September 3, 1996......
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).........
24.1 Power of Attorney (included on signature page)...........................
27 Financial Data Schedule..................................................
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
Exhibit 3.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
LONG BEACH FINANCIAL CORPORATION
The undersigned Corporation does hereby certify as follows:
1. The name of the Corporation is Long Beach Financial Corporation, the
name under which it was originally incorporated.
2. The original Certificate of Incorporation of the Corporation was
filed in the Office of the Secretary of State of the State of Delaware on
January 30, 1997.
3. This Amended and Restated Certificate of Incorporation has been duly
adopted in accordance with Sections 242 and 245 of the General Corporation Law
of the State of Delaware.
4. The text of the Certificate of Incorporation of the Corporation is
hereby amended and restated in its entirety as follows:
ARTICLE I
NAME OF CORPORATION
The name of this Corporation is Long Beach Financial Corporation.
ARTICLE II
REGISTERED OFFICE
The address of the registered office of the Corporation in the State of
Delaware is at National Registered Agents, Inc., 9 East Loockerman Street, in
the City of Dover 19901, County of Kent, and the name of its registered agent at
that address is National Registered Agents, Inc.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
<PAGE> 2
ARTICLE IV
AUTHORIZED CAPITAL STOCK
SECTION 1. Number of Authorized Shares. The Corporation shall be
authorized to issue two classes of shares of stock to be designated,
respectively, "Common Stock" and "Preferred Stock." The total number of shares
which the Corporation shall have authority to issue is one-hundred-seventy-five
million (175,000,000); the total number of shares of common stock shall be
one-hundred-fifty million (150,000,000) and each such share shall have a par
value of $.001 (the "Common Stock"); the total number of shares of preferred
stock shall be twenty-five million (25,000,000) and each such share shall have a
par value of $.001 (the "Preferred Stock").
SECTION 2. Common Stock. The Board of Directors of the Corporation may
authorize the issuance of shares of Common Stock from time to time. Shares of
Common Stock that are redeemed, purchased or otherwise acquired by the
Corporation may be reissued except as otherwise provided by law.
SECTION 3. Preferred Stock. The Board of Directors of the Corporation
may by resolution authorize the issuance of shares of Preferred Stock from time
to time in one or more series. Shares of Preferred Stock that are redeemed,
purchased or otherwise acquired by the Corporation may be reissued except as
otherwise provided by law. The Board of Directors is hereby authorized to fix or
alter the designations, powers and preferences, and relative, participating,
optional or other rights, if any, and qualifications, limitations or
restrictions thereof, including, without limitation, dividend rights (and
whether dividends are cumulative), conversion rights, if any, voting rights
(including the number of votes, if any, per share, as well as the number of
members, if any, of the Board of Directors or the percentage of members, if any,
of the Board of Directors each class or series of Preferred Stock may be
entitled to elect), rights and terms of redemption (including sinking fund
provisions, if any), redemption price and liquidation preferences of any wholly
unissued series of Preferred Stock, and the number of shares constituting any
such series and the designation thereof, and to increase or decrease the number
of shares of any such series subsequent to the issuance of shares of such
series, but not below the number of shares of such series then outstanding.
SECTION 4. Dividends and Distributions. Subject to the preferences
applicable to Preferred Stock outstanding at any time, the holders of shares of
Common Stock shall be entitled to receive such dividends, payable in cash or
otherwise, as may be declared thereon by the Board of Directors from time to
time out of assets or funds of the Corporation legally available therefor.
SECTION 5. Voting Rights. Each share of Common Stock shall entitle the
holder thereof to one vote on all matters submitted to a vote of the
stockholders of the Corporation.
SECTION 6. Distributions Upon Liquidation. In the event of any
dissolution, liquidation or winding up of the affairs of the Corporation in
accordance with applicable
2
<PAGE> 3
law, whether voluntary or involuntary, after payment or provision for payment of
the debts and other liabilities of the Corporation, the holders of each series
of Preferred Stock, if any, shall be entitled to receive, out of the net assets
of the Corporation, an amount for each share of such series of Preferred Stock
equal to the amount fixed and determined by the Board of Directors in the
resolution or resolutions creating such series and providing for the issuance of
such shares, plus an amount equal to all dividends accrued and unpaid on shares
of such series to the date fixed for distribution, and no more, before any of
the assets of the Corporation shall be distributed or paid over to the holders
of Common Stock. After payment in full of said amounts to the holders of
Preferred Stock of all series, the remaining assets and funds of the Corporation
shall be divided among and paid to the holders of shares of Common Stock (and
any series of Preferred Stock having rights to participate with the holders of
Common Stock in any such distribution) on a pro rata basis in accordance with
their respective interests. If, upon such dissolution, liquidation or winding
up, the assets of the Corporation distributable as aforesaid among the holders
of Preferred Stock of all series shall be insufficient to permit full payment to
them of said preferential amounts, then such assets shall be distributed ratably
among such holders of Preferred Stock in proportion to the respective total
amounts that they shall be entitled to receive as provided in this Section 6
(unless such series are, by their terms, entitled to different distribution
preferences).
ARTICLE V
MEETINGS OF STOCKHOLDERS
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in Delaware General Corporation Law) outside
the State of Delaware at such place or places as may be designated from time to
time by the Board of Directors or in the Bylaws of the Corporation.
ARTICLE VI
NUMBER AND ELECTION OF DIRECTORS
The number of directors of the Corporation shall be fixed from time to
time by or in the manner provided in the Bylaws of the Corporation or amendment
thereof duly adopted by the Board of Directors or by the stockholders of the
Corporation. Elections of directors need not be by written ballot unless the
Bylaws of the Corporation shall so provide.
ARTICLE VII
NO STOCKHOLDER ACTION BY WRITTEN CONSENT
No action, which has not been previously approved by the Board of
Directors, shall be taken by the stockholders except at an annual meeting or a
special meeting of the stockholders.
3
<PAGE> 4
ARTICLE VIII
LIABILITY AND INDEMNIFICATION
To the fullest extent permitted by the Delaware General Corporation
Law, as the same exists or may hereafter be amended (provided that the effect of
any such amendment shall be prospective only) (the "Delaware Law"), a director
of the Corporation shall not be liable to the Corporation or its stockholders
for monetary damages for breach of his or her fiduciary duty as a director. The
Corporation shall indemnify, in the manner and to the fullest extent permitted
by the Delaware Law (but in the case of any such amendment, only to the extent
that such amendment permits the Corporation to provide broader indemnification
rights than permitted prior thereto), any person (or the estate of any person)
who is or was a party to, or is threatened to be made a party to, any
threatened, pending or completed action, suit or proceeding, whether or not by
or in the right of the Corporation, and whether civil, criminal, administrative,
investigative or otherwise, by reason of the fact that such person is or was a
director or officer of the Corporation, or is or was serving at the request of
the Corporation as a director or officer of another corporation, partnership,
joint venture, trust or other enterprise. The Corporation may, to the fullest
extent permitted by the Delaware Law, purchase and maintain insurance on behalf
of any such person against any liability which may be asserted against such
person. The Corporation may create a trust fund, grant a security interest or
use other means (including without limitation a letter of credit) to ensure the
payment of such sums as may become necessary or desirable to effect the
indemnification as provided herein. To the fullest extent permitted by the
Delaware Law, the indemnification provided herein shall include expenses as
incurred (including attorneys' fees), judgments, fines and amounts paid in
settlement and any such expenses shall be paid by the Corporation in advance of
the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of the person seeking indemnification to repay such
amounts if it is ultimately determined that he or she is not entitled to be
indemnified. Notwithstanding the foregoing or any other provision of this
Article, no advance shall be made by the Corporation if a determination is
reasonably and promptly made by the Board 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 Corporation, that, based upon the facts known to the Board 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
Corporation 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 this Article VIII. The indemnification provided herein shall not
be deemed to limit the right of the Corporation to indemnify any other person
for any such expenses to the fullest extent permitted by the Delaware Law, nor
shall it be deemed exclusive of any other rights to which any person seeking
indemnification from the Corporation may be entitled under any agreement, the
Corporation's Bylaws, vote of stockholders or disinterested directors, or
otherwise, both as to action in such person's official capacity and as to action
in another capacity while holding such office. The Corporation may, but only to
the extent that the Board of Directors may (but shall not be obligated to)
authorize
4
<PAGE> 5
from time to time, grant rights to indemnification and to the advancement of
expenses to any employee or agent of the Corporation to the fullest extent of
the provisions of this Article VIII as it applies to the indemnification and
advancement of expenses of directors and officers of the Corporation.
ARTICLE IX
AMENDMENT OF CORPORATE DOCUMENTS
SECTION 1. Certificate of Incorporation. The Corporation reserves the
right to alter, amend, repeal or rescind any provision contained in this
Certificate of Incorporation in any manner now or hereafter prescribed by law,
and all rights conferred on stockholders herein are granted subject to this
reservation, provided, however, that in the case of an amendment of this Article
IX, such amendment will require an affirmative vote of not less than sixty-six
and two-thirds percent (66 2/3%) of the total voting power of all outstanding
shares of voting stock of the Corporation.
SECTION 2. Bylaws. In furtherance and not in limitation of the powers
conferred by statute, the Board of Directors is expressly authorized to make,
repeal, alter, amend, and rescind the Bylaws of the Corporation. Bylaws shall
not be made, repealed, altered, amended or rescinded by the Stockholders of the
Corporation, except by an affirmative vote of not less than sixty-six and
two-thirds percent (66 2/3%) of the total voting power of all outstanding shares
of voting stock of the Corporation.
ARTICLE X
CREDITOR COMPROMISE OR ARRANGEMENT
Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders, of this Corporation, as the case may be,
and also on this Corporation.
5
<PAGE> 6
IN WITNESS WHEREOF, the undersigned Corporation has executed this
Amended and Restated Certificate of Incorporation as of February 12, 1997
LONG BEACH FINANCIAL CORPORATION
By:_________________________________
M. Jack Mayesh, Chairman of the Board
of Directors
ATTEST:
_________________________________
Edward Resendez, President
6
<PAGE> 1
Exhibit 3.2
LONG BEACH FINANCIAL CORPORATION
A DELAWARE CORPORATION
BYLAWS
Restated February 18, 1997
ARTICLE I: OFFICES
SECTION 1.1 Registered Office. The registered office of LONG BEACH
FINANCIAL CORPORATION (the "Corporation") shall be at National Registered
Agents, Inc., 9 East Loockerman Street, in the City of Dover 19901, County of
Kent, and the name of its registered agent at that address is National
Registered Agents, Inc.
SECTION 1.2 Principal Office. The principal office for the
transaction of the business of the Corporation shall be at 1100 Town & Country
Road, Suite 900, Orange, CA 92868 or otherwise as set forth in a resolution
adopted by the Board.
SECTION 1.3 Other Offices. The Corporation may also have an office
or offices at such other place or places, either within or without the State of
Delaware, as the Board may from time to time determine or as the business of the
Corporation may require.
ARTICLE II: MEETINGS OF STOCKHOLDERS
SECTION 2.1 Place of Meetings. All annual meetings of stockholders
and all other meetings of stockholders shall be held either at the principal
office of the Corporation or at any other place within or without the State of
Delaware that may be designated by the Board pursuant to authority hereinafter
granted to the Board.
SECTION 2.2 Annual Meetings. Annual meetings of stockholders of the
Corporation for the purpose of electing directors and for the transaction of
such other business as may properly come before such meetings may be held at
such time and place and on such date as the Board shall determine by resolution.
SECTION 2.3 Special Meetings. A special meeting of the stockholders
for the transaction of any proper business may be called at any time exclusively
by the Board or the Chairman.
SECTION 2.4 Notice of Meetings. Except as otherwise required by law,
notice of each meeting of stockholders, whether annual or special, shall be
given not less than ten (10) days nor more than sixty (60) days before the date
of the meeting to each stockholder of record entitled to vote at such meeting by
delivering a typewritten or
<PAGE> 2
printed notice thereof to such stockholder personally, or by depositing such
notice in the United States mail, in a postage prepaid envelope, directed to
such stockholder at such stockholder's post office address furnished by such
stockholder to the Secretary of the Corporation for such purpose, or, if such
stockholder shall not have furnished an address to the Secretary for such
purpose, then at such stockholder's post office address last known to the
Secretary, or by transmitting a notice thereof to such stockholder at such
address by telegraph, cable, wireless or facsimile. Except as otherwise
expressly required by law, no publication of any notice of a meeting of
stockholders shall be required. Every notice of a meeting of stockholders shall
state the place, date and hour of the meeting and, in the case of a special
meeting, shall also state the purpose for which the meeting is called. Notice of
any meeting of stockholders shall not be required to be given to any stockholder
to whom notice may be omitted pursuant to applicable Delaware law or who shall
have waived such notice, and such notice shall be deemed waived by any
stockholder who shall attend such meeting in person or by proxy, except a
stockholder who shall attend such meeting for the express purpose of objecting,
at the beginning of the meeting, to the transaction of any business because the
meeting is not lawfully called or convened. Except as otherwise expressly
required by law, notice of any adjourned meeting of stockholders need not be
given if the time and place thereof are announced at the meeting at which the
adjournment is taken.
SECTION 2.5 Fixing Date for Determination of Stockholders of Record.
In order that the Corporation may determine the stockholders entitled to notice
of or to vote at any meeting of stockholders or any adjournment thereof, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any other
change, conversion or exchange of stock or for the purpose of any other lawful
action other than to consent to corporate action in writing without a meeting,
the Board may fix, in advance, a record date, which shall not be more than sixty
(60) nor less than ten (10) days before the date of such meeting, nor more than
sixty (60) days prior to any such other action. If in any case involving the
determination of stockholders for any purpose other than notice of or voting at
a meeting of stockholders the Board shall not fix such a record date, then the
record date for determining stockholders for such purpose shall be the close of
business on the day on which the Board shall adopt the resolution relating
thereto. A determination of stockholders entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of such meeting;
provided, however, that the Board may fix a new record date for the adjourned
meeting.
SECTION 2.6 Quorum. Except as otherwise required by law, the holders
of record of a majority in voting interest of the shares of stock of the
Corporation entitled to be voted thereat, present in person or by proxy, shall
constitute a quorum for the transaction of business at any meeting of
stockholders of the Corporation or any adjournment thereof. Subject to the
requirement of a larger percentage vote, if any, contained in the Certificate of
Incorporation, these Bylaws or by statute, the stockholders present at a duly
called or held meeting at which a quorum is present may continue to do business
until adjournment, notwithstanding any withdrawal of stockholders that may leave
less than a quorum remaining, if any action taken (other than adjournment) is
2
<PAGE> 3
approved by the vote of at least a majority in voting interest of the shares
required to constitute a quorum. In the absence of a quorum at any meeting or
any adjournment thereof, a majority in voting interest of the stockholders
present in person or by proxy and entitled to vote thereat or, in the absence
therefrom of all the stockholders, any officer entitled to preside at, or to act
as secretary of, such meeting may adjourn such meeting from time to time. At any
such adjourned meeting at which a quorum is present, any business may be
transacted that might have been transacted at the meeting as originally called.
SECTION 2.7 Voting.
(A) Each stockholder shall, at each meeting of stockholders, be
entitled to vote, in the manner prescribed by the Corporation's Certificate of
Incorporation, in person or by proxy each share of the stock of the Corporation
that has voting rights on the matter in question and that shall have been held
by such stockholder and registered in such stockholder's name on the books of
the Corporation:
(i) on the date fixed pursuant to Section 2.5 of these Bylaws as the
record date for the determination of stockholders entitled to notice
of and to vote at such meeting; or
(ii) if no such record date shall have been so fixed, then (a) at
the close of business on the business day next preceding the day
upon which notice of the meeting shall be given or (b) if notice of
the meeting shall be waived, at the close of business on the
business day next preceding the day upon which the meeting shall be
held.
(B) Shares of the Corporation's own stock belonging to the
Corporation or to another corporation, if a majority of the shares entitled to
vote in the election of directors in such other corporation is held, directly or
indirectly, by the Corporation, shall neither be entitled to vote nor be counted
for quorum purposes. Persons holding stock of the Corporation in a fiduciary
capacity shall be entitled to vote such stock. Persons whose stock is pledged
shall be entitled to vote, unless in the transfer by the pledgor on the books of
the Corporation the pledgor shall have expressly empowered the pledgee to vote
thereon, in which case only the pledgee, or the pledgee's proxy, may represent
such stock and vote thereon. Stock having voting power standing of record in the
names of two or more persons, whether fiduciaries, members of a partnership,
joint tenants, tenants in common, tenants by the entirety or otherwise, or with
respect to which two or more persons have the same fiduciary relationship, shall
be voted in accordance with the provisions of the Delaware General Corporation
Law, as the same exists or may hereafter be amended (the "DGCL").
(C) Subject to the provisions of the Corporation's Certificate of
Incorporation, any such voting rights may be exercised by the stockholder
entitled thereto in person or by such stockholder's proxy appointed by an
instrument in writing, subscribed by such stockholder or by such stockholder's
attorney thereunto authorized and delivered
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to the secretary of the meeting. The attendance at any meeting of a stockholder
who may theretofore have given a proxy shall not have the effect of revoking the
same unless such stockholder shall in writing so notify the secretary of the
meeting prior to the voting of the proxy. At any meeting of stockholders at
which a quorum is present, all matters, except as otherwise provided in the
Certificate of Incorporation, in these Bylaws or by law, shall be decided by the
vote of a majority in voting interest of the stockholders present in person or
by proxy and entitled to vote thereat and thereon. The vote at any meeting of
stockholders on any question need not be by ballot, unless so directed by the
chairman of the meeting. On a vote by ballot, each ballot shall be signed by the
stockholder voting, or by such stockholder's proxy, if there be such proxy, and
it shall state the number of shares voted.
SECTION 2.8 Judges. Prior to each meeting of stockholders, the
Chairman of such meeting shall appoint a judge or judges to act with respect to
any vote. Each judge so appointed shall first subscribe an oath faithfully to
execute the duties of a judge at such meeting with strict impartiality and
according to the best of such judge's ability. Such judges shall decide upon the
qualification of the voters and shall certify and report the number of shares
represented at the meeting and entitled to vote on any question, determine the
number of votes entitled to be cast by each share, shall conduct the vote and,
when the voting is completed, accept the votes and ascertain and report the
number of shares voted respectively for and against each question, and
determine, and retain for a reasonable period a record of the disposition of,
any challenge made to any determination made by such judges. Reports of judges
shall be in writing and subscribed and delivered by them to the Secretary of the
Corporation. The judges need not be stockholders of the Corporation, and any
officer of the Corporation may be a judge on any question other than a vote for
or against a proposal in which such officer shall have a material interest. The
judges may appoint or retain other persons or entities to assist the judges in
the performance of the duties of the judges.
SECTION 2.9 Advance Notice of Stockholder Proposals and Stockholder
Nominations.
(A) At any meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting (i) by or at the
direction of the Board or (ii) by any stockholder of the Corporation who
complies with the notice procedures set forth in this Section 2.9(A). For
business to be properly brought before any meeting of the stockholders by a
stockholder, the stockholder must have given notice thereof in writing to the
Secretary of the Corporation not less than ninety (90) days in advance of such
meeting or, if later, the seventh day following the first public announcement of
the date of such meeting. A stockholder's notice to the Secretary shall set
forth as to each matter the stockholder proposes to bring before the meeting (1)
a brief description of the business desired to be brought before the meeting and
the reasons for conducting such business at the meeting, (2) the name and
address, as they appear on the Corporation's books, of the stockholder proposing
such business, (3) the class and number of shares of the Corporation that are
beneficially owned by the stockholder, and (4) any material interest of the
stockholder in such business. In addition, the stockholder making
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such proposal shall promptly provide any other information reasonably requested
by the Corporation. Notwithstanding anything in these Bylaws to the contrary, no
business shall be conducted at any meeting of the stockholders except in
accordance with the procedures set forth in this Section 2.9. The Chairman of
any such meeting shall direct that any business not properly brought before the
meeting shall not be considered.
(B) Nominations for the election of directors may be made by the
Board or by any stockholder entitled to vote in the election of directors;
provided, however, that a stockholder may nominate a person for election as a
director at a meeting only if written notice of such stockholder's intent to
make such nomination has been given to the Secretary of the Corporation not
later than ninety (90) days in advance of such meeting or, if later, the seventh
day following the first public announcement of the date of such meeting. Each
such notice shall set forth: (i) the name and address of the stockholder who
intends to make the nomination and of the person or persons to be nominated;
(ii) a representation that the stockholder is a holder of record of stock of the
Corporation entitled to vote at such meeting and intends to appear in person or
by proxy at the meeting and nominate the person or persons specified in the
notice; (iii) a description of all arrangements or understandings between the
stockholder and each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are to be made by
the stockholder; (iv) such other information regarding each nominee proposed by
such stockholder as would be required to be included in a proxy statement filed
pursuant to the proxy rules of the United States Securities and Exchange
Commission had the nominee been nominated, or intended to be nominated, by the
Board; and (v) the consent of each nominee to serve as a director of the
Corporation if so elected. In addition, the stockholder making such nomination
shall promptly provide any other information reasonably requested by the
Corporation. No person shall be eligible for election as a director of the
Corporation unless nominated in accordance with the procedures set forth in this
Section 2.9(B). The Chairman of any meeting of stockholders shall direct that
any nomination not made in accordance with these procedures be disregarded.
SECTION 2.10 Action Without Meeting. Any action required to be taken
at any annual or special meeting of stockholders of the Corporation, or any
action which may be taken at any annual or special meeting of such stockholders,
may, if such action has been earlier approved by the Board, be taken without a
meeting, without prior notice and without a vote, if a consent in writing,
setting forth the action so taken, shall be signed by the holders of outstanding
stock having not less than the minimum number of votes that would be necessary
to authorize or take such action at a meeting at which all shares entitled to
vote thereon were present and voted. Prompt notice of the taking of the
corporate action without a meeting by less than unanimous written consent shall
be given to those stockholders who have not consented in writing.
ARTICLE III: BOARD OF DIRECTORS
SECTION 3.1 General Powers. Subject to any requirements in the
Certificate of Incorporation, these Bylaws, or of the DGCL as to action which
must be
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authorized or approved by the stockholders, any and all corporate powers shall
be exercised by or under the authority of, and the business and affairs of the
Corporation shall be under the direction of, the Board to the fullest extent
permitted by law. Without limiting the generality of the foregoing, it is hereby
expressly declared that the Board shall have the following powers, to wit:
(A) to select and remove all the officers, agents and employees of
the Corporation, prescribe such powers and duties for them as may not be
inconsistent with law, the Certificate of Incorporation or these Bylaws, fix
their compensation, and require from them security for faithful service;
(B) to conduct, manage and control the affairs and business of the
Corporation, and to make such rules and regulations therefor not inconsistent
with law, the Certificate of Incorporation or these Bylaws, as it may deem best;
(C) to change the location of the registered office of the
Corporation in Section 1.1 hereof; to change the principal office and the
principal office for the transaction of the business of the Corporation from one
location to another as provided in Section 1.2 hereof; to fix and locate from
time to time one or more offices of the Corporation within or without the State
of Delaware as provided in Section 1.3 hereof; to designate any place within or
without the State of Delaware for the holding of any meeting or meetings of
stockholders; and to adopt, make and use a corporate seal, and to prescribe the
forms of certificates of stock, and to alter the form of such seal and of such
certificates from time to time, and in its judgment as it may deem best,
provided such seal and such certificate shall at all times comply with the
provisions of law;
(D) to authorize the issuance of shares of stock of the Corporation
from time to time, upon such terms and for such considerations as may be lawful;
(E) to borrow money and incur indebtedness for the purposes of the
Corporation, and to cause to be executed and delivered therefor, in the
corporate name, promissory notes, bonds, debentures, deeds of trust and
securities therefor; and
(F) by resolution adopted by a majority of the whole Board to
designate an executive and other committees of the Board, each consisting of one
or more directors, to serve at the pleasure of the Board, and to prescribe the
manner in which proceedings of such committee or committees shall be conducted.
SECTION 3.2 Number and Term of Office.
(A) Until this Section 3.2 is amended by a resolution duly adopted
by the Board or by the stockholders of the Corporation, the number of directors
constituting the entire Board shall be not less than five (5) members nor more
than nine (9) members and shall initially consist of five (5) members. Directors
need not be stockholders. Each of the directors of the Corporation shall hold
office until his successor shall have been duly
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elected or until he shall resign or shall have been removed in the manner
hereinafter provided.
(B) The Board shall be divided into three classes: Class I, Class II
and Class III. Each Director shall serve for a term ending on the date of the
third annual meeting following the annual meeting at which such director was
elected; provided, however, that the directors first elected to Class I shall
serve for a term ending on the date of the annual meeting next following the end
of the calendar year 1997, the director first elected to Class II shall serve
for a term ending on the date of the second annual meeting next following the
end of the calendar year 1997, and the directors first elected to Class III
shall serve for a term ending on the date of the third annual meeting next
following the end of the calendar year 1997. Notwithstanding the foregoing
provisions of this Article, each director shall serve until his successor is
duly elected and qualified or until his death, resignation or removal. No
decrease in the number of directors constituting the Board of Directors shall
shorten the term of an incumbent director.
SECTION 3.3 Chairman of the Board. The Chairman of the Board, when
present, shall preside at all meetings of the Board and all meetings of
stockholders. The Chairman of the Board shall perform other duties commonly
incident to his office and shall also perform such other duties and have such
other powers as the Board of Directors shall designate from time to time.
SECTION 3.4 Election of Directors. The directors shall be elected by
the stockholders of the Corporation, and at each election, the persons receiving
the greater number of votes, up to the number of directors then to be elected,
shall be the persons then elected. The election of directors is subject to any
provision contained in the Certificate of Incorporation relating thereto,
including any provision regarding the rights of holders of preferred stock to
elect directors.
SECTION 3.5 Resignations. Any director of the Corporation may resign
at any time by giving written notice to the Board or to the Secretary of the
Corporation. Any such resignation shall take effect at the time specified
therein, or, if the time is not specified, it shall take effect immediately upon
receipt; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
SECTION 3.6 Vacancies. Except as otherwise provided in the
Certificate of Incorporation, any vacancy in the Board, whether because of
death, resignation, disqualification, an increase in the number of directors,
removal, or any other cause, may be filled by vote of the majority of the
remaining directors, although less than a quorum. Increases in the number of
directors shall be filled in accordance with the rule that each class of
directors shall be as nearly equal in number of directors as possible.
Notwithstanding such rule, in the event of any change in the authorized number
of directors each director then continuing to serve as such will nevertheless
continue as a director of the class of which he is a member, until the
expiration of his current term or his earlier death, resignation or removal. If
any newly created directorship or vacancy on the
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Board, consistent with the rule that the three classes shall be as nearly equal
in number of directors as possible, may be allocated to one or two or more
classes, the Board shall allocate it to that of the available class whose term
of office is due to expire at the earliest date following such allocation. When
the Board fills a vacancy, the director chosen to fill that vacancy shall be of
the same class as the director he succeeds and shall hold office until such
director's successor shall have been elected and shall qualify or until such
director shall resign or shall have been removed. No reduction of the authorized
number of directors shall have the effect of removing any director prior to the
expiration of such director's term of office.
SECTION 3.7 Place of Meeting. The Board or any committee thereof may
hold any of its meetings at such place or places within or without the State of
Delaware as the Board or such committee may from time to time by resolution
designate or as shall be designated by the person or persons calling the meeting
or in the notice or a waiver of notice of any such meeting. Directors may
participate in any regular or special meeting of the Board or any committee
thereof by means of conference telephone or similar communications equipment
pursuant to which all persons participating in the meeting of the Board or such
committee can hear each other, and such participation shall constitute presence
in person at such meeting.
SECTION 3.8 Regular Meetings. Regular meetings of the Board may be
held at such times as the Board shall from time to time by resolution determine.
SECTION 3.9 Special Meetings. Special meetings of the Board for any
purpose or purposes shall be called at any time by the Chairman of the Board or,
if the Chairman of the Board is absent or unable or refuses to act, by the
President, and may also be called by any two members of the Board. Except as
otherwise provided by law or by these Bylaws, written notice of the time and
place of special meetings shall be delivered personally or by facsimile to each
director, or sent to each director by mail or by other form of written
communication, charges prepaid, addressed to such director at such director's
address as it is shown upon the records of the Corporation, or, if it is not so
shown on such records and is not readily ascertainable, at the place in which
the meetings of the directors are regularly held. In case such notice is mailed
or telegraphed, it shall be deposited in the United States mail or delivered to
the telegraph company in the County in which the principal office for the
transaction of the business of the Corporation is located at least 48 hours
prior to the time of the holding of the meeting. In case such notice is
delivered personally or by facsimile as above provided, it shall be delivered at
least 24 hours prior to the time of the holding of the meeting. Such mailing,
telegraphing, delivery or facsimile transmission as above provided shall be due,
legal and personal notice to such director. Except where otherwise required by
law or by these Bylaws, notice of the purpose of a special meeting need not be
given. Notice of any meeting of the Board shall not be required to be given to
any director who is present at such meeting, except a director who shall attend
such meeting for the express purpose of objecting, at the beginning of the
meeting, to the transaction of any business because the meeting is not lawfully
called or convened.
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SECTION 3.10 Quorum and Manner of Acting. Except as otherwise
provided in these Bylaws, the Certificate of Incorporation or by applicable law,
the presence of a majority of the authorized number of directors shall be
required to constitute a quorum for the transaction of business at any meeting
of the Board, and all matters shall be decided at any such meeting, a quorum
being present, by the affirmative votes of a majority of the directors present.
A meeting at which a quorum is initially present may continue to transact
business notwithstanding the withdrawal of directors, provided any action taken
is approved by at least a majority of the required quorum for such meeting. In
the absence of a quorum, a majority of directors present at any meeting may
adjourn the same from time to time until a quorum shall be present. Notice of
any adjourned meeting need not be given. The directors shall act only as a
Board, and the individual directors shall have no power as such.
SECTION 3.11 Action by Unanimous Written Consent. Any action
required or permitted to be taken at any meeting of the Board or of any
committee thereof may be taken without a meeting if consent in writing is given
thereto by all members of the Board or of such committee, as the case may be,
and such consent is filed with the minutes of proceedings of the Board or of
such committee.
SECTION 3.12 Compensation. Directors, whether or not employees of
the Corporation or any of its subsidiaries, may receive an annual fee for their
services as directors in an amount fixed by resolution of the Board plus other
compensation, including options to acquire capital stock of the Corporation, in
an amount and of a type fixed by resolution of the Board, and, in addition, a
fixed fee, with or without expenses of attendance, may be allowed by resolution
of the Board for attendance at each meeting, including each meeting of a
committee of the Board. Nothing herein contained shall be construed to preclude
any director from serving the Corporation in any other capacity as an officer,
agent, employee, or otherwise, and receiving compensation therefor.
SECTION 3.13 Committees. The Board may, by resolution passed by a
majority of the whole Board, designate one or more committees, each committee to
consist of one or more of the directors of the Corporation. Any such committee,
to the extent provided in the resolution of the Board and subject to any
restrictions or limitations on the delegation of power and authority imposed by
applicable law, shall have and may exercise all the powers and authority of the
Board in the management of the business and affairs of the Corporation, and may
authorize the seal of the Corporation to be affixed to all papers which may
require it. Any such committee shall keep written minutes of its meetings and
report the same to the Board at the next regular meeting of the Board. Unless
the Board or these Bylaws shall otherwise prescribe the manner of proceedings of
any such committee, meetings of such committee may be regularly scheduled in
advance and may be called at any time by the chairman of the committee or by any
two members thereof; otherwise, the provisions of these Bylaws with respect to
notice and conduct of meetings of the Board shall govern.
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SECTION 3.14 Affiliated Transactions. Notwithstanding any other
provision of these Bylaws, each transaction, or, if an individual transaction
constitutes a part of a series of transactions, each series of transactions,
proposed to be entered into between the Corporation, on the one hand, and any
affiliate of the Corporation, on the other hand, must be approved by a majority
of the Independent Directors. Notwithstanding any other provision of these
Bylaws, this Section 3.14 may only be amended by the vote of the majority of the
Independent Directors. For the purposes of this Section 3.14, (a) "affiliate"
shall mean (i) any person that, directly or indirectly, controls or is
controlled by or is under common control with such person, (ii) any other person
that owns, beneficially, directly or indirectly, twenty percent (20%) or more of
the outstanding capital shares, shares or equity interests of such person, or
(iii) any officer, director, employee, partner or trustee of such person or any
person controlling, controlled by or under common control with such person
(excluding trustees and persons serving in similar capacities who are not
otherwise an Affiliate of such person); (b) "person" shall mean and include
individuals, corporations, general and limited partnerships, stock companies or
associations, joint ventures, associations, companies, trusts, banks, trust
companies, land trusts, business trusts or other entities and governments and
agencies and political subdivisions thereof; (c) "control" (including the
correlative meanings of the terms "controlled by" and "under common control
with"), as used with respect to any person, shall mean the possession, directly
or indirectly, of the power to direct or cause the direction of the management
and policies of such person, through the ownership of voting securities,
partnership interests or other equity interests; and (d) Independent Director
shall mean a Director who is not an officer or employee of the Corporation or
any of its subsidiaries.
ARTICLE IV: OFFICERS
SECTION 4.1 Officers. The officers of the Corporation shall be a
Chief Executive Officer, a President, one or more Vice Presidents (the number
thereof and their respective titles to be determined by the Board), a Secretary,
a Chief Financial Officer, and such other officers as may be appointed at the
discretion of the Board in accordance with the provisions of Section 4.3 hereof.
SECTION 4.2 Election. The officers of the Corporation, except such
officers as may be appointed or elected in accordance with the provisions of
Sections 4.3 or 4.5 hereof, shall be chosen annually by the Board at the first
meeting thereof after the annual meeting of stockholders, and each officer shall
hold office until such officer shall resign or shall be removed or otherwise
disqualified to serve, or until such officer's successor shall be elected and
qualified.
SECTION 4.3 Other Officers. In addition to the officers chosen
annually by the Board at its first meeting, the Board also may appoint or elect
such other officers as the business of the Corporation may require, each of whom
shall have such authority and perform such duties as are provided in these
Bylaws or as the Board may from time to time specify, and shall hold office
until such officer shall resign or shall be
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removed or otherwise disqualified to serve, or until such officer's successor
shall be elected and qualified.
SECTION 4.4 Removal and Resignation. Except as provided by DGCL
Section 141(k), any officer may be removed, either with or without cause, by
resolution of the Board, at any regular or special meeting of the Board, or
except in case of an officer chosen by the Board, by any officer upon whom such
power of removal may be conferred by the Board. Any officer or assistant may
resign at any time by giving written notice of his resignation to the Board or
the Secretary of the Corporation. Any such resignation shall take effect at the
time specified therein, or, if the time is not specified, upon receipt thereof
by the Board or the Secretary, as the case may be; and, unless otherwise
specified therein, the acceptance of such resignation shall not be necessary to
make it effective.
SECTION 4.5 Vacancies. A vacancy in any office because of death,
resignation, removal, disqualification or any other cause shall be filled in the
manner prescribed in these Bylaws for regular appointments to such office.
SECTION 4.6 Chief Executive Officer. The Chief Executive Officer
shall preside at all meetings of the stockholders and at all meetings of the
Board of Directors, unless the Chairman of the Board has been appointed and is
present. The Chief Executive Officer shall be the chief executive officer of the
Corporation and shall, subject to the control of the Board of Directors, have
general supervision, direction and control of the business and affairs of the
Corporation. The Chief Executive Officer shall also perform such other duties
and have such other powers as the Board of Directors may designate from time to
time.
SECTION 4.7 President. The President shall preside at all meetings
of the stockholders and at all meetings of the Board of Directors, unless the
Chairman of the Board has been appointed and is present or, in the absence of
the Chairman of the Board, the Chief Executive Officer has been appointed and is
present. Subject to the provisions of these Bylaws and to the direction of the
Board of Directors and Chief Executive Officer, the President shall have the
responsibility for the general management and control of the business and
affairs of the Corporation and shall perform all duties and have all powers
which are commonly incident to the office of President or which are delegated to
him by the Board of Directors. The President shall have the power to sign all
stock certificates, contracts and other instruments of the Corporation which are
authorized and shall have general supervision and direction of all the other
officers, employees and agents of the corporation.
SECTION 4.8 Vice President. Each Vice President shall have such
powers and perform such duties with respect to the administration of the
business and affairs of the Corporation as are commonly incident to their office
or as may from time to time be assigned to such Vice President by the Chairman
of the Board, or the Board, or the President, or as may be prescribed by these
Bylaws. In the absence or disability of the Chairman of the Board and the
President, the Vice Presidents in order of their rank as fixed by the Board, or
if not ranked, the Vice President designated by the Board, shall
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perform all of the duties of the Chairman of the Board, and when so acting shall
have all the powers of, and be subject to all the restrictions upon, the
Chairman of the Board.
SECTION 4.9 Secretary.
(A) The Secretary shall attend all meetings of the stockholders and
of the Board of Directors and shall record all acts and proceedings thereof in
the minute book of the Corporation. The Secretary shall give notice in
conformity with these Bylaws of all meetings of the stockholders and of all
meetings of the Board of Directors and any committee thereof requiring notice.
The Secretary shall perform all other duties given him in these Bylaws and other
duties commonly incident to his office and shall also perform such other duties
and have such other powers as the Board shall designate from time to time.
(B) The Secretary shall keep, or cause to be kept, at the principal
office of the Corporation or such other place as the Board may order, a book of
minutes of all meetings of directors and stockholders, with the time and place
of holding, whether regular or special, and if special, how authorized and the
notice thereof given, the names of those present at meetings of directors, the
number of shares present or represented at meetings of stockholders, and the
proceedings thereof.
(C) The Secretary shall keep, or cause to be kept, at the principal
office of the Corporation's transfer agent, a share register, or a duplicate
share register, showing the name of each stockholder, the number of shares of
each class held by such stockholder, the number and date of certificates issued
for such shares, and the number and date of cancellation of every certificate
surrendered for cancellation.
SECTION 4.10 Chief Financial Officer.
The Chief Financial Officer shall keep or cause to be kept the books
of account of the corporation in a thorough and proper manner and shall render
statements of the financial affairs of the corporation in such form and as often
as required by the Board of Directors or the Chief Executive Officer. The Chief
Financial Officer, subject to the order of the Board, shall have the custody of
all funds and securities of the Corporation. The Chief Financial Officer shall
perform other duties commonly incident to his office and shall also perform such
other duties and have such other powers as the Board or the Chief Executive
Officer shall designate from time to time.
ARTICLE V: CORPORATE INSTRUMENTS, CHECKS, DRAFTS, BANK ACCOUNTS,
ETC.
SECTION 5.1 Execution of Corporate Instruments.
The Board of Directors may, in its discretion, determine the method
and designate the signatory officer or officers, or other person or persons, to
execute on behalf of the Corporation the corporate name without limitation, or
enter into contracts on behalf of the Corporation, except where otherwise
provided by law or these Bylaws, and such
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execution or signature shall be binding upon the Corporation. Such authority may
be general or confined to specific instances, and unless so authorized by the
Board or by these Bylaws, no officer, agent, or employee shall have any power or
authority to bind the Corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or in any amount.
SECTION 5.2 Checks, Drafts, Etc. All checks, drafts or other orders
for payment of money, notes or other evidence of indebtedness, issued in the
name of or payable to the Corporation, shall be signed or endorsed by such
person or persons and in such manner as, from time to time, shall be determined
by resolution of the Board. Each such officer, assistant, agent or attorney
shall give such bond, if any, as the Board may require.
SECTION 5.3 Deposits. All funds of the Corporation not otherwise
employed shall be deposited from time to time to the credit of the Corporation
in such banks, trust companies or other depositories as the Board may select, or
as may be selected by any officer or officers, assistant or assistants, agent or
agents, or attorney or attorneys of the Corporation to whom such power shall
have been delegated by the Board. For the purpose of deposit and for the purpose
of collection for the account of the Corporation, the Chairman of the Board, the
Chief Executive Officer, the President, any Vice President (or any other officer
or officers, assistant or assistants, agent or agents, or attorney or attorneys
of the Corporation who shall from time to time be determined by the Board) may
endorse, assign and deliver checks, drafts and other orders for the payment of
money which are payable to the order of the Corporation.
SECTION 5.4 General and Special Bank Accounts. The Board may from
time to time authorize the opening and keeping of general and special bank
accounts with such banks, trust companies or other depositories as the Board may
select or as may be selected by any officer or officers, assistant or
assistants, agent or agents, or attorney or attorneys of the Corporation to whom
such power shall have been delegated by the Board. The Board may make such
special rules and regulations with respect to such bank accounts, not
inconsistent with the provisions of these Bylaws, as it may deem expedient.
ARTICLE VI: SHARES AND THEIR TRANSFER
SECTION 6.1 Certificates for Stock. Every owner of stock of the
Corporation shall be entitled to have a certificate or certificates, to be in
such form as the Board shall prescribe, certifying the number and class or
series of shares of the stock of the Corporation owned by such owner. The
certificates representing shares of such stock shall be numbered in the order in
which they shall be issued and shall be signed in the name of the Corporation by
the Chairman of the Board, the Chief Executive Officer, the President or any
Vice President, and by the Secretary. Any or all of the signatures on the
certificates may be a facsimile. In case any officer, transfer agent or
registrar who has signed, or whose facsimile signature has been placed upon, any
such certificate, shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, such
13
<PAGE> 14
certificate may nevertheless be issued by the Corporation with the same effect
as though the person who signed such certificate, or whose facsimile signature
shall have been placed thereupon, were such an officer, transfer agent or
registrar at the date of issue. A record shall be kept of the respective names
of the persons, firms or corporations owning the stock represented by such
certificates, the number and class or series of shares represented by such
certificates, respectively, and the respective dates thereof, and in case of
cancellation, the respective dates of cancellation. Every certificate
surrendered to the Corporation for exchange or transfer shall be canceled, and
no new certificate or certificates shall be issued in exchange for any existing
certificate until such existing certificate shall have been so canceled, except
in cases provided for in Section 6.4 hereof.
SECTION 6.2 Transfers of Stock. Transfers of shares of stock of the
Corporation shall be made only on the books of the Corporation by the registered
holder thereof, or by such holder's attorney thereunto authorized by power of
attorney duly executed and filed with the Secretary, or with a transfer clerk or
a transfer agent appointed as provided in Section 6.3 hereof, and upon surrender
of the certificate or certificates for such shares properly endorsed and the
payment of all taxes thereon. The person in whose name shares of stock stand on
the books of the Corporation shall be deemed the owner thereof for all purposes
as regards the Corporation. Whenever any transfer of shares shall be made for
collateral security, and not absolutely, such fact shall be so expressed in the
entry of transfer if, when the certificate or certificates shall be presented to
the Corporation for transfer, both the transferor and the transferee request the
Corporation to do so.
SECTION 6.3 Regulations. The Board may make such rules and
regulations as it may deem expedient, not inconsistent with these Bylaws,
concerning the issue, transfer and registration of certificates for shares of
the stock of the Corporation. It may appoint, or authorize any officer or
officers to appoint, one or more transfer clerks or one or more transfer agents
and one or more registrars, and may require all certificates for stock to bear
the signature or signatures of any of them.
SECTION 6.4 Lost, Stolen, Destroyed, and Mutilated Certificates. In
any case of loss, theft, destruction, or mutilation of any certificate of stock,
another may be issued in its place upon proof satisfactory to the Board of such
loss, theft, destruction, or mutilation and upon the giving of a bond of
indemnity to the Corporation in such form and in such sum as the Board may
direct; provided, however, that a new certificate may be issued without
requiring any bond when, in the judgment of the Board, it is proper so to do.
ARTICLE VII: INDEMNIFICATION
SECTION 7.1 Indemnification of Directors and Officers. To the fullest
extent permitted by the Delaware General Corporation Law, as the same exists or
may hereafter be amended (provided that the effect of any such amendment shall
be prospective only) (the "Delaware Law"), a director of the Corporation shall
not be liable to the Corporation or its stockholders for monetary damages for
breach of his or her
14
<PAGE> 15
fiduciary duty as a director. The Corporation shall indemnify, in the manner and
to the fullest extent permitted by the Delaware Law (but in the case of any such
amendment, only to the extent that such amendment permits the Corporation to
provide broader indemnification rights than permitted prior thereto), any person
(or the estate of any person) who is or was a party to, or is threatened to be
made a party to, any threatened, pending or completed action, suit or
proceeding, whether or not by or in the right of the Corporation, and whether
civil, criminal, administrative, investigative or otherwise, by reason of the
fact that such person is or was a director or officer of the Corporation, or is
or was serving at the request of the Corporation as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise. The
Corporation may, to the fullest extent permitted by the Delaware Law, purchase
and maintain insurance on behalf of any such person against any liability which
may be asserted against such person. The Corporation may create a trust fund,
grant a security interest or use other means (including without limitation a
letter of credit) to ensure the payment of such sums as may become necessary or
desirable to effect the indemnification as provided herein. To the fullest
extent permitted by the Delaware Law, the indemnification provided herein shall
include expenses as incurred (including attorneys' fees), judgments, fines and
amounts paid in settlement and any such expenses shall be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the person seeking
indemnification to repay such amounts if it is ultimately determined that he or
she is not entitled to be indemnified. Notwithstanding the foregoing or any
other provision of this Section 7.1, no advance shall be made by the Corporation
if a determination is reasonably and promptly made by the Board 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 Corporation, that, based upon the
facts known to the Board 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 Corporation 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 this Section 7.1. The indemnification provided
herein shall not be deemed to limit the right of the Corporation to indemnify
any other person for any such expenses to the fullest extent permitted by the
Delaware Law, nor shall it be deemed exclusive of any other rights to which any
person seeking indemnification from the Corporation may be entitled under any
agreement, the Corporation's Bylaws, vote of stockholders or disinterested
directors, or otherwise, both as to action in such person's official capacity
and as to action in another capacity while holding such office. The Corporation
may, but only to the extent that the Board of Directors may (but shall not be
obligated to) authorize from time to time, grant rights to indemnification and
to the advancement of expenses to any employee or agent of the Corporation to
the fullest extent of the provisions of this Section 7.1 as it applies to the
indemnification and advancement of expenses of directors and officers of the
Corporation.
SECTION 7.2 Indemnification of Employees and Agents. Subject to
Section 7.1, the Corporation may, but only to the extent that the Board may (but
shall not
15
<PAGE> 16
be obligated to) authorize from time to time, grant rights to indemnification
and to the advancement of expenses to any employee or agent of the Corporation
to the fullest extent of the provisions of this Article VII as they apply to the
indemnification and advancement of expenses of directors and officers of the
Corporation.
SECTION 7.3 Enforcement of Indemnification. The rights to
indemnification and the advancement of expenses conferred above shall be
contract rights. If a claim under this Article VII is not paid in full by the
Corporation within 60 days after written claim has been received by the
Corporation, except in the case of a claim for an advancement of expenses, in
which case the applicable period shall be 20 days, the indemnitee may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of such claim. If successful in whole or in part in any such suit, or in a suit
brought by the Corporation to recover an advancement of expenses pursuant to the
terms of an undertaking, the indemnitee shall be entitled to be paid also the
expenses of prosecuting or defending such suit. In (i) any suit brought by the
indemnitee to enforce a right to indemnification hereunder (but not in a suit
brought by the indemnitee to enforce a right to an advancement of expenses) it
shall be a defense that, and (ii) any suit by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking the Corporation
shall be entitled to recover such expenses upon a final adjudication that, the
indemnitee has not met any applicable standard for indemnification set forth in
the DGCL. Neither the failure of the Corporation (including its Board,
independent legal counsel or stockholders) to have made a determination prior to
the commencement of such suit that indemnification of the indemnitee is proper
in the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the DGCL, nor an actual determination by the Corporation
(including its Board, independent legal counsel or stockholders) that the
indemnitee has not met such applicable standard of conduct, shall either create
a presumption that the indemnitee has not met the applicable standard of conduct
or, in the case of such a suit brought by the indemnitee, be a defense to such
suit. In any suit brought by the indemnitee to enforce a right to
indemnification or to an advancement of expenses hereunder, or by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking, the burden of proving that the indemnitee is not entitled to be
indemnified, or to such advancement of expenses, under this Article VII or
otherwise shall be on the Corporation.
ARTICLE VIII: MISCELLANEOUS
SECTION 8.1 Seal. The Board shall adopt a corporate seal, which
shall be in the form of two concentric circles with the name of the Corporation
between the two circles and the date and state of incorporation appearing in the
inner circle.
SECTION 8.2 Waiver of Notices. Whenever notice is required to be
given by these Bylaws or the Certificate of Incorporation or by law, the person
entitled to said notice may waive such notice in writing, either before or after
the time stated therein, and such waiver shall be deemed equivalent to notice.
16
<PAGE> 17
SECTION 8.3 Amendments. Except as otherwise provided herein or in
the Certificate of Incorporation, these Bylaws or any of them may be altered,
amended, repealed or rescinded and new Bylaws may be adopted by the Board or by
the stockholders at any annual or special meeting of stockholders, provided that
notice of such proposed alteration, amendment, repeal, recession or adoption is
given in the notice of such meeting.
17
<PAGE> 18
CERTIFICATE OF SECRETARY
The undersigned, being the duly elected Secretary of Long Beach
Financial Corporation, a Delaware corporation, hereby certifies that the Bylaws
to which this Certificate is attached were duly adopted by the Board of
Directors of said Corporation as of January 30, l997.
------------------------------------
M. Jack Mayesh
18
<PAGE> 1
Exhibit 10.6
LONG BEACH FINANCIAL CORPORATION
1997 STOCK INCENTIVE PLAN
FEBRUARY 18, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I PURPOSE OF PLAN............................................................................... 1
ARTICLE II EFFECTIVE DATE AND TERM OF PLAN.............................................................. 1
2.1 TERM OF PLAN........................................................................................ 1
2.2 EFFECT ON AWARDS.................................................................................... 1
2.3 STOCKHOLDER APPROVAL................................................................................ 1
ARTICLE III SHARES SUBJECT TO PLAN...................................................................... 1
3.1 NUMBER OF SHARES.................................................................................... 1
3.2 SOURCE OF SHARES.................................................................................... 1
3.3 AVAILABILITY OF UNUSED SHARES....................................................................... 2
3.4 ADJUSTMENT PROVISIONS............................................................................... 2
3.5 RESERVATION OF SHARES............................................................................... 2
ARTICLE IV ADMINISTRATION OF PLAN....................................................................... 3
4.1 ADMINISTERING BODY.................................................................................. 3
4.2 AUTHORITY OF ADMINISTERING BODY..................................................................... 3
4.3 NO LIABILITY........................................................................................ 4
4.4 AMENDMENTS.......................................................................................... 4
4.5 OTHER COMPENSATION PLANS............................................................................ 5
4.6 PLAN BINDING ON SUCCESSORS.......................................................................... 5
4.7 REFERENCES TO SUCCESSOR STATUTES, REGULATIONS AND RULES............................................. 5
4.8 ISSUANCES FOR COMPENSATION PURPOSES ONLY............................................................ 5
4.9 INVALID PROVISIONS.................................................................................. 5
4.10 GOVERNING LAW...................................................................................... 6
ARTICLE V GENERAL AWARD PROVISIONS...................................................................... 6
5.1 PARTICIPATION IN THE PLAN........................................................................... 6
5.2 AWARD DOCUMENTS..................................................................................... 6
5.3 EXERCISE OF STOCK OPTIONS........................................................................... 6
5.4 PAYMENT FOR AWARDS.................................................................................. 7
5.5 NO EMPLOYMENT RIGHTS................................................................................ 7
5.6 RESTRICTIONS UNDER APPLICABLE LAWS AND REGULATIONS.................................................. 8
5.7 ADDITIONAL CONDITIONS............................................................................... 9
5.8 NO PRIVILEGES OF STOCK OWNERSHIP.................................................................... 9
5.9 NONASSIGNABILITY.................................................................................... 9
5.10 INFORMATION TO RECIPIENTS.......................................................................... 10
5.11 WITHHOLDING TAXES.................................................................................. 10
5.12 LEGENDS ON AWARDS AND STOCK CERTIFICATES........................................................... 10
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
5.13 EFFECT OF TERMINATION OF EMPLOYMENT ON INCENTIVE AWARDS............................................ 10
(a) Termination for Just Cause....................................................................... 10
(b) Termination Other than for Just Cause............................................................ 11
(c) Alteration of Vesting and Exercise Periods....................................................... 11
(d) Leave of Absence................................................................................. 11
5.14 LIMITS ON AWARDS TO CERTAIN ELIGIBLE PERSONS....................................................... 11
ARTICLE VI INCENTIVE AWARDS............................................................................. 12
6.1 STOCK OPTIONS....................................................................................... 12
(a) Nature of Stock Options.......................................................................... 12
(b) Option Exercise Price............................................................................ 12
(c) Option Period and Vesting........................................................................ 12
(d) Special Provisions Regarding Incentive Stock Options............................................. 12
6.2 STOCK APPRECIATION RIGHTS........................................................................... 13
(a) Granting of Stock Appreciation Rights............................................................ 13
(b) Stock Appreciation Rights Related to Options..................................................... 13
(c) Stock Appreciation Rights Unrelated to Options................................................... 14
(d) Limits........................................................................................... 14
(e) Payments......................................................................................... 14
(f) Rule 16b-3....................................................................................... 14
6.3 STOCK PAYMENTS...................................................................................... 14
6.4 DIVIDEND EQUIVALENTS................................................................................ 14
6.5 STOCK BONUSES....................................................................................... 14
6.6 STOCK SALES......................................................................................... 15
6.7 PHANTOM STOCK....................................................................................... 15
6.8 OTHER STOCK-BASED BENEFITS.......................................................................... 15
ARTICLE VII REORGANIZATIONS............................................................................. 15
7.1 CORPORATE TRANSACTIONS NOT INVOLVING A CHANGE IN CONTROL............................................ 15
7.2 CORPORATE TRANSACTIONS INVOLVING A CHANGE IN CONTROL................................................ 15
ARTICLE VIII DEFINITIONS................................................................................ 16
</TABLE>
ii
<PAGE> 4
LONG BEACH FINANCIAL CORPORATION
1997 STOCK INCENTIVE PLAN
ARTICLE I
PURPOSE OF PLAN
The Company has adopted this Plan to promote the interests of the
Company and its stockholders by using investment interests in the Company to
attract, retain and motivate its management and other persons, to encourage and
reward their contributions to the performance of the Company, and to align their
interests with the interests of the Company's stockholders. Capitalized terms
not otherwise defined herein shall have the meanings ascribed to them in Article
VIII.
ARTICLE II
EFFECTIVE DATE AND TERM OF PLAN
2.1 TERM OF PLAN. This Plan became effective as of the Effective
Date and shall continue in effect until the Expiration Date, at which time this
Plan shall automatically terminate.
2.2 EFFECT ON AWARDS. Awards may be granted during the Plan Term,
but no Awards may be granted after the Plan Term. Notwithstanding the foregoing,
each Award properly granted under this Plan during the Plan Term shall remain in
effect after termination of this Plan until such Award has been exercised,
terminated, or expired in accordance with its terms and the terms of this Plan.
2.3 STOCKHOLDER APPROVAL. This Plan shall be approved by the
Company's stockholders within 12 months after the Effective Date. The
effectiveness of any Awards granted prior to such stockholder approval shall be
subject to such stockholder approval.
ARTICLE III
SHARES SUBJECT TO PLAN
3.1 NUMBER OF SHARES. The maximum number of shares of Common Stock
that may be issued pursuant to Awards granted under this Plan shall be
3,000,000, subject to adjustment as set forth in Section 3.4.
3.2 SOURCE OF SHARES. The Common Stock to be issued under this
Plan will be made available, at the discretion of the Board, either from
authorized but unissued shares of Common Stock or from previously issued shares
of Common Stock reacquired by the Company, including without limitation shares
purchased on the open market.
3.3 AVAILABILITY OF UNUSED SHARES. Shares of Common Stock subject
to unexercised portions of any Award granted under this Plan that expire,
terminate or are canceled, and shares of Common Stock issued pursuant to an
Award under this Plan that are reacquired by the
<PAGE> 5
Company pursuant to the terms of the Award under which such shares were issued,
will again become available for the grant of further Awards under this Plan.
3.4 ADJUSTMENT PROVISIONS.
(a) If (i) the outstanding shares of Common Stock of the Company
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
the Company, 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 the Company is reduced by reason of an extraordinary cash dividend, an
appropriate and proportionate adjustment may be made in (1) the maximum number
and kind of shares subject to this Plan as provided in Section 3.1, (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.
(b) No fractional interests will be issued under this Plan
resulting from any adjustments.
(c) To the extent any adjustments relate to stock or securities of
the Company, such adjustments shall be made by the Administering Body, whose
determination in that respect shall be final, binding and conclusive.
(d) The grant of an Award pursuant to this Plan shall not affect
in any way the right or power of the Company to make adjustments,
reclassifications, reorganizations or changes of its capital or business
structure or to merge or to consolidate or to dissolve, liquidate or sell, or
transfer all or any part of its business or assets.
(e) No adjustment to the terms of an Incentive Stock Option shall
be made unless such adjustment either (i) would not cause such Option to lose
its status as an Incentive Stock Option or (ii) is agreed to in writing by the
Administering Body and the Recipient.
3.5 RESERVATION OF SHARES. The Company will at all times reserve
and keep available such number of shares of Common Stock as shall equal at least
the number of shares of Common Stock subject to then outstanding Awards issuable
in shares of Common Stock under this Plan.
ARTICLE IV
ADMINISTRATION OF PLAN
4.1 ADMINISTERING BODY.
(a) Subject to the provisions of Section 4.1(b)(ii), this Plan
shall be administered by the Board or by the Compensation Committee of the Board
appointed pursuant to Section 4.1(b).
2
<PAGE> 6
(b) (i) The Board in its sole discretion may from time to time
appoint a Compensation Committee of not less than two Board members to
administer this Plan and, subject to applicable law, to exercise all of the
powers, authority and discretion of the Board under this Plan. The Board may
from time to time increase or decrease (but not below two) the number of members
of the Compensation Committee, remove from membership on the Compensation
Committee all or any portion of its members, and/or appoint such person or
persons as it desires to fill any vacancy existing on the Compensation
Committee, whether caused by removal, resignation or otherwise. The Board may
disband the Compensation Committee at any time and revest in the Board the
administration of this Plan.
(ii) Notwithstanding the foregoing provisions of this Section
4.1(b) to the contrary, as long as the Company is an Exchange Act Registered
Company, (1) the Board shall appoint the Compensation Committee, (2) this Plan
shall be administered by the Compensation Committee, and (3) each member of the
Compensation Committee shall be a Nonemployee Director, and, in addition, if
Awards are to be made to persons subject to Section 162(m) of the IRC and such
Awards are intended to constitute Performance-Based Compensation, then each
member of the Compensation Committee shall, in addition to being a Nonemployee
Director, be an Outside Director.
(iii) The Compensation Committee shall report to the Board the
names of Eligible Persons granted Awards, the number of shares of Common Stock
covered by each Award, and the terms and conditions of each such Award.
4.2 AUTHORITY OF ADMINISTERING BODY.
(a) Subject to the express provisions of this Plan, the Administering
Body shall have the power to interpret and construe this Plan and any Award
Documents or other documents defining the rights and obligations of the Company
and Recipients hereunder and thereunder, to determine all questions arising
hereunder and thereunder, to adopt and amend such rules and regulations for the
administration hereof and thereof as it may deem desirable, and otherwise to
carry out the terms of this Plan and such Award Documents and other documents.
The interpretation and construction by the Administering Body of any provisions
of this Plan or of any Award shall be conclusive and binding. Any action taken
by, or inaction of, the Administering Body relating to this Plan or any Awards
shall be within the absolute discretion of the Administering Body and shall be
conclusive and binding upon all persons. Subject only to compliance with the
express provisions hereof, the Administering Body may act in its absolute
discretion in matters related to this Plan and any and all Awards.
(b) Subject to the express provisions of this Plan, the Administering
Body may from time to time in its discretion select the Eligible Persons to
whom, and the time or times at which, Incentive Awards shall be granted or sold,
the nature of each Incentive Award, the number of shares of Common Stock or the
number of rights that make up or underlie each Incentive Award, the period for
the exercise of each Incentive Award, and such other terms and conditions
applicable to each individual Incentive Award as the Administering Body shall
determine. The Administering Body may grant at any time new Incentive Awards to
an Eligible Person who has previously received Incentive Awards or other grants
(including other stock options) whether
3
<PAGE> 7
such prior Incentive Awards or such other grants are still outstanding, have
previously been exercised as a whole or in part, or are canceled in connection
with the issuance of new Incentive Awards. The Administering Body may grant
Incentive Awards singly, in combination or in tandem with other Incentive
Awards, as it determines in its discretion. The purchase price, exercise price,
initial value and any and all other terms and conditions of the Incentive Awards
may be established by the Administering Body without regard to existing
Incentive Awards or other grants.
(c) Any action of the Administering Body with respect to the
administration of this Plan shall be taken pursuant to a majority vote of the
authorized number of members of the Administering Body or by the unanimous
written consent of its members; provided, however, that (i) if the Administering
Body is the Compensation Committee and consists of two members, then actions of
the Administering Body must be unanimous, and (ii) if the Administering Body is
the Board, actions taken at a meeting of the Board shall be valid if approved by
directors constituting a majority of the required quorum for such meeting.
4.3 NO LIABILITY. No member of the Board or the Compensation Committee
or any designee thereof will be liable for any action or inaction with respect
to this Plan or any Award or any transaction arising under this Plan or any
Award, except in circumstances constituting bad faith of such member.
4.4 AMENDMENTS.
(a) The Administering Body may, insofar as permitted by applicable law,
rule or regulation, from time to time suspend or discontinue this Plan or revise
or amend it in any respect whatsoever, and this Plan as so revised or amended
will govern all Awards hereunder, including those granted before such revision
or amendment; provided, however, that no such revision or amendment shall alter,
impair or diminish any rights or obligations under any Award previously granted
under this Plan, without the written consent of the Recipient to whom such Award
was granted. Without limiting the generality of the foregoing, the Administering
Body is authorized to amend this Plan to comply with or take advantage of
amendments to applicable laws, rules or regulations, including amendments to the
Securities Act, Exchange Act or the IRC or any rules or regulations promulgated
thereunder. No stockholder approval of any amendment or revision shall be
required unless (i) such approval is required by applicable law, rule or
regulation or (ii) an amendment or revision to this Plan would materially
increase the number of shares subject to this Plan (as adjusted under Section
3.4), materially modify the requirements as to eligibility for participation in
this Plan, extend the final date upon which Awards may be granted under this
Plan, or otherwise materially increase the benefits accruing to Recipients in a
manner not specifically contemplated herein, or affect this Plan's compliance
with Rule 16b-3 or applicable provisions of or regulations under the IRC, and
stockholder approval of the amendment or revision is required to comply with
Rule 16b-3 or applicable provisions of or rules under the IRC.
(b) The Administering Body may, with the written consent of a
Recipient, make such modifications in the terms and conditions of an Incentive
Award as it deems advisable. Without limiting the generality of the foregoing,
the Administering Body may, in its discretion with the written consent of the
Recipient, at any time and from time to time after the grant of any Incentive
4
<PAGE> 8
Award accelerate or extend the vesting or exercise period of any Incentive Award
as a whole or in part, and adjust or reduce the purchase or exercise price of
Incentive Awards held by such Recipient by cancellation of such Incentive Awards
and granting of Incentive Awards at lower purchase or exercise prices or by
modification, extension or renewal of such Incentive Awards. In the case of
Incentive Stock Options, Recipients acknowledge that extensions of the exercise
period may result in the loss of the favorable tax treatment afforded incentive
stock options under Section 422 of the IRC.
(c) Except as otherwise provided in this Plan or in the applicable
Award Document, no amendment, revision, suspension or termination of this Plan
will, without the written consent of the Recipient, alter, terminate, impair or
adversely affect any right or obligation under any Award previously granted
under this Plan.
4.5 OTHER COMPENSATION PLANS. The adoption of this Plan shall not
affect any other stock option, incentive or other compensation plans in effect
for the Company, and this Plan shall not preclude the Company from establishing
any other forms of incentive or other compensation for employees, directors,
advisors or consultants of the Company, whether or not approved by stockholders.
4.6 PLAN BINDING ON SUCCESSORS. This Plan shall be binding upon the
successors and assigns of the Company.
4.7 REFERENCES TO SUCCESSOR STATUTES, REGULATIONS AND RULES. Any
reference in this Plan to a particular statute, regulation or rule shall also
refer to any successor provision of such statute, regulation or rule.
4.8 ISSUANCES FOR COMPENSATION PURPOSES ONLY. This Plan constitutes an
"employee benefit plan" as defined in Rule 405 promulgated under the Securities
Act. Awards to eligible employees or directors shall be made for any lawful
consideration, including compensation for services rendered, promissory notes or
otherwise. Awards to consultants and advisors shall be made only in exchange for
bona fide services rendered by such consultants or advisors and such services
must not be in connection with the offer and sale of securities in a
capital-raising transaction.
4.9 INVALID PROVISIONS. In the event that any provision of this Plan is
found to be invalid or otherwise unenforceable under any applicable law, such
invalidity or unenforceability shall not be construed as rendering any other
provisions contained herein invalid or unenforceable, and all such other
provisions shall be given full force and effect to the same extent as though the
invalid and unenforceable provision were not contained herein.
4.10 GOVERNING LAW. This Agreement shall be governed by and interpreted
in accordance with the internal laws of the State of California, without giving
effect to the principles of the conflicts of laws thereof.
5
<PAGE> 9
ARTICLE V
GENERAL AWARD PROVISIONS
5.1 PARTICIPATION IN THE PLAN.
(a) A person shall be eligible to receive grants of Incentive Awards
under this Plan if, at the time of the grant of the Incentive Award, such person
is an Eligible Person.
(b) Incentive Stock Options may be granted only to Eligible Persons
meeting the employment requirements of Section 422 of the IRC.
(c) Notwithstanding anything to the contrary herein, the Administering
Body may, in order to fulfill the purposes of this Plan, modify grants of
Incentive Awards to Recipients who are foreign nationals or employed outside of
the United States to recognize differences in applicable law, tax policy or
local custom.
5.2 AWARD DOCUMENTS.
(a) Each Award granted under this Plan shall be evidenced by an
agreement duly executed on behalf of the Company and by the Recipient or, in the
Compensation Committee's discretion, a confirming memorandum issued by the
Company to the Recipient, setting forth such terms and conditions applicable to
the Award as the Compensation Committee may in its discretion determine. Award
Documents may but need not be identical and shall comply with and be subject to
the terms and conditions of this Plan, a copy of which shall be provided to each
Recipient and incorporated by reference into each Award Document. Any Award
Document may contain such other terms, provisions and conditions not
inconsistent with this Plan as may be determined by the Compensation Committee.
(b) In case of any conflict between this Plan and any Award Document,
this Plan shall control.
5.3 EXERCISE OF STOCK OPTIONS. No Stock Option shall be exercisable
except in respect of whole shares, and fractional share interests shall be
disregarded. Not less than 100 shares of Common Stock (or such other amount as
is set forth in the applicable Award Documents) may be purchased at one time and
Stock Options must be exercised in multiples of 100 unless the number purchased
is the total number at the time available for purchase under the terms of the
Stock Option. A Stock Option shall be deemed to be exercised when the Secretary
or other designated official of the Company receives written notice of such
exercise from the Recipient, together with payment of the exercise price made in
accordance with Section 5.4 and any amounts required under Section 5.11.
Notwithstanding any other provision of this Plan, the Administering Body may
impose, by rule and/or in Award Documents, such conditions upon the exercise of
Stock Options (including without limitation conditions limiting the time of
exercise to specified periods) as may be required to satisfy applicable
regulatory requirements, including without limitation Rule 16b-3 and Rule 10b-5
under the Exchange Act, and any amounts required under Section 5.12 or other
applicable section of or regulation under the IRC.
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5.4 PAYMENT FOR AWARDS.
(a) The exercise price or other payment for an Award shall be payable
upon the exercise of a Stock Option or upon other purchase of shares pursuant to
an Award granted hereunder by delivery of legal tender of the United States or
payment of such other consideration as the Administering Body may from time to
time deem acceptable in any particular instance.
(b) The Company may assist any person to whom an Award is granted
hereunder (including without limitation any officer or director of the Company)
in the payment of the purchase price or other amounts payable in connection with
the receipt or exercise of that Award, by lending such amounts to such person on
such terms and at such rates of interest and upon such security (if any) as
shall be approved by the Administering Body.
(c) In the discretion of the Administering Body, Awards may be
exercised by capital stock of the Company delivered in transfer to the Company
by or on behalf of the person exercising the Award and duly endorsed in blank or
accompanied by stock powers duly endorsed in blank, with signatures guaranteed
in accordance with the Exchange Act if required by the Administering Body, or
retained by the Company from the stock otherwise issuable upon exercise or
surrender of vested and/or exercisable Awards or other equity incentive awards
previously granted to the Recipient and being exercised (if applicable) (in
either case valued at Fair Market Value as of the exercise date); or such other
consideration as the Administering Body may from time to time in the exercise of
its discretion deem acceptable in any particular instance; provided, however,
that the Administering Body may, in the exercise of its discretion, (i) allow
exercise of an Award in a broker-assisted or similar transaction in which the
exercise price is not received by the Company until promptly after exercise,
and/or (ii) allow the Company to loan the exercise price to the person entitled
to exercise the Award, if the exercise will be followed by a prompt sale of some
or all of the underlying shares and a portion of the sale proceeds is dedicated
to full payment of the exercise price and amounts required pursuant to Section
5.11.
5.5 NO EMPLOYMENT RIGHTS. Nothing contained in this Plan (or in Award
Documents or in any other documents related to this Plan or to Awards granted
hereunder) shall confer upon any Eligible Person or Recipient any right to
continue in the employ of the Company or any Affiliated Entity or constitute any
contract or agreement of employment or engagement, or interfere in any way with
the right of the Company or any Affiliated Entity to reduce such person's
compensation or other benefits or to terminate the employment or engagement of
such Eligible Person or Recipient, with or without cause. Except as expressly
provided in this Plan or in any statement evidencing the grant of an Award
pursuant to this Plan, the Company shall have the right to deal with each
Recipient in the same manner as if this Plan and any such statement evidencing
the grant of an Award pursuant to this Plan did not exist, including without
limitation with respect to all matters related to the hiring, discharge,
compensation and conditions of the employment or engagement of the Recipient.
Any questions as to whether and when there has been a termination of a
Recipient's employment or engagement, the reason (if any) for such termination,
and/or the consequences thereof under the terms of this Plan or any statement
evidencing the grant of an Award pursuant to this Plan shall be determined by
the Administering Body and the Administering Body's determination thereof shall
be final and binding.
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5.6 RESTRICTIONS UNDER APPLICABLE LAWS AND REGULATIONS.
(a) All Awards granted under this Plan shall be subject to the
requirement that, if at any time the Company shall determine, in its discretion,
that the listing, registration or qualification of the shares subject to Awards
granted under this Plan upon any securities exchange or under any federal, state
or foreign law, or the consent or approval of any government regulatory body, is
necessary or desirable as a condition of, or in connection with, the granting of
such an Award or the issuance, if any, or purchase of shares in connection
therewith, such Award may not be exercised as a whole or in part unless and
until such listing, registration, qualification, consent or approval shall have
been effected or obtained free of any conditions not acceptable to the Company.
During the term of this Plan, the Company will use its reasonable efforts to
seek to obtain from the appropriate regulatory agencies any requisite
qualifications, consents, approvals or authorizations in order to issue and sell
such number of shares of its Common Stock as shall be sufficient to satisfy the
requirements of this Plan. The inability of the Company to obtain from any such
regulatory agency having jurisdiction thereof the qualifications, consents,
approvals or authorizations deemed by the Company to be necessary for the lawful
issuance and sale of any shares of its Common Stock hereunder shall relieve the
Company of any liability in respect of the nonissuance or sale of such stock as
to which such requisite authorization shall not have been obtained.
(b) The Company shall be under no obligation to register or qualify the
issuance of Awards or underlying shares under the Securities Act or applicable
state securities laws. Unless the issuance of Awards and underlying shares have
been registered under the Securities Act and qualified or registered under
applicable state securities laws, the Company shall be under no obligation to
issue any Awards or underlying shares of Common Stock covered by any Award
unless the Awards and underlying shares may be issued pursuant to applicable
exemptions from such registration or qualification requirements. In connection
with any such exempt issuance, the Administering Body may require the Recipient
to provide a written representation and undertaking to the Company, satisfactory
in form and scope to the Company and upon which the Company may reasonably rely,
that such Recipient is acquiring such Awards and underlying shares for such
Recipient's own account as an investment and not with a view to, or for sale in
connection with, the distribution of any such shares of stock, and that such
person will make no transfer of the same except in compliance with any rules and
regulations in force at the time of such transfer under the Securities Act and
other applicable law, and that if shares of stock are issued without such
registration, a legend to this effect (together with any other legends deemed
appropriate by the Administering Body) may be endorsed upon the securities so
issued. The Company may also order its transfer agent to stop transfers of such
shares. The Administering Body may also require the Recipient to provide the
Company such information and other documents as the Administering Body may
request in order to satisfy the Administering Body as to the investment
sophistication and experience of the Recipient and as to any other conditions
for compliance with any such exemptions from registration or qualification.
5.7 ADDITIONAL CONDITIONS. Any Incentive Award may also be subject to
such other provisions (whether or not applicable to any other Award or
Recipient) as the Administering Body determines appropriate including without
limitation provisions to assist the Recipient in financing the purchase of
Common Stock through the exercise of Stock Options, provisions for
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the forfeiture of or restrictions on resale or other disposition of shares of
Common Stock acquired under any form of benefit, provisions giving the Company
the right to repurchase shares of Common Stock acquired under any form of
benefit in the event the Recipient elects to dispose of such shares, and
provisions to comply with federal and state securities laws and federal and
state income tax withholding requirements.
5.8 NO PRIVILEGES OF STOCK OWNERSHIP. Except as otherwise set forth
herein, a Recipient or a permitted transferee of an Award shall have no rights
as a stockholder with respect to any shares issuable or issued in connection
with the Award until the date of the receipt by the Company of all amounts
payable in connection with exercise of the Award and performance by the
Recipient of all obligations thereunder. Status as an Eligible Person shall not
be construed as a commitment that any Award will be granted under this Plan to
an Eligible Person or to Eligible Persons generally. No person shall have any
right, title or interest in any fund or in any specific asset (including shares
of capital stock) of the Company by reason of any Award granted hereunder.
Neither this Plan (or any documents related hereto) nor any action taken
pursuant hereto shall be construed to create a trust of any kind or a fiduciary
relationship between the Company and any person. To the extent that any person
acquires a right to receive an Award hereunder, such right shall be no greater
than the right of any unsecured general creditor of the Company.
5.9 NONASSIGNABILITY. No Award granted under this Plan shall be
assignable or transferable except (i) by will or by the laws of descent and
distribution, or (ii) subject to the final sentence of this Section 5.9, upon
dissolution of marriage pursuant to a qualified domestic relations order or, in
the discretion of the Administering Body and under circumstances that would not
adversely affect the interests of the Company, pursuant to a nominal transfer
that does not result in a change in beneficial ownership. During the lifetime of
a Recipient, an Award granted to such person shall be exercisable only by the
Recipient (or the Recipient's permitted transferee) or such person's guardian or
legal representative. Notwithstanding the foregoing, (i) no Award owned by a
Recipient subject to Section 16 of the Exchange Act may be assigned or
transferred in any manner inconsistent with Rule 16b-3, and (ii) Incentive Stock
Options (or other Awards subject to transfer restrictions under the IRC) may not
be assigned or transferred in violation of Section 422(b)(5) of the IRC (or any
comparable or successor provision) or the regulations thereunder, and nothing
herein is intended to allow such assignment or transfer.
5.10 INFORMATION TO RECIPIENTS.
(a) The Administering Body in its sole discretion shall determine what,
if any, financial and other information shall be provided to Recipients and when
such financial and other information shall be provided after giving
consideration to applicable federal and state laws, rules and regulations,
including without limitation applicable federal and state securities laws, rules
and regulations.
(b) The furnishing of financial and other information that is
confidential to the Company shall be subject to the Recipient's agreement that
the Recipient shall maintain the confidentiality of such financial and other
information, shall not disclose such information to third parties, and shall not
use the information for any purpose other than evaluating an investment in
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the Company's securities under this Plan. The Administering Body may impose
other restrictions on the access to and use of such confidential information and
may require a Recipient to acknowledge the Recipient's obligations under this
Section 5.10(b) (which acknowledgment shall not be a condition to Recipient's
obligations under this Section 5.10(b)).
5.11 WITHHOLDING TAXES. Whenever the granting, vesting or exercise of
any Award granted under this Plan, or the transfer of any shares issued upon
exercise of any Award, gives rise to tax or tax withholding liabilities or
obligations, the Administering Body shall have the right to require the
Recipient to remit to the Company an amount sufficient to satisfy any federal,
state and local withholding tax requirements prior to issuance of such shares.
The Administering Body may, in the exercise of its discretion, allow
satisfaction of tax withholding requirements by accepting delivery of stock of
the Company or by withholding a portion of the stock otherwise issuable in
connection with an Award.
5.12 LEGENDS ON AWARDS AND STOCK CERTIFICATES. Each Award Document and
each certificate representing shares acquired upon vesting or exercise of an
Award shall be endorsed with all legends, if any, required by applicable federal
and state securities and other laws to be placed on the Award Document and/or
the certificate. The determination of which legends, if any, shall be placed
upon Award Documents or the certificates shall be made by the Administering Body
in its sole discretion and such decision shall be final and binding.
5.13 EFFECT OF TERMINATION OF EMPLOYMENT ON INCENTIVE AWARDS.
(a) TERMINATION FOR JUST CAUSE. Subject to Section 5.13(c), and except
as otherwise provided in a written agreement between the Company and the
Recipient, which may be entered into at any time before or after termination of
employment, in the event of a Just Cause Dismissal of a Recipient all of the
Recipient's unexercised Stock Options, whether or not vested, shall expire and
become unexercisable as of the date of such Just Cause Dismissal.
(b) TERMINATION OTHER THAN FOR JUST CAUSE. Subject to Section 5.13(c),
and except as otherwise provided in a written agreement between the Company and
the Recipient, which may be entered into at any time before or after termination
of employment, in the event of a Recipient's termination of employment for:
(i) any reason other than for Just Cause Dismissal, death,
Permanent Disability or normal retirement, the Recipient's Stock Options,
whether or not vested, shall expire and become unexercisable as of the earlier
of (A) the date such Stock Options would expire in accordance with their terms
had the Recipient remained employed and (B) 30 days after the date of employment
termination.
(ii) death, Permanent Disability or normal retirement, the
Recipient's unexercised Options shall, whether or not vested, expire and become
unexercisable as of the earlier of (A) the date such Stock Options would expire
in accordance with their terms had the Recipient remained employed and (B) six
months after the date of employment termination.
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(c) ALTERATION OF VESTING AND EXERCISE PERIODS. Notwithstanding
anything to the contrary in Section 5.13(a) or Section 5.13(b), the
Administering Body may in its discretion designate shorter or longer periods to
exercise Stock Options following a Recipient's termination of employment;
provided, however, that any shorter periods determined by the Administering Body
shall be effective only if provided for in the instrument that evidences the
grant to the Recipient of such Stock Options or if such shorter period is agreed
to in writing by the Recipient. Notwithstanding anything to the contrary herein,
Stock Options shall be exercisable by a Recipient (or the Recipient's successor
in interest) following such Recipient's termination of employment only to the
extent that installments thereof had become exercisable on or prior to the date
of such termination; and provided, further, that the Administering Body may, in
its discretion, elect to accelerate the vesting of all or any portion of any
Stock Options that had not become exercisable on or prior to the date of such
termination.
(d) LEAVE OF ABSENCE. In the case of any employee on an approved leave
of absence, the Administering Body may make such provision respecting
continuance of a Stock Option as the Administering Body in its discretion deems
appropriate, except that in no event shall a Stock Option be exercisable after
the date such Stock Options would expire in accordance with its terms had the
Recipient remained continuously employed.
5.14 LIMITS ON AWARDS TO ELIGIBLE PERSONS. Notwithstanding any other
provision of this Plan, in order for the compensation attributable to Awards
hereunder to qualify as Performance-Based Compensation, 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. The limitation set forth in this Section 5.14
shall be subject to adjustment as provided in Section 3.4 or under Article VII,
but only to the extent such adjustment would not affect the status of
compensation attributable to Awards hereunder as Performance-Based Compensation.
ARTICLE VI
INCENTIVE AWARDS
6.1 STOCK OPTIONS.
(a) NATURE OF STOCK OPTIONS. Stock Options may be Incentive Stock
Options or Nonqualified Stock Options.
(b) OPTION EXERCISE PRICE. The exercise price for each Stock Option
shall be determined by the Administering Body as of the date such Stock Option
is granted. The exercise price shall be no less than the Fair Market Value of
the Common Stock subject to the Option. The Administering Body may, with the
consent of the Recipient and subject to compliance with statutory or
administrative requirements applicable to Incentive Stock Options, amend the
terms of any Stock Option to provide that the exercise price of the shares
remaining subject to the Stock Option shall be reestablished at a price not less
than 100% of the Fair Market Value of the Common Stock on the effective date of
the amendment. No modification of any other term or provision of any Stock
Option that is amended in accordance with the foregoing shall be required,
although the Administering Body may, in its discretion, make such further
modifications of any such Stock Option as are not inconsistent with this Plan.
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(c) OPTION PERIOD AND VESTING. Stock Options granted hereunder shall
vest and may be exercised as determined by the Administering Body, except that
exercise of such Stock Options after termination of the Recipient's employment
shall be subject to Section 5.13. Each Stock Option granted hereunder and all
rights or obligations thereunder shall expire on such date as shall be
determined by the Administering Body, but not later than l0 years after the date
the Stock Option is granted and shall be subject to earlier termination as
provided herein or in the Award Document. The Administering Body may, in its
discretion at any time and from time to time after the grant of a Stock Option,
accelerate vesting of such Option as a whole or part by increasing the number of
shares then purchasable, provided that the total number of shares subject to
such Stock Option may not be increased. Except as otherwise provided herein, a
Stock Option shall become exercisable, as a whole or in part, on the date or
dates specified by the Administering Body and thereafter shall remain
exercisable until the expiration or earlier termination of the Stock Option.
(d) SPECIAL PROVISIONS REGARDING INCENTIVE STOCK OPTIONS.
(i) Notwithstanding anything in this Section 6.1 to the
contrary, the exercise price and vesting period of any Stock Option intended to
qualify as an Incentive Stock Option shall comply with the provisions of Section
422 of the IRC and the regulations thereunder. As of the Effective Date, such
provisions require, among other matters, that (A) the exercise price must not be
less than the Fair Market Value of the underlying stock as of the date the
Incentive Stock Option is granted, and not less than 110% of the Fair Market
Value as of such date in the case of a grant to a Significant Stockholder; and
(B) that the Incentive Stock Option not be exercisable after the expiration of
five years from the date of grant in the case of an Incentive Stock Option
granted to a Significant Stockholder.
(ii) The aggregate Fair Market Value (determined as of the
respective date or dates of grant) of the Common Stock for which one or more
Options granted to any Recipient under this Plan (or any other option plan of
the Company or any of its subsidiaries or affiliates) may for the first time
become exercisable as Incentive Stock Options under the federal tax laws during
any one calendar year shall not exceed $100,000.
(iii) Any Options granted as Incentive Stock Options pursuant
to this Plan that for any reason fail or cease to qualify as such shall be
treated as Nonqualified Stock Options.
6.2 STOCK APPRECIATION RIGHTS.
(a) GRANTING OF STOCK APPRECIATION RIGHTS. The Administering Body may
at any time and from time to time approve the grant to Eligible Persons of Stock
Appreciation Rights, related or unrelated to Stock Options.
(b) STOCK APPRECIATION RIGHTS RELATED TO OPTIONS.
(i) A Stock Appreciation Right granted in connection with a
Stock Option granted under this Plan will entitle the holder of the related
Stock Option, upon exercise of the Stock Appreciation Right, to surrender such
Stock Option, or any portion thereof to the extent
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previously vested but unexercised, with respect to the number of shares as to
which such Stock Appreciation Right is exercised, and to receive payment of an
amount computed pursuant to Section 6.2(b)(iii). Such Stock Option will, to the
extent surrendered, then cease to be exercisable.
(ii) A Stock Appreciation Right granted in connection with a
Stock Option hereunder will be exercisable at such time or times, and only to
the extent that, the related Stock Option is exercisable, and will not be
transferable except to the extent that such related Stock Option may be
transferable.
(iii) Upon the exercise of a Stock Appreciation Right related
to a Stock Option, the Recipient will be entitled to receive payment of an
amount determined by multiplying: (A) the difference obtained by subtracting the
exercise price of a share of Common Stock specified in the related Stock Option
from the Fair Market Value of a share of Common Stock on the date of exercise of
such Stock Appreciation Right (or as of such other date or as of the occurrence
of such event as may have been specified in the instrument evidencing the grant
of the Stock Appreciation Right), by (B) the number of shares as to which such
Stock Appreciation Right is exercised.
(c) STOCK APPRECIATION RIGHTS UNRELATED TO OPTIONS. The Administering
Body may grant Stock Appreciation Rights unrelated to Stock Options to Eligible
Persons. Section 6.2(b)(iii) shall be used to determine the amount payable at
exercise under such Stock Appreciation Right, except that in lieu of the Option
exercise price specified in the related Stock Option the initial base amount
specified in the Incentive Award shall be used.
(d) LIMITS. Notwithstanding the foregoing, the Administering Body, in
its discretion, may place a dollar limitation on the maximum amount that will be
payable upon the exercise of a Stock Appreciation Right under this Plan.
(e) PAYMENTS. Payment of the amount determined under the foregoing
provisions may be made solely in whole shares of Common Stock valued at their
Fair Market Value on the date of exercise of the Stock Appreciation Right or,
alternatively, at the sole discretion of the Administering Body, in cash or in a
combination of cash and shares of Common Stock as the Administering Body deems
advisable. The Administering Body has full discretion to determine the form in
which payment of a Stock Appreciation Right will be made and to consent to or
disapprove the election of a Recipient to receive cash in full or partial
settlement of a Stock Appreciation Right. If the Administering Body decides to
make full payment in shares of Common Stock, and the amount payable results in a
fractional share, payment for the fractional share will be made in cash.
(f) RULE 16b-3. The Administering Body may, at the time a Stock
Appreciation Right is granted, impose such conditions on the exercise of the
Stock Appreciation Right as may be required to satisfy the requirements of Rule
16b-3 (or any other comparable provisions in effect at the time or times in
question).
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6.3 STOCK PAYMENTS. The Administering Body may approve Stock Payments
of the Company's Common Stock to any Eligible Person for all or any portion of
the compensation (other than base salary) or other payment that would otherwise
become payable by the Company to the Eligible Person in cash.
6.4 DIVIDEND EQUIVALENTS. The Administering Body may grant Dividend
Equivalents to any Recipient who has received a Stock Option, Stock Appreciation
Right or other Incentive Award denominated in shares of Common Stock. Such
Dividend Equivalents shall be effective and shall entitle the recipients thereof
to payments during the Applicable Dividend Period. Dividend Equivalents may be
paid in cash, Common Stock or other Incentive Awards; the amount of Dividend
Equivalents paid other than in cash shall be determined by the Administering
Body by application of such formula as the Administering Body may deem
appropriate to translate the cash value of dividends paid to the alternative
form of payment of the Dividend Equivalent. Dividend Equivalents shall be
computed as of each dividend record date and shall be payable to recipients
thereof at such time as the Administering Body may determine.
6.5 STOCK BONUSES. The Administering Body may issue shares of Common
Stock to Eligible Persons as bonuses for services rendered or for any other
valid consideration on such terms and conditions as the Administering Body may
determine.
6.6 STOCK SALES. The Administering Body may sell to Eligible Persons
shares of Common Stock on such terms and conditions as the Administering Body
may determine.
6.7 PHANTOM STOCK. The Administering Body is authorized to grant Awards
of Phantom Stock. Phantom Stock is a cash bonus granted under this Plan measured
by the Fair Market Value of a specified number of shares of Common Stock on a
specified date, or measured by the excess of such Fair Market Value over a
specified minimum, which may but need not include a Dividend Equivalent.
6.8 OTHER STOCK-BASED BENEFITS. The Administering Body is authorized to
grant Other Stock-Based Benefits. Other Stock-Based Benefits are any
arrangements granted under this Plan not otherwise described above that (i) by
their terms might involve the issuance or sale of Common Stock or (ii) involve a
benefit that is measured, as a whole or in part, by the value, appreciation,
dividend yield or other features attributable to a specified number of shares of
Common Stock.
ARTICLE VII
REORGANIZATIONS
7.1 CORPORATE TRANSACTIONS NOT INVOLVING A CHANGE IN CONTROL. If the
Company shall consummate any Reorganization not involving a Change of Control in
which holders of shares of Common Stock are entitled to receive in respect of
such shares any securities, cash or other consideration (including without
limitation a different number of shares of Common Stock), each Award outstanding
under this Plan shall thereafter be exercisable, in accordance with this Plan,
only for the kind and amount of securities, cash and/or other consideration
receivable upon such Reorganization by a holder of the same number of shares of
Common Stock as are subject to
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that Award immediately prior to such Reorganization, and any adjustments will be
made to the terms of the Award in the sole discretion of the Administering Body
as it may deem appropriate to give effect to the Reorganization.
7.2 CORPORATE TRANSACTIONS INVOLVING A CHANGE IN CONTROL. As of the
effective time and date of any Change in Control, this Plan and any then
outstanding Awards (whether or not vested) shall automatically terminate unless
(a) provision is made in writing in connection with such transaction for the
continuance of this 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 this 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 (b) the Board otherwise shall
provide in writing for such adjustments as it deems appropriate in the terms and
conditions of the then-outstanding Awards (whether or not vested), including
without limitation (i) accelerating the vesting of outstanding Awards and/or
(ii) providing 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 this Section 7.2, this Plan and the Awards shall
terminate by reason of the occurrence of a Change in Control without provision
for any of the actions described in clause (a) or (b) hereof, 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.
ARTICLE VIII
DEFINITIONS
Capitalized terms used in this Plan and not otherwise defined shall
have the meanings set forth below:
"ADMINISTERING BODY" shall mean the Board as long as no Compensation
Committee has been appointed and is in effect and shall mean the Compensation
Committee as long as the Compensation Committee is appointed and in effect.
"AFFILIATED ENTITY" means any Parent Corporation or Subsidiary
Corporation.
"APPLICABLE DIVIDEND PERIOD" means (i) the period between the date a
Dividend Equivalent is granted and the date the related Stock Option, Stock
Appreciation Right, or other Incentive Award is exercised, terminates, or is
converted to Common Stock, or (ii) such other time as the Administering Body may
specify in the written instrument evidencing the grant of the Dividend
Equivalent.
"AWARD" means any Incentive Award.
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"AWARD DOCUMENT" means the agreement or confirming memorandum setting
forth the terms and conditions of an Award.
"BOARD" means the Board of Directors of the Company.
"CHANGE IN CONTROL" means the following and shall be deemed to occur if
any of the following events occur:
(a) Any Person becomes the beneficial owner (within the meaning of Rule
13d-3 promulgated under the Exchange Act) of thirty percent (30%) or more of
either the then outstanding shares of Common Stock or the combined voting power
of the Company's then outstanding securities entitled to vote generally in the
election of directors; or
(b) Individuals who, as of the effective date hereof, constitute the
Board of Directors of the Company (the "INCUMBENT BOARD") cease for any reason
to constitute at least a majority of the Board of Directors of the Company,
provided that any individual who becomes a director after the effective date
hereof whose election, or nomination for election by the Company's stockholders,
is approved by a vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered to be a member of the Incumbent Board
unless that individual was nominated or elected by any Person having the power
to exercise, through beneficial ownership, voting agreement and/or proxy, twenty
percent (20%) or more of either the outstanding shares of Common Stock or the
combined voting power of the Company's then outstanding voting securities
entitled to vote generally in the election of directors, in which case that
individual shall not be considered to be a member of the Incumbent Board unless
such individual's election or nomination for election by the Company's
stockholders is approved by a vote of at least two-thirds of the directors then
comprising the Incumbent Board; or
(c) Consummation by the Company of the sale or other disposition by the
Company of all or substantially all of the Company's assets or a reorganization
or merger or consolidation of the Company with any other person, entity or
corporation, other than
(i) a reorganization or merger or consolidation that would
result in the voting securities of the Company outstanding immediately
prior thereto (or, in the case of a reorganization or merger or
consolidation that is preceded or accomplished by an acquisition or
series of related acquisitions by any Person, by tender or exchange
offer or otherwise, of voting securities representing five percent (5%)
or more of the combined voting power of all securities of the Company,
immediately prior to such acquisition or the first acquisition in such
series of acquisitions) continuing to represent, either by remaining
outstanding or by being converted into voting securities of another
entity, more than fifty percent (50%) of the combined voting power of
the voting securities of the Company or such other entity outstanding
immediately after such reorganization or merger or consolidation (or
series of related transactions involving such a reorganization or
merger or consolidation), or
(ii) a reorganization or merger or consolidation effected to
implement a recapitalization or reincorporation of the Company (or
similar transaction) that does not
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result in a material change in beneficial ownership of the voting
securities of the Company or its successor; or
(d) Approval by the stockholders of the Company or any order by a court
of competent jurisdiction of a plan of liquidation of the Company.
Notwithstanding the foregoing, a Change in Control of the type
described in paragraph (b), (c) or (d) shall be deemed to be completed on the
date it occurs, and a Change in Control of the type described in paragraph (a)
shall be deemed to be completed as of the date the entity or group attaining
thirty percent (30%) or greater ownership has elected its representatives to the
Company's board of directors and/or caused its nominees to become officers of
the Company with the authority to terminate or alter the terms of Employee's
employment.
"COMMISSION" means the Securities and Exchange Commission.
"COMMON STOCK" means the common stock of the Company, par value $.001
per share, as constituted on the Effective Date of this Plan, and as thereafter
adjusted as a result of any one or more events requiring adjustment of
outstanding Awards under Section 3.4 above.
"COMPANY" means Long Beach Financial Corporation, a Delaware
corporation.
"COMPENSATION COMMITTEE" means the committee appointed by the Board to
administer this Plan pursuant to Section 4.1.
"DIVIDEND EQUIVALENT" means a right granted by the Company under
Section 6.5 to a holder of a Stock Option, Stock Appreciation Right or other
Incentive Award denominated in shares of Common Stock to receive from the
Company during the Applicable Dividend Period payments equivalent to the amount
of dividends payable to holders of the number of shares of Common Stock
underlying such Stock Option, Stock Appreciation Right, or other Incentive
Award.
"EFFECTIVE DATE" means February 18, 1997, which is the date this Plan
was adopted by the Board.
"ELIGIBLE PERSON" shall include directors, officers, employees,
consultants and advisors of the Company or of any Affiliated Entity.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCHANGE ACT REGISTERED COMPANY" means that the Company has any class
of any equity security registered pursuant to Section 12 of the Exchange Act.
"EXPIRATION DATE" means the tenth anniversary of the Effective Date.
17
<PAGE> 21
"FAIR MARKET VALUE" of a share of the Company's capital stock as of a
particular date shall be: (i) if the stock is listed on an established stock
exchange or exchanges (including for this purpose, the Nasdaq National Market),
the average of the highest and lowest sale prices of the stock quoted for such
date as reported in the Transactions Index of each such exchange, as published
in The Wall Street Journal and determined by the Administering Body, or, if no
sale price was quoted in any such Index for such date, then as of the next
preceding date on which such a sale price was quoted; or (ii) if the stock is
not then listed on an exchange or the Nasdaq National Market, the average of the
closing bid and asked prices per share for the stock in the over-the-counter
market as quoted on The Nasdaq Small Cap Market on such date (in the case of (i)
or (ii), subject to adjustment as and if necessary and appropriate to set an
exercise price not less than 100% of the fair market value of the stock on the
date an option is granted); or (iii) if the stock is not then listed on an
exchange or quoted in the over-the-counter market, an amount determined in good
faith by the Administering Body; provided, however, that (A) when appropriate,
the Administering Body, in determining Fair Market Value of capital stock of the
Company, may take into account such other factors as it may deem appropriate
under the circumstances and (B) if the stock is traded on the Nasdaq Small Cap
Market and both sales prices and bid and asked prices are quoted or available,
the Administering Body may elect to determine Fair Market Value under either
clause (i) or (ii) above. Notwithstanding the foregoing, the Fair Market Value
of capital stock for purposes of grants of Incentive Stock Options shall be
determined in compliance with applicable provisions of the IRC. The Fair Market
Value of rights or property other than capital stock of the Company means the
fair market value thereof as determined by the Compensation Committee on the
basis of such factors as it may deem appropriate.
"INCENTIVE AWARD" means any Stock Option, Restricted Stock, Stock
Appreciation Right, Stock Payment, Stock Bonus, Stock Sale, Phantom Stock,
Dividend Equivalent, or Other Stock-Based Benefit granted or sold to an Eligible
Person under this Plan.
"INCENTIVE STOCK OPTION" means a Stock Option that qualifies as an
incentive stock option under Section 422 of the IRC, or any successor statute
thereto.
"IRC" means the Internal Revenue Code of 1986, as amended.
"JUST CAUSE DISMISSAL" shall mean a termination of a Recipient's
employment for any of the following reasons: (i) the Recipient violates any
reasonable rule or regulation of the Board, the Company's Chief Executive
Officer or the Recipient's superiors that results in damage to the Company or
which, after written notice to do so, the Recipient fails to correct within a
reasonable time; (ii) any willful misconduct or gross negligence by the
Recipient in the responsibilities assigned to the Recipient; (iii) any willful
failure to perform the Recipient's job as required to meet Company objectives;
(iv) any wrongful conduct of a Recipient which has an adverse impact on the
Company or which constitutes a misappropriation of Company assets; (v) the
Recipient's performing services for any other person or entity which competes
with the Company while the Recipient is employed by the Company, without the
written approval of the Chief Executive Officer of the Company; or (vi) any
other conduct that the Administering Body determines constitutes Just Cause for
Dismissal; provided, however, that if a Recipient is party to an employment
agreement with the Company providing for just cause dismissal (or some
comparable
18
<PAGE> 22
notion) of Recipient from Recipient's employment with the Company, "Just Cause
Dismissal" for purposes of this Plan shall have the same meaning as ascribed
thereto or to such comparable notion in such employment agreement.
"NONEMPLOYEE DIRECTOR" means any director of the Company who qualifies
as a "nonemployee director" within the meaning of Rule 16b-3.
"NONQUALIFIED STOCK OPTION" means a Stock Option that is not an
Incentive Stock Option.
"OTHER STOCK-BASED BENEFITS" means an Incentive Award granted under
Section 6.9 of this Plan.
"OUTSIDE DIRECTOR means an "outside director" as defined in the
regulations adopted under Section 162(m) of the IRC.
"PARENT CORPORATION" means any Parent Corporation as defined in Section
424(e) of the IRC.
"PAYMENT EVENT" means the event or events giving rise to the right to
payment of a Performance Award.
"PERFORMANCE-BASED COMPENSATION" means performance-based compensation
as described in Section 162(m) of the IRC. If the amount of compensation an
Eligible Person will receive under any Award is not based solely on an increase
in the value of Common Stock after the date of grant or award, the Compensation
Committee, in order to qualify an Award as performance-based compensation under
Section 162(m) of the IRC, can condition the grant, award, 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 earning 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.
"PERSON" means any person, entity or group, within the meaning of
Section 13(d) or 14(d) of the Exchange Act, but excluding (i) the Company and
its subsidiaries, (ii) any employee stock ownership or other employee benefit
plan maintained by the Company that is qualified under ERISA and (iii) an
underwriter or underwriting syndicate that has acquired the Company's securities
solely in connection with a public offering thereof.
"PERMANENT DISABILITY" shall mean that the Recipient becomes physically
or mentally incapacitated or disabled so that the Recipient is unable to perform
substantially the same services as the Recipient performed prior to incurring
such incapacity or disability (the Company, at its option and expense, being
entitled to retain a physician to confirm the existence of such incapacity or
disability, and the determination of such physician to be binding upon the
Company and the
19
<PAGE> 23
Recipient), and such incapacity or disability continues for a period of three
consecutive months or six months in any 12-month period or such other period(s)
as may be determined by the Compensation Committee with respect to any Award,
provided that for purposes of determining the period during which an Incentive
Stock Option may be exercised pursuant to Section 5.13(ii) hereof, Permanent
Disability shall mean "permanent and total disability" as defined in Section
22(e) of the IRC.
"PHANTOM STOCK" means an Incentive Award granted under Section 6.8 of
this Plan.
"PLAN" means this 1997 Stock Incentive Plan of the Company.
"PLAN TERM" means the period during which this Plan remains in effect
(commencing the Effective Date and ending on the Expiration Date).
"PURCHASE PRICE" means the purchase price (if any) to be paid by a
Recipient for Restricted Stock as determined by the Compensation Committee
(which price shall be at least equal to the minimum price required under
applicable laws and regulations for the issuance of Common Stock which is
nontransferable and subject to a substantial risk of forfeiture until specific
conditions are met).
"RECIPIENT" means a person who has received an Award under this Plan.
"REORGANIZATION" means any merger, consolidation or other
reorganization.
"RULE 16b-3" means Rule 16b-3 under the Exchange Act.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SIGNIFICANT STOCKHOLDER" is an individual who, at the time a Stock
Option is granted to such individual under this Plan, owns more than ten percent
(10%) of the combined voting power of all classes of stock of the Company or of
any Parent Corporation or Subsidiary Corporation (after application of the
attribution rules set forth in Section 424(d) of the IRC).
"STOCK APPRECIATION RIGHT" means a right granted under Section 6.3 to
receive a payment that is measured with reference to the amount by which the
Fair Market Value of a specified number of shares of Common Stock appreciates
from a specified date, such as the date of grant of the Stock Appreciation
Right, to the date of exercise.
"STOCK BONUS" means an issuance or delivery of unrestricted or
restricted shares of Common Stock under Section 6.6 of this Plan as a bonus for
services rendered or for any other valid consideration under applicable law.
"STOCK PAYMENT" means a payment in shares of the Company's Common Stock
to replace all or any portion of the compensation (other than base salary) that
would otherwise become payable to a Recipient.
20
<PAGE> 24
"STOCK OPTION" means a right to purchase stock of the Company granted
under Section 6.1 of this Plan.
"STOCK SALE" means a sale of Common Stock to an Eligible Person under
Section 6.7 of this Plan.
"SUBSIDIARY CORPORATION" means any Subsidiary Corporation as defined in
Section 425(f) of the IRC.
<PAGE> 1
EXHIBIT 21.1
LIST OF SUBSIDIARIES
1. Name: Ameriquest Mortgage Corporation
State of Incorporation: Delaware
Name Under Which Subsidiary Does Business: Ameriquest Mortgage Corporation
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement 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
February 18, 1997
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement 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
February 18, 1997
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<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
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0
0
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