<PAGE>   1
 
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                                 UNITED STATES
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON D.C. 20549
 
                                   FORM 10-K
 
              [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
          THE SECURITIES EXCHANGE ACT OF 1934
 
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
                                       OR
            [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
        THE SECURITIES EXCHANGE ACT OF 1934
 
           FOR THE TRANSITION PERIOD FROM ____________ TO __________

 
                         COMMISSION FILE NUMBER 1-12889
 
                        LONG BEACH FINANCIAL CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                                                          <C>
                          DELAWARE                                              33-0739843
              (STATE OR OTHER JURISDICTION OF                                (I.R.S. EMPLOYER
               INCORPORATION OR ORGANIZATION)                              IDENTIFICATION NO.)
</TABLE>
 
         1100 TOWN & COUNTRY ROAD, SUITE 1600, ORANGE, CALIFORNIA 92868
          (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
 
                                 (714) 835-5743
              (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
 
        SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
 
          SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
 
<TABLE>
<CAPTION>
             TITLE OF EACH CLASS                 NAME OF EACH EXCHANGE ON WHICH REGISTERED
             -------------------                 -----------------------------------------
<S>                                            <C>
       COMMON STOCK, PAR VALUE $0.001                     NASDAQ NATIONAL MARKET
       PREFERRED STOCK PURCHASE RIGHTS                    NASDAQ NATIONAL MARKET
</TABLE>
 
     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [X]  No [ ].
 
     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [ ].
 
     The aggregate market value of the voting stock held by non-affiliates of
Registrant, as of March 15, 1999, was $223,270,000, based upon the closing price
of Registrant's Common Stock on that date. For purposes of this disclosure,
shares of common stock held by directors and executive officers of Registrant
are assumed to be "held by affiliates"; this assumption is not to be deemed to
be an admission by such persons that they are affiliates of Registrant.
 
     As of March 15, 1999, Registrant had outstanding 22,609,618 shares of
Common Stock.
 
                      DOCUMENTS INCORPORATED BY REFERENCE
 
     Portions of Registrant's Proxy Statement relating to its 1999 Annual
Meeting of Stockholders are incorporated by reference into Part III of this
report.
 
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<PAGE>   2
 
                        LONG BEACH FINANCIAL CORPORATION
 
                               TABLE OF CONTENTS
 
                                  TO FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 1998
 
<TABLE>
<CAPTION>
                                                                        PAGE
                                                                        ----
<S>       <C>                                                           <C>
                                   PART I
 
Item 1.   Business....................................................    1
Item 2.   Properties..................................................   22
Item 3.   Legal Proceedings...........................................   23
Item 4.   Submission of Matters to a Vote of Security Holders.........   23
 
                                  PART II
 
Item 5.   Market for Registrant's Common Equity and Related
          Stockholder Matters.........................................   23
Item 6.   Selected Financial Data.....................................   24
Item 7.   Management's Discussion and Analysis of Financial Condition,
          Results of Operations, Liquidity and Capital Resources......   25
Item 7A.  Quantitative and Qualitative Disclosures About Market
          Risk........................................................   37
Item 8.   Financial Statements and Supplementary Data.................   38
Item 9.   Changes in and Disagreements With Accountants on Accounting
          and Financial Disclosure....................................   38
 
                                  PART III
 
Item 10.  Directors and Executive Officers of the Registrant..........   38
Item 11.  Executive Compensation......................................   38
Item 12.  Security Ownership of Certain Beneficial Owners and
          Management..................................................   38
Item 13.  Certain Relationships and Related Transactions..............   39
 
                                  PART IV
 
Item 14.  Financial Statement Schedules, Exhibits, and Reports of Form
          8-K.........................................................   39
          Signatures..................................................   42
Index to Financial Statements.........................................  F-1
</TABLE>
 
                                        i
<PAGE>   3
 
                        LONG BEACH FINANCIAL CORPORATION
 
                                     PART I
 
ITEM 1. BUSINESS
 
GENERAL
 
     Long Beach Financial Corporation ("LBFC"), through its subsidiary, Long
Beach Mortgage Company (collectively, the "Company"), is a specialty finance
company engaged in the business of originating, purchasing and selling subprime
residential mortgage loans secured by one-to-four family residences. The
Company's core borrower base consists of individuals who do not qualify for
traditional "A" credit because their credit histories, debt to income ratios or
other factors cause them not to conform to standard agency lending criteria. The
Company's primary operating strategy has been to originate, purchase and sell
loans on a basis that exposes the Company to less default and prepayment risk
than is normally inherent in a mortgage lender's business. A key element in this
strategy has been the Company's sales of its loans for cash to institutional
purchasers at a premium above the outstanding principal balance of the loans. As
a result, the Company has historically generated positive cash flow and
substantially reduced the risk of holding residual interests in the loans sold
by the Company.
 
     The Company sources loans through approximately 12,500 independent mortgage
loan brokers that generate loans in all 50 states. The large number of brokers
reflects the Company's strategy of utilizing a diverse group of small brokers to
avoid becoming dependent on a few primary producers. In 1998, the Company's
single largest wholesale producing broker was responsible for less than 1% of
the Company's wholesale originations during the year. The Company maintains a
close working relationship with brokers through its sales force of approximately
325 account executives located in 72 offices. Having account executives
geographically close to the independent brokers enables the Company to deliver a
high level of customer service to the brokers with whom the Company does
business. The primary elements of the Company's customer service are actively
assisting the broker in identifying the appropriate product for the borrower,
applying lending criteria in a consistent manner, promptly processing loan
applications and providing any other assistance that the broker may require to
complete the loan transaction. A high level of customer service, together with
the account executive's 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 originates loans through wholesale and retail channels of
production. The wholesale channel is comprised of broker-sourced production and
production from correspondents. Through the retail production channel the
Company directly interacts with the customer through direct mail, telemarketing,
the internet and other sources. See Management's Discussion and Analysis of
Financial Condition, Results of Operations, Liquidity and Capital Resources and
Note 16 to the Consolidated Financial Statements for financial information about
the Company's business segments.
 
     The Company historically has followed a strategy of selling substantially
all of its loan originations in the secondary market through loan sales in which
the Company disposes of its entire economic interest in the loan except for the
related servicing rights, which it has generally retained, for a cash price that
represents a premium over the principal balance of the loans sold. Cash from
loan sales has been used by the Company to repay borrowings previously made
under its warehouse financing facility. These loan sales have been an important
factor in generating the Company's historic earnings and creating consistent
positive cash flow to further its operations. The Company may utilize
alternative strategies to maximize the value it receives on its loan sales. Such
strategies may include securitization. The Company's focus in utilizing such a
strategy would be to retain a positive cash flow operating model.
 
  Growth Strategy
 
     The Company seeks to profitably expand its broker-sourced 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) increasing
coordination
 
                                        1
<PAGE>   4
 
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); and (iv) expanding the automation of the underwriting process.
 
     The retail loan operations conducted under the name "Financing USA" offers
the same products as those of the broker-sourced operations and are sourced
primarily through technology-based direct mail and electronic media marketing,
rather than on a network of branch sales offices. This strategy is designed to
enable the Company to operate with less overhead than a direct-sourced loan
business that operates through a branch sales office network.
 
     In accordance with the strategic plan, the Company successfully launched an
independent servicing operation in November 1998. The Company was approved as a
residential subprime loan servicer by Standard & Poor's during the fourth
quarter of 1998. Additionally, the Company is approved as a seller for Fannie
Mae, and as a non-supervised mortgagee by the United States Department of
Housing and Urban Development.
 
  Corporate History
 
     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 "Long Beach Mortgage Company."
 
     LBFC was incorporated in January 1997. At the time of incorporation, LBFC
was a wholly-owned subsidiary of a company now known as Ameriquest Mortgage
Company ("AMC"). AMC conducted its mortgage lending business through four
divisions: (i) the direct-sourced lending division, (ii) the broker-sourced
lending division, (iii) loan sales division, and (iv) the loan servicing
division. LBFC was formed to facilitate the public sale of AMC's broker-sourced
lending and loan sales divisions. All references to the "Wholesale Division"
herein shall be deemed to include the operations of the broker-sourced lending
division of AMC prior to the Reorganization (defined below).
 
     On April 28, 1997, LBFC's Registration Statement (No. 333-22013) on Form
S-1 under the Securities Act of 1933, as amended (the "Registration Statement"),
relating to the initial public offering of its common stock was declared
effective. The initial public offering of 22,504,000 shares of common stock
closed at a price of $6.50 per share on May 2, 1997. On May 14, 1997, the
underwriters, Friedman, Billings, Ramsey and Co., Inc. ("FBR"), purchased an
additional 2,496,000 shares of common stock at a price of $6.50 per share
following their exercise of the overallotment option, resulting in a total of
25,000,000 shares sold in the initial public offering (the "Offering") for a
total aggregate price of $162.5 million.
 
     On May 2, 1997, immediately prior to the closing of the initial public sale
of LBFC's common stock, AMC reorganized its business operations (the
"Reorganization") by transferring certain assets (including furniture, leasehold
improvements and equipment) and personnel relating to the broker-sourced lending
and the loan sales divisions and approximately $40.0 million in cash (less
approximately $2.0 million in related expenses) to the Company in exchange for
24,999,999 shares of common stock. The assets transferred to the Company
included loans in process as of May 2, 1997, but did not include loans funded or
servicing rights with respect to loans funded prior to May 2, 1997. The rights
to loans which were originated by the Wholesale Division but remained unsold at
May 2, 1997 were retained by AMC (the "Retained Loans"). The costs relating to
the production of these loans were incurred and recorded by the Wholesale
Division and are included in the Company's consolidated results of operations
for 1997. These loans are included in loan production amounts reported for the
Company for the year ended December 31, 1997. Subsequent to the Reorganization,
the Company purchased the Retained Loans from AMC at the same price and at the
same time that the Company sold these loans to independent, third-party
purchasers. Because the gain from the sale of the Retained Loans was recorded
after the Reorganization, and because the Company's stockholders did not receive
any of the benefit of this gain, the Company did not include the gain from the
sale of the Retained Loans as part of the Company's net earnings in 1997. The
principal amount of the Retained Loans was approximately $33.8 million and the
after-tax gain from the sale of these loans was approximately $807,000.
 
                                        2
<PAGE>   5
 
The gains from the sale of the Retained Loans are not reflected either as income
from the Wholesale Division of AMC or as income from the Company.
 
     Additionally, as part of the Reorganization, the Company acquired the
going-concern value of the existing and established approved customer base of
independent brokers and the sole right to the "Long Beach Mortgage Company"
name. The Company did not assume any liabilities of AMC other than certain
liabilities associated with equipment and property leases acquired by the
Company and accrued vacation and other employee benefits for personnel
transferred to the Company. The Reorganization has been accounted for in a
manner similar to a pooling of interests; therefore, the historical cost basis
of the assets and liabilities transferred to the Company was carried over from
the Wholesale Division.
 
     The transfer of the assets and personnel described above by AMC to the
Company was treated for federal income tax purposes as a taxable sale of assets.
As a result, the tax basis of the assets transferred from AMC to the Company in
the Reorganization was increased to their fair market value (determined by
reference to the initial public offering price.) In general, Section 197 of the
Internal Revenue Code allows for the amortization over a 15-year period of
intangible assets (including goodwill and going concern value) acquired in a
transaction such as the Reorganization. The so-called "anti-churning rules set
forth in Section 197(f)(9) of the Internal Revenue Code, however, prohibit the
amortization of goodwill, going concern value and intangible assets, the useful
lives of which cannot be determined with reasonable accuracy where such assets
are transferred between related parties and the transferor held or used such
intangible assets at any time on or after July 25, 1991, and on or before August
10, 1993.
 
     For income tax purposes, the Company is amortizing over a 15-year period
the intangible assets acquired from AMC in the Reorganization. Based upon
historical earnings levels it is probable that the Company will generate
sufficient taxable income to realize the benefits associated with the net
deferred tax asset through future tax deductions. As the Company realizes the
benefits associated with the deferred tax asset, there will be a corresponding
reduction in income taxes payable by the Company. The deferred tax benefit is
realized through a reduction in the current tax payable resulting in no effect
on net income. If the Company determines that estimated future earnings are not
sufficient to realize the deferred tax benefit, the Company will establish a
valuation allowance for the impairment of the deferred tax assets, through a
charge to the income tax provision, which will result in a reduction of net
earnings.
 
     As part of the Reorganization, the Company and AMC entered into several
agreements which include: (i) two administrative services agreements, (ii) a
loan sub-servicing agreement and (iii) a contribution agreement. Under the first
administrative services agreement, AMC agreed to provide various services to the
Company, including certain employee benefits administration services,
information services and data processing functions. The agreement had a one-year
term from the effective date of the Reorganization unless earlier terminated by
the Company upon 30 days written notice. In February 1998, the Company
terminated the administrative services agreement, effective March 1, 1998.
 
     Under an additional administrative services agreement, the Company agreed
to assist AMC in selling the mortgage loans originated by AMC and to provide
investor coordination and information for the existing loan portfolio as well as
new loan originations. The agreement had a one-year term from the effective date
of the Reorganization, unless earlier terminated by AMC upon 30 days written
notice. In February 1998, AMC terminated the second administrative service
agreement, effective March 1, 1998.
 
     Under the loan sub-servicing agreement, AMC agreed, for a three-year
period, to sub-service mortgage loans originated or purchased by the Company
after the Reorganization. Sub-servicing activities include collecting and
remitting loan payments, accounting for principal and interest, holding escrow
or impound funds for payment of taxes and insurance, if applicable, making
required inspections of the mortgaged property, contacting delinquent borrowers,
and supervising foreclosures and property dispositions. The agreement provides
that either party has the right to terminate the agreement effective at any time
after November 2, 1998, upon six months prior written notice to the other party.
The Company has agreed to pay AMC a 45 basis points annual servicing fee on the
declining principal balance of each loan sub-serviced. During the third quarter
of 1998, the Company and AMC modified the sub-servicing agreement to accommodate
the establishment of the Company's independent servicing operations. Under the
modified sub-
 
                                        3
<PAGE>   6
 
servicing agreement, AMC no longer is required to sub-service loans originated
by the Company on or after November 2, 1998 and the Company is no longer
required to engage AMC to sub-service its loans.
 
     Under the contribution agreement, AMC agreed to indemnify and hold the
Company harmless from any tax liability attributable to periods ending on or
before the Reorganization. For periods ending after the Reorganization, the
Company will pay its tax liability directly to the appropriate taxing
authorities.
 
     The agreements between the Company and AMC were developed in the context of
a related party relationship and, therefore, may not necessarily reflect the
same business terms as might have been obtained in arm's length negotiations
between independent parties.
 
  Products and Marketing
 
     The Company offers both fixed rate and adjustable rate loans. The
adjustable rate loans begin 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,
negotiate better terms on their existing mortgage, or purchase homes, fall into
four subprime risk classifications, 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
adjustable rate loans primarily consist of (i) loans that bear a fixed interest
rate for the first two or three years that convert to an adjustable rate
thereafter ("fixed/adjustable rate loans") and (ii) loans that bear a fixed
interest rate for the first six months that convert to an adjustable rate
thereafter ("six-month adjustable rate loans"). The Company has established
interest rate caps for its adjustable rate loans which limit changes in the
interest rate on such loans to 1% during any six month period.
 
     The following table presents the Company's loan production by product type
for the periods indicated (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                YEAR ENDED DECEMBER 31,
                                         --------------------------------------
                                            1998          1997          1996
                                         ----------    ----------    ----------
<S>                                      <C>           <C>           <C>
Fixed rate loans.......................  $  588,794    $  428,793    $  392,251
Fixed/adjustable rate loans............   1,594,738       756,853        97,962
Six-month adjustable rate loans........     392,433       500,096       567,909
                                         ----------    ----------    ----------
          Total loan production........  $2,575,965    $1,685,742    $1,058,122
                                         ==========    ==========    ==========
</TABLE>
 
     Many of the Company's borrowers utilize funds from loans to pay-off
existing debts. During 1998, approximately 62% of the Company's loan production
was made for the purpose of providing funds for refinancing, and in
approximately 71% of these refinancings, the respective borrowers received cash
to pay-off other debts.
 
     While the Company's core loan products allow for maximum loan amounts of up
to $500,000 with a loan-to-value ratio of up to 85%. During 1998, core product
origination totaled $2.2 billion and represented 86.8% of total production. The
Company also offers a "jumbo" product allowing balances of up to $1,000,000 with
lower loan-to-value ratios than the core products, and products that permit a
loan-to-value ratio of up to 90% for selected borrowers with a risk
classification of "A-."
 
  Broker-Sourced Loan Operations
 
     The Company's primary means of marketing its products is direct contact
between its account executives and the independent mortgage loan brokers. Each
account executive is responsible for maintaining and expanding existing broker
relationships through "cold calls" and following up on inquiries made by brokers
to a toll-free number.
 
     A key element in developing, maintaining and expanding its independent
mortgage loan 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,
 
                                        4
<PAGE>   7
 
training includes experience in the loan processing 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
thereby enhance the likelihood that the loan will be approved at the rate and on
the terms submitted by the broker. 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. The account executive does not have
approval authority on the transaction. Account executives are compensated based
on the number and the dollar volume of loans funded.
 
     The marketing department designs and produces 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 sponsors most
national industry conventions and trade shows, as well as most state and
regional industry conventions and trade shows in states where the Company has an
operating location. The Company conducts free seminars at its operating
locations designed to target new and existing independent brokers.
 
  Correspondent Loan Purchasing
 
     The Company augments its loan production by purchasing loans on a
correspondent basis from smaller mortgage companies and other financial
institutions after such loans have been funded by the originator. The Company
typically purchases the servicing rights to the loans as well. 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 economies of scale in larger transactions.
 
     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 this
initial phase with a new originator, the Company processes the loan applications
as if they were the Company's own originations. Once the Company is comfortable
that the originator has developed the capability to originate and process loans
that comply with the Company's guidelines, the Company's active involvement in
the processing of the originator's loans is reduced. At this point, the Company
re-underwrites loans submitted by the originator prior to accepting them,
confirming compliance with the Company's underwriting guidelines and
documentation standards.
 
     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.
 
     The loan purchase program accounted for approximately 11.5% of the
Company's total loan volume by principal amount during 1998, compared to 9.0%
and 3.1% in 1997 and 1996, respectively. Such increase is due to the expansion
of the loan purchase program which was accomplished through better integration
of the loan purchasing process into the Company's correspondent team structure.
 
  Direct-Sourced Loan Operations
 
     Direct-sourced loan operations offer the same products as those of the
broker-sourced operations and are sourced primarily through technology-based
marketing, relying to a great extent on telemarketing, direct mail and
electronic media advertising rather than a network of branch sales offices. This
enables the Company to operate with less overhead than a direct-sourced loan
business that operates through a branch office network. The Company's senior
management is experienced in both direct-sourced and broker-sourced loan
originations, since several of the senior executives were involved in creating
the direct-sourced lending operations of AMC prior to the Reorganization. The
Company filled a portion of the staffing needs of the direct-sourced loan
operations with experienced personnel previously working in the broker-sourced
loan operations.
 
     The direct-sourced loan origination channel accounted for approximately
2.3% of the Company's total loan volume by principal amount during 1998.
 
                                        5
<PAGE>   8
 
LOAN ORIGINATION AND PURCHASING
 
     The Company originates loans through Company approved independent mortgage
loan 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>
                                                      FOR THE YEAR ENDED DECEMBER 31,
                                                   -------------------------------------
                                                      1998         1997          1996
                                                   ----------   ----------    ----------
                                                          (DOLLARS IN THOUSANDS)
<S>                                                <C>          <C>           <C>
Aggregate principal balance:
  Broker-sourced.................................  $2,220,096   $1,531,266    $1,026,390
  Correspondent..................................     296,283      151,768        31,732
  Retail.........................................      59,586        2,708            --
                                                   ----------   ----------    ----------
          Total..................................  $2,575,965   $1,685,742    $1,058,122
Average principal balance per loan
  Broker-sourced.................................  $      113   $      112    $      107
  Correspondent..................................         119          124            94
  Retail.........................................         110          129            --
                                                   ----------   ----------    ----------
          Total..................................  $      113   $      113    $      105
Combined weighted average loan-to-value(2)
  Broker-sourced.................................        77.8%        77.0%         75.1%
  Correspondent..................................        77.3%        77.4%         74.3%
  Retail.........................................        76.5%        76.6%           --%
                                                   ----------   ----------    ----------
          Total..................................        77.7%        77.1%         75.1%
Weighted average interest rate(2)
  Broker-sourced.................................         9.6%         9.6%          9.9%
  Correspondent..................................         9.9%         9.9%         10.1%
  Retail.........................................         9.6%         9.1%           --%
                                                   ----------   ----------    ----------
          Total..................................         9.6%         9.5%         10.0%
"A-" through "B-" loans as a percentage of total
  loans(1)(2)....................................        85.2%        88.1%         85.4%
</TABLE>
 
---------------
(1) Based on original principal balance.
 
(2) For 1996, amounts were calculated based on raw data from the loan
    origination system which did not consider timing differences between the
    time various loans actually funded and the date such loans were uploaded
    into the Company's system. Although these amounts differ from the "true"
    origination and purchase amounts recorded in 1996, the calculated amounts
    above are not materially affected by such differences. See the tables on
    pages 11 and 12 for more information.
 
     All loans originated or purchased by the Company are secured by a first
priority mortgage on the subject property.
 
                                        6
<PAGE>   9
 
  Geographic Markets
 
     The approximately 12,500 independent mortgage loan brokers with whom the
Company has had a relationship originate loans in all 50 states. The following
table shows geographic distribution of the aggregate principal balance of loan
originations and purchases for the periods shown.
 
<TABLE>
<CAPTION>
                                                             LOAN ORIGINATIONS
                                                          YEAR ENDED DECEMBER 31,
                                                      --------------------------------
                                                      1998     1997     1996     1995
                                                      -----    -----    -----    -----
<S>                                                   <C>      <C>      <C>      <C>
States(1)(3):
California..........................................   33.8%    34.4%    37.1%    43.1%
Colorado............................................    7.8      8.4      7.3      2.9
Michigan............................................    5.3      6.0      3.7      3.9
Texas...............................................    4.9      3.7      3.8      1.5
Florida.............................................    4.6      5.1      3.5      1.5
Oregon..............................................    4.0      5.3      4.3      4.0
Illinois............................................    3.8      4.1      6.2      8.7
New York............................................    3.5      2.0      1.5      0.3
Minnesota...........................................    3.0      2.7      2.2       --
All other States (41 other states)(2)...............   29.3     28.3     30.4     34.1
                                                      -----    -----    -----    -----
          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, 1998.
 
(2) For the year ended December 31, 1998, loan originations and purchases in
    each state were less than 2.7% of total originations and purchases for the
    year.
 
(3) For 1996 and 1995, amounts were calculated based on raw data from the loan
    origination system which did not consider timing differences between the
    time various loans actually funded and the date such loans were uploaded
    into the Company's system. Although these amounts differ from the "true"
    origination and purchase amounts recorded in 1996 and 1995, the calculated
    amounts above are not materially affected by such differences.
 
     The Company's geographic markets are divided among 19 regional teams and
one national correspondent lending team. 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. The 20 teams are deployed into 11 regional processing centers. When
a regional processing center is first established, the staff responsible for
underwriting and funding is physically located at the Company's headquarters.
Once the Company determines that the level of current and projected business
from a region warrants the deployment of the regional processing center, the
Company moves the processing center in or near the region and relocates the
relevant regional teams to the new center. These centers enable the Company to
more effectively anticipate and respond to broker and borrower needs in each
region. 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 and the corporate headquarters by a wide area network that
enables management to monitor the quality of all regional functions on a real
time basis. The Company opened four regional processing centers during 1998 and
intends to establish two additional regional processing centers in 1999.
 
  Underwriting
 
     The Company trains its account executives and underwriters to evaluate loan
application and supporting documentation (a "loan package") against the
Company's underwriting guidelines. The Company utilizes experienced underwriters
who have been provided comprehensive training. Underwriters are educated
regarding the Company's underwriting guidelines and the implementation of the
Company's underwriting
 
                                        7
<PAGE>   10
 
procedures. The Company's training program enables its underwriters to review
and evaluate loan packages while understanding and adhering to the Company's
underwriting guidelines. The Company's underwriters are required to have one or
more years of subprime underwriting experience gained from either a finance
company or other subprime lender. Underwriting experience may be substituted
with one or more years experience acquired by performing other Company subprime
lending functions.
 
     The Company's underwriting guidelines are primarily intended to evaluate
the applicant's credit profile, repayment ability, and the value and adequacy of
the property offered as mortgage collateral. Loan applications meeting the
Company's core product guidelines may be approved by regional service managers,
who are required to have a minimum of five years subprime underwriting lending
experience. On occasion, with the approval of a regional service manager,
divisional operations manager or regional vice president, a prospective borrower
not strictly adhering to the Company's underwriting guidelines may be granted an
underwriting exception. Divisional operations managers and regional vice
presidents are required to have a minimum of seven years subprime lending
experience. Underwriting exceptions are granted based upon compensating factors
which may include, but are not limited to, good credit history (mortgage and/or
consumer), low debt-to-income and loan-to-value ratios, stable employment and
residency at the borrower's current address.
 
     All of the wholesale loans originated by the Company are based on loan
packages submitted through mortgage brokers directly or through Company account
executives, directly from a borrower or purchased from a Company-approved
originator. Loan packages submitted through mortgage brokers are required to
include information relevant to credit, the property offered as collateral and
any additional related facts for underwriting purposes. This information is
compiled by the submitting broker and submitted to the Company for underwriting
approval and funding authorization. The mortgage broker receives a fully
disclosed portion of the loan origination fee charged to the borrower at the
time the loan is funded.
 
     The Company reviews loan packages submitted by originators prior to
accepting them to confirm each complies with the Company's underwriting
guidelines and documentation standards. The Company's underwriting procedures
comply with applicable state and federal laws and regulations. Each prospective
borrower is required to complete a loan application which includes information
related to the borrower's liabilities, assets, income, employment history and
other relevant personal information. When the loan package is received, it is
entered into the Company's underwriting system. The underwriters from the
appropriate regional team, including those reviewing loans submitted for
purchase, typically re-verify the borrower's information for compliance with the
Company's underwriting guidelines. Information re-verified includes: (i) sources
of income, (ii) credit history, (iii) debt-to-income ratios, (iv) sources of
down payment funds, and (v) value of the property offered as collateral.
 
     The prospective applicant generally provides to the Company or the
originator of a purchased loan, a letter explaining all late payments on
mortgage, consumer installment and revolving debt with local and national
merchants and lenders, records of defaults, bankruptcies, repossessions, suits
and judgments. Prior to funding a loan and as a function of its quality control
system, the Company re-verifies the information that has been provided by the
submitting mortgage broker. Additionally, the Company performs a random post
funding audit on 5% of all originations that re-evaluates all of the factors
previously identified.
 
     The Company utilizes three different income documentation programs to which
prospective borrower's income is evaluated and determined for underwriting
purposes. Each imposes specific documentation requirements and standards. The
full income documentation program may include and be based on W-2's, tax
returns, verifications of employment and current paycheck stubs. Alternatively,
a less rigorous documentation standard is the limited documentation program
where income may be determined and based on cash flow over an extended period
based on bank statements. The third source is the stated income program in which
the borrowers provide the Company with their source and amount of monthly
earnings. The stated amount is then assessed to determine whether or not it is
reasonable as it relates to the occupation and source. Additionally, employment
of the applicant is verbally re-verified.
 
     The Company's guidelines are less stringent with respect to the borrower's
credit and repayment ability than the standards generally acceptable to the
Federal National Mortgage Association ("FNMA") and the
 
                                        8
<PAGE>   11
 
Federal Home Loan Mortgage Corporation ("FHLMC"). However, in those cases, the
Company's loan-to-value ratio requirements are more stringent than those of the
agencies. Borrowers who qualify under the Company's guidelines generally have
payment histories which would not satisfy FNMA and FHLMC underwriting
guidelines. Their credit reports may exhibit major derogatory credit items, such
as outstanding judgments or previous bankruptcies.
 
     The Company has formed risk classifications with respect to each
prospective borrower's credit profile and ability to repay. The Company's
guidelines establish maximum permitted loan-to-value ratios for each loan type
risk based upon these and other factors. These classifications are indications
of the borrower's credit-worthiness. Each prospective borrower is identified by
one of five letter ratings ("A-", "B", "B-", "C", and "D"). Other factors that
are evaluated during the underwriting process and affect the final lending
decision are the property value and type, loan-to-value ratio, loan amount, and
subject property's occupancy status.
 
     Mortgaged properties that are offered as security for underwriting purposes
are appraised by qualified independent appraisers. These appraisers are
qualified and accepted by the Company's internal valuation staff or chief
appraiser. The Company requires an appraisal of the mortgage property offered as
collateral that conforms to agency standards. Every appraisal includes a market
data analysis based on recent sales in the market area of the offered property
of comparable homes. Where deemed appropriate, replacement cost analysis based
on current cost of constructing a similar home is provided.
 
     An appraisal review is conducted on each appraisal submitted. These reviews
may be performed by a Company trained underwriter, a Company valuation manager,
or a Company approved independent appraiser. Additionally, depending upon the
original principal balance or the loan-to-value ratio of the mortgaged property,
a drive-by review appraisal may be performed. Properties that are identified to
be in below average condition and have below average marketability (including
properties exhibiting major deferred maintenance) are considered unacceptable
collateral for the Company's mortgage loan program.
 
     The Company strives to process each loan package in compliance with its
underwriting guidelines as quickly as possible. Accordingly, most underwriting
decisions are rendered in 24 to 48 hours, and approved packages are funded on
average within 20 calendar days from submission date.
 
     Upon completion of the underwriting process and subsequent approval, 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 in accordance with applicable law and the Company's operating
procedures. The closing attorney or agent is typically selected by the mortgage
broker. The Company audits the selected closing attorney or agent to ensure the
attorney or agent is a fully licensed, experienced professional from an
established firm or company. In addition, the Company generally requires the
closing attorneys and agents to maintain insurance against errors and omissions.
 
     The Company requires each mortgage loan to be covered by title insurance
and secured by a lien on single-family real property. The Company also requires
fire and extended coverage casualty insurance to be maintained on the secured
property. Flood insurance is also required for all properties located in a
defined flood zone. The dollar amount of insurance coverage on the secured
property is to be at least equal to the principal balance of the related loan.
The Company monitors the existence of insurance coverage through a bonded
outside insurance vendor. 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 outside vendor will provide coverage on the borrower's behalf
under policies insuring the Company's collateral interest. The amount, type of
insurance and circumstances under which the Company can force place insurance
are subject to state and federal regulations, with which the Company believes
that it complies.
 
                                        9
<PAGE>   12
 
     The chart below summarizes the general criteria used by the Company at
February 28, 1999, in classifying prospective borrowers who have provided the
basic documentation described above:
 
<TABLE>
<CAPTION>
    UNDERWRITING
    CRITERIA/RISK
   CLASSIFICATION           "A-" RISK            "B" RISK             "B-" RISK            "C" RISK             "D" RISK
   --------------           ---------            --------             ---------            --------             --------
<S>                    <C>                  <C>                  <C>                  <C>                  <C>
Loan-to-Value
Ratio                  85% for owner        85% for owner        80% for owner        75% for owner        65% for owner
                       occupied purchases   occupied purchases   occupied purchases   occupied purchases   occupied purchases
                       of single family     of single family     or refinances of     of single family     or refinances of
                       residences, planned  residences, planned  single family        residences, planned  single family
                       unit developments,   unit developments,   residences, planned  unit developments,   residences, planned
                       and condominiums;    and condominiums;    unit developments,   and condominiums;    unit developments,
                       80% for owner        80% for owner        and condominiums;    70% for owner        and condominiums;
                       occupied purchases   occupied purchases   75% for owner        occupied purchases   60% for owner
                       or refinances of 2   or refinances of 2   occupied purchases   or refinances of 2   occupied purchases
                       to 4 unit dwellings  to 4 unit dwellings  or refinances of 2   to 4 unit dwellings  or refinances of 2
                       and second homes,    and second homes,    to 4 unit dwellings  and second homes,    to 4 unit dwellings
                       80% for non-owner    80% for non-owner    and second homes,    70% for non-owner    and second homes,
                       occupied single      occupied single      75% for non-owner    occupied single      60% for non-owner
                       family residences,   family residences,   occupied single      family residences,   occupied single
                       planned unit         planned unit         family residences,   planned unit         family residences,
                       developments or      developments or      planned unit         developments or      planned unit
                       condominiums; 70%    condominiums; 70%    developments or      condominiums; 60%    developments or
                       for non-owner        for non-owner        condominiums; 65%    for non-owner        condominiums; 50%
                       occupied 2 to 4      occupied 2 to 4      for non-owner        occupied 2 to 4      for non-owner
                       unit dwellings.      unit dwellings.      occupied 2 to 4      unit dwellings.      occupied 2 to 4
                                                                 unit dwellings.                           unit dwellings.
Maximum Debt Ratio(A)  LTV's .85% = 45%
                       LTV's ,85% = 47%             50%                  55%                  55%          55%
Consumer
Credit(B)              LTV's ,85% 30 day    30 & 60 days late    30 & 60 days late    Other derogatory     Other derogatory
                       late in the past 12  in the past 12       in the past 12       credit items are     credit items are
                       months; derogatory   months; derogatory   months; derogatory   considered on a      considered on a
                       credit items are     credit items are     credit items are     case-by-case basis;  case-by-case basis.
                       less than 25% of     less than 35% of     less than 50% of     no bankruptcies in
                       total items on       total items on       total items on       the last 12 months.
                       credit report, no    credit report, no    credit report, no
                       bankruptcies in the  bankruptcies in the  bankruptcies in the
                       last 24 months.      last 24 months.      last 18 months.
                       LTV's .85% (3)
                       30-day revolving
                       lates and (3)
                       30-day installment
                       lates.
Mortgage
Credit(C)              Maximum of (2)       Maximum of (3)       Maximum of (1)       Maximum of (2)       All mortgage and
                       30-day late          30-day late          60-day late          60-day late          consumer credit
                       payments in the      payments in the      payments in the      payments and (1)     including
                       past 12 months; no   past 12 months; no   past 12 months;      90-day late payment  bankruptcies and
                       notices of default   notices of default   maximum 30 days      or (3) 60- day late  foreclosures may be
                       or foreclosures in   or foreclosures in   late at time of      payments and no      waived if
                       the last 36 months.  the last 36 months.  application or       90-day late          reasonable
                                                                 funding, no notices  payments in the      explanation is
                                                                 of default or        last 12 months;      provided and
                                                                 foreclosures in the  maximum of a 60      problem no longer
                                                                 last 24 months.      days late at time    exists.
                                                                                      of funding; no
                                                                                      notices of default
                                                                                      or foreclosures in
                                                                                      the last 12 months.
</TABLE>
 
---------------
(A) Debt ratios may be increased to 55% if the net disposable income minimum
    requirement is doubled on loan programs A- and B, where LTV's are ,85%.
 
(B) For LTV's ,85% non-mortgage and consumer-related credit, collections or
    judgments (i.e., dental and/or medical) may be disregarded on a case-by-case
    basis. Thirty day credit may be disregarded and not included in the
    percentage of derogatory credit items.
 
(C) Consecutive rolling consumer and mortgage 30-day delinquencies up to six
    months reported on a credit report may be counted as one late payment.
 
                                       10
<PAGE>   13
 
     The following table sets forth certain information with respect to the
Company's loan purchases and originations by product and risk classification,
for the years ended December 31 (dollars in thousands):
 
<TABLE>
<CAPTION>
                                                   1998                                            1997(3)
                               ---------------------------------------------    ---------------------------------------------
                                                       WEIGHTED                                         WEIGHTED
                                                       AVERAGE     WEIGHTED                             AVERAGE     WEIGHTED
                                              % OF     INTEREST     AVERAGE                    % OF     INTEREST     AVERAGE
PRODUCT/ RISK CLASSIFICATIONS    VOLUME      TOTAL     RATE(1)     MARGIN(2)      VOLUME      TOTAL     RATE(1)     MARGIN(2)
-----------------------------  ----------    ------    --------    ---------    ----------    ------    --------    ---------
<S>                            <C>           <C>       <C>         <C>          <C>           <C>       <C>         <C>
FIXED RATE:
  A-.......................    $  374,953     63.68%     9.50%                  $  281,828     65.73%     9.83%
  B+.......................            NA        NA     NA                          33,302      7.77     10.20
  B........................        67,742     11.51     10.18                       43,830     10.22     10.45
  B-.......................        61,576     10.46     10.49                       28,507      6.65     10.73
  C........................        56,531      9.60     11.38                       35,806      8.35     11.43
  C-.......................            NA        NA     NA                           3,064      0.71     11.77
  D........................        27,992      4.75     12.23                        2,456      0.57     12.26
                               ----------    ------                             ----------    ------
        Totals.............    $  588,794    100.00%     9.99%                  $  428,793    100.00%    10.16%
SIX-MONTH ADJUSTABLE RATE:
  A-.......................    $  276,691     70.50%     8.54%       6.46%      $  319,045     63.80%     8.58%       6.34%
  B+.......................            NA        NA     NA             NA           35,204      7.04      8.88        6.16
  B........................        37,507      9.56      8.88        6.50           42,641      8.53      9.12        6.42
  B-.......................        32,213      8.21      9.41        6.52           33,758      6.75      9.44        6.54
  C........................        28,173      7.18     10.07        6.58           46,932      9.38     10.18        6.63
  C-.......................            NA        NA     NA             NA           18,077      3.61     10.96        6.73
  D........................        17,849      4.55     11.47        6.67            4,439      0.89     11.49        7.02
                               ----------    ------                             ----------    ------
        Totals.............    $  392,433    100.00%     8.89%       6.49%      $  500,096    100.00%     8.97%       6.40%
FIXED/ADJUSTABLE RATE:
  A-.......................    $  910,886     57.12%     9.30%       6.61%      $  487,351     64.39%     9.46%       6.29%
  B+.......................            NA        NA     NA             NA           50,048      6.61      9.72        6.20
  B........................       225,212     14.12      9.64        6.67           75,780     10.01      9.95        6.50
  B-.......................       208,907     13.10      9.96        6.70           53,037      7.01      9.99        6.59
  C........................       165,626     10.39     10.55        6.73           73,489      9.71     10.62        6.60
  C-.......................            NA        NA     NA             NA           10,171      1.35     11.28        6.79
  D........................        84,107      5.27     11.51        6.81            6,977      0.92     11.70        7.04
                               ----------    ------                             ----------    ------
        Totals.............    $1,594,738    100.00%     9.68%       6.65%      $  756,853    100.00%     9.73%       6.37%
ALL PRODUCTS:
  A-.......................    $1,562,530     60.66%                            $1,088,224     64.56%
  B+.......................            NA        NA                                118,554      7.03
  B........................       330,461     12.83                                162,251      9.62
  B-.......................       302,696     11.75                                115,302      6.84
  C........................       250,330      9.72                                156,227      9.27
  C-.......................            NA        NA                                 31,312      1.86
  D........................       129,948      5.04                                 13,872      0.82
                               ----------    ------                             ----------    ------
        Totals.............    $2,575,965    100.00%                            $1,685,742    100.00%
</TABLE>
 
                                       11
<PAGE>   14
 
<TABLE>
<CAPTION>
                                                  1996(4)                                          1995(4)
                               ---------------------------------------------    ---------------------------------------------
                                                       WEIGHTED                                         WEIGHTED
                                                       AVERAGE     WEIGHTED                             AVERAGE     WEIGHTED
                                              % OF     INTEREST     AVERAGE                    % OF     INTEREST     AVERAGE
PRODUCT/ RISK CLASSIFICATIONS    VOLUME      TOTAL     RATE(1)     MARGIN(2)      VOLUME      TOTAL     RATE(1)     MARGIN(2)
-----------------------------  ----------    ------    --------    ---------    ----------    ------    --------    ---------
<S>                            <C>           <C>       <C>         <C>          <C>           <C>       <C>         <C>
FIXED RATE:
  A-.......................    $  231,792     59.23%    10.20%                  $   38,896     49.86%    10.95%
  B+.......................        53,184     13.59     10.43                       18,577     23.81     11.25
  B........................        36,257      9.26     10.76                        6,365      8.16     11.23
  B-.......................        28,699      7.33     10.97                        4,359      5.59     11.74
  C........................        39,594     10.12     11.66                        9,598     12.30     12.46
  C-.......................         1,820      0.47     11.36                          219      0.28     12.83
  D........................            NA        NA     NA                              NA        NA     NA
                               ----------    ------                             ----------    ------
        Totals.............    $  391,346    100.00%    10.49%                  $   78,014    100.00%    11.28%
SIX-MONTH ADJUSTABLE RATE:
  A-.......................    $  293,519     51.82%     8.98%       6.09%      $  207,152     43.11%     9.70%       5.80%
  B+.......................        67,306     11.88      9.30        6.15           42,811      8.91     10.13        5.84
  B........................        51,770      9.14      9.90        6.39           42,050      8.75     10.50        6.29
  B-.......................        45,080      7.96     10.00        6.49           63,324     13.18     10.64        6.29
  C........................        86,778     15.32     10.73        6.64          100,768     20.97     11.28        6.58
  C-.......................        22,001      3.88     11.89        6.85           24,378      5.08     12.33        6.87
  D........................            NA        NA     NA             NA               NA        NA     NA             NA
                               ----------    ------                             ----------    ------
        Totals.............    $  566,454    100.00%     9.57%       6.27%      $  480,483    100.00%    10.40%       6.13%
FIXED/ADJUSTABLE RATE:
  A-.......................        70,949     73.08      9.84        5.58       $   11,804     42.96%    10.61%       5.24%
  B+.......................        13,462     13.86     10.30        6.00            2,854     10.39     10.78        5.35
  B........................         6,649      6.85     10.46        6.17            2,878     10.47     11.17        5.18
  B-.......................         1,987      2.05     10.72        6.41            3,921     14.27     11.57        5.58
  C........................         3,521      3.63     11.19        6.77            4,826     17.56     12.53        5.74
  C-.......................           518      0.53     11.11        6.87            1,196      4.35     13.37        6.10
  D........................            NA        NA     NA             NA               NA        NA     NA             NA
                               ----------    ------                             ----------    ------
        Totals.............    $   97,086    100.00%    10.02%       5.75%      $   27,479    100.00%    11.28%       5.42%
ALL PRODUCTS:
  A-.......................    $  596,260     56.52%                            $  257,852     44.01%
  B+.......................       133,952     12.70                                 64,242     10.96
  B........................        94,675      8.98                                 51,293      8.75
  B-.......................        75,766      7.18                                 71,604     12.22
  C........................       129,893     12.31                                115,192     19.66
  C-.......................        24,340      2.31                                 25,793      4.40
  D........................            NA        NA                                     NA        NA
                               ----------    ------                             ----------    ------
        Totals.............    $1,054,886    100.00%                            $  585,976    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 Six-Month 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 a Six-Month 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 the first two
    years commencing on the date of funding 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.
 
(3) Underwriting guidelines were revised effective 10/1/97, eliminating B+ and
    C- categories and adding D category.
 
(4) For 1996 and 1995, amounts were compiled based on raw data from the loan
    origination system which did not consider timing differences between the
    time various loans actually funded and the date such loans were uploaded
    into the Company's system. As a result, origination and purchase amounts
    differ from the "reportable amount of" origination and purchase amounts
    recorded in 1996 and 1995.
 
                                       12
<PAGE>   15
 
FINANCING AND SALE OF LOANS
 
  Warehouse Financing Facility
 
     The Company finances originations and purchases of loans primarily with the
proceeds of borrowings under a committed warehouse financing facility, which
initially provided for a borrowing capacity of $250 million and was increased to
$300 million in April 1998 (the "Facility"). This Facility is provided by a
syndicate of banks led by Chase Bank of Texas. Borrowings under this 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 this Facility are permitted up to 98% of
the principal balance of the originated and purchased loans and bear interest at
rates ranging from 1.25% to 1.50% 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 Facility. The Facility also includes a $15 million
subline for principal and interest advances and a $10 million subline for other
servicing advances made primarily to security holders in connection with
securitizations by purchasers of the Company's loans in which the Company serves
as the master servicer, and a $15 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 2.0% over the 30-day
reserve-adjusted LIBOR. The Facility will expire on April 16, 2000, unless
earlier terminated or extended in accordance with its terms. The Facility
contains a number of financial covenants including: (i) the Company maintain
tangible net worth equal to at least $30 million, plus 25% of cumulative
positive net earnings, (ii) delinquencies on the Company's mortgage servicing
portfolio not exceed 12% and (iii) the ratio of total liabilities to adjusted
tangible net worth not exceed 10:1. The Facility also contains other
affirmative, negative and financial covenants typical of similar credit
facilities. The Company was in compliance with all such covenants at December
31, 1998.
 
     At December 31, 1998 the Company had access to a $100 million uncommitted
warehouse line from an investment banking firm. This line bears interest at
LIBOR plus 0.75%. The line expires in September 1999. During February 1999, the
Company obtained an additional $100 million warehouse line from another
investment banker. This line bears interest at LIBOR plus 1.25% and expires
January 2000. The Company was in compliance with all of its debt and equity
covenants at December 31, 1998.
 
  Loan Sales
 
     The Company has followed a strategy of selling for cash substantially all
loan originations and purchased loans in the secondary market through loan sales
in which the Company disposes of its entire economic interest in the loans. The
Company sold $2.5 billion, $1.7 billion and $1.0 billion of loans through loan
sales during 1998, 1997 and 1996, respectively. The Company did not issue any
securities during the period; however, substantially all of the loans sold
during the period were ultimately securitized by the purchasers thereof.
 
     Loans generally have been sold to institutional purchasers on a quarterly
basis. 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). Cash gains from loan sales
represented 93% of the Company's total revenues in 1998. 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 premiums. During 1998, the Company sold loans to a number of
institutional purchasers. The Company's loan purchasers typically securitize the
loans and sell major portions of the economic interest through mortgage backed
securities.
 
     The Company has historically engaged in loan sales by obtaining commitments
from its loan purchasers 30 to 120 days in advance of funding the loans to be
purchased. These commitments are obtained through a competitive bidding process
among potential purchasers who in most cases have purchased loans from the
Company previously. The successful bidder is committed to a minimum quantity of
loans at a determined price, and may be granted the option to purchase more than
the minimum quantity at a negotiated price. The
 
                                       13
<PAGE>   16
 
Company continuously monitors its loan production and purchases against its
unfilled purchase commitments to identify potential shortfalls or overages in
loans available for delivery. As loans are funded, the Company packages them and
delivers them to the purchaser on a periodic basis.
 
     Loan sales are made on a non-recourse basis pursuant to a purchase
agreement containing customary representations and warranties 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 the borrower defaults on the first payment
due after the loan is funded, unless other arrangements are made between the
Company and the purchaser. The Company is also required in some cases to
repurchase or substitute a loan if the loan documentation is alleged to contain
fraudulent misrepresentations made by the borrower.
 
     The Company's gain on sale of loans is determined by the excess of the
premiums that the Company receives over the cost of acquiring the loan. The gain
on sale for each of the Company's channels of production differs due to
differences in the cost of acquisition and loan fees. The cost of acquiring a
broker-sourced loan includes the fees paid to the originating broker. This
results in a broker-sourced loan having a lower gain on sale than a retail loan,
in which no broker fees are paid. However, the cost of acquiring a retail
generated loan reflects higher general and administrative expenses as compared
to a broker-sourced loan. Additionally, because the originating broker typically
retains all origination points and fees, the gain on sale of broker-sourced
loans have substantially smaller fee components than retail generated loans.
Loans originated through correspondents have a higher cost of acquisition and no
fee component. Correspondent loans require little incremental general and
administrative expenditures by the Company.
 
     The following table illustrates the historical economics of the gain on
sale of loans from the Company's various channels (general and administrative
expenses are not included):
 
<TABLE>
<CAPTION>
                                  BROKER-SOURCED              RETAIL           CORRESPONDENT
                                    PRODUCTION              PRODUCTION           PRODUCTION
                               --------------------    --------------------    --------------
<S>                            <C>                     <C>                     <C>
Gross sales premiums.........          4 - 6 points            4 - 6 points      4 - 6 points
Less broker fees (PYA).......          0 - 2 points                     N/A               N/A
Less purchase costs..........                   N/A                     N/A      1 - 4 points
Plus points and fees.........  40 - 60 basis points            2 - 5 points               N/A
Less capitalized direct
  origination costs..........  40 - 50 basis points    50 - 70 basis points               N/A
Net gain on sale of loans....      4 - 5 1/2 points           7 - 10 points      2 - 4 points
</TABLE>
 
     During 1998, the Company's net gain on sale of loans, as a percentage of
loans sold, totaled 4.87%. This represents a decrease from 5.28% in 1997 and
from 4.92% in 1996. The reduction in net gain on sale resulted from a decline in
the prices of subprime loans in the secondary market, negatively impacting the
gross sales premiums that the Company has realized from the sale of its loans.
There can be no assurance provided that the Company will be able to sell its
loans at historical premiums or at the levels indicated in the above table. As a
result of the recent decline in whole loan prices, the Company may consider
alternatives to whole loan sales, including securitizations, depending on market
conditions and available levels of whole loan executions. The Company's focus in
utilizing such strategy would be to retain a positive cash flow operating model.
 
SERVICING
 
     At the time of the Reorganization, the Company entered into a sub-servicing
agreement with AMC under which AMC agreed to sub-service loans originated or
purchased by the Company following the Reorganization. Sub-servicing has been
provided by AMC at an agreed-upon rate and with default terms comparable to
industry standards. The agreement contains other customary terms and conditions.
Either AMC or the Company has the right to terminate the agreement at any time
upon six months' prior written notice to the other party, provided that all
required approvals of investors, rating agencies and other parties have been
obtained. During the third quarter of 1998, the Company and AMC modified the
sub-servicing agreement to accommodate the establishment of the Company's
independent servicing operations. Under the
 
                                       14
<PAGE>   17
 
modified sub-servicing agreement, AMC no longer is required to sub-service loans
originated by the Company on or after November 2, 1998, and the Company is no
longer required to engage AMC to sub-service its loans.
 
     The Company's objective in establishing a proprietary loan servicing
platform was to continue its evolution into a fully integrated mortgage banking
organization. The Company's loan service function is a critical component in
managing the loan collection process, generating recurring revenues, and
providing full service to its customers. In developing its loan servicing
operation, the Company sought seasoned professionals and a platform that was
year 2000 compliant.
 
     In accordance with the strategic plan, the Company successfully launched an
independent servicing operation in November 1998. The Company was approved as a
residential subprime loan servicer by Standard & Poor's during the fourth
quarter of 1998. Additionally, the Company is an approved FNMA seller/servicer
and is licensed as a non-supervised mortgagee by the United States Department of
Housing and Urban Development.
 
     At December 31, 1998, the Company was directly servicing loans with an
aggregate principal balance of $546.6 million. An additional $972.9 million of
loans were serviced by AMC at December 31, 1998 pursuant to the sub-servicing
agreement. During January 1999, the Company transferred $550 million of loans
from AMC to its own servicing operation.
 
TECHNOLOGY
 
     During the first quarter of 1998, the Company completed the development and
deployment of its independent data processing center. The implementation of the
data center enabled the Company to terminate the utilization of AMC's data
center on March 1, 1998.
 
     The Company utilizes computer technology to maximize 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. Long Beach Mortgage Company has an established internet website
through which 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.longbeachmortgage.com. Financing USA, the
Company's retail lending division, also has established an internet website
through which borrowers can access information about the Company's retail
products and submit data to simplify the application process. Financing USA's
website address is http://www.financingusa.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 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 also expanded the automation
of its underwriting process in order to increase the number of loan applications
processed by each underwriter in a given day.
 
COMPETITION
 
     The Company continues to anticipate 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 resources than the Company and may have lower costs of funds
than the Company. Establishing a broker-sourced loan business requires a
substantially smaller commitment of capital and personnel resources compared to
a direct-sourced loan business. Such relatively low barriers to entry permit
potential new competitors with an easy entrance into the market, in particular,
existing direct-
 
                                       15
<PAGE>   18
 
sourced lenders who can draw upon existing branch networks and personnel in
seeking to add product through broker sources.
 
     In the future, the Company may also face competition from, among others,
government-sponsored entities who may enter the subprime mortgage market.
Existing or new loan purchase programs may be expanded by FNMA, FHLMC or the
Government National Mortgage Association to include subprime mortgages,
particularly those in the "A-" category, which constitute a significant portion
of the Company's loan production. Increased competition could have the possible
effect 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) broadening the industry standard for subprime underwriting guidelines
as competitors attempt to maintain market share in the face of increased
competition.
 
     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. Such "prepayment risk"
may have a long-term impact affecting the Company's ability to sell its loans in
the future. During economic slowdowns or recessions, the Company's borrowers may
have new financial difficulties and may be receptive to offers by the Company's
competitors. In addition, in periods of economic slowdown the Company may
experience an increase in default rates and loss experience.
 
REGULATION
 
     The Company'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 the Company'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 enforcement actions.
 
     The Company is subject to the rules and regulations of, and examinations
by, the Department of Housing and Urban Development ("HUD"), 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 the Company, 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.
The Company is required to submit annual audited financial statements to various
governmental regulatory agencies that require the maintenance of specified net
worth levels.
 
     The Company is a FNMA approved seller/servicer and is subject to the
supervision of FNMA. In addition, the Company's operations are subject to
supervision by state authorities (typically state banking or consumer credit
authorities), many of which generally require that the Company be licensed to
conduct its business. This normally requires state examinations and reporting
requirements on an annual basis.
 
     TILA requires a written statement showing an annual percentage rate of
finance charges and requires that other information be presented to debtors when
consumer credit contracts are executed. RESPA requires written disclosure
concerning settlement fees and charges, mortgage servicing transfer practices
and escrow or impound account practices. It also prohibits the payment or
receipt of kickbacks or referral fees in connection with the performance of
settlement services. The Fair Credit Reporting Act requires certain disclosures
to
 
                                       16
<PAGE>   19
 
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.
 
     In October 1997, HUD issued a proposed rule which would create a qualified
"safe harbor" under RESPA for lender payments to mortgage brokers (such as yield
spread premiums). Under the proposal, fees paid by a lender to a mortgage broker
would not be prohibited under RESPA if the broker enters into a contract with
the consumer explaining the broker's relationship and total compensation. In
July 1998, HUD and the Board of Governors of the Federal Reserve System
delivered to Congress a joint report containing legislative proposals to reform
RESPA and TILA. This report proposed an exemption from the fee restrictions of
RESPA for mortgage brokers that offer a package of settlement services for
mortgage loans at a guaranteed price and follow other requirements. In March
1999, HUD issued a policy statement setting forth its position on lender-paid
broker compensation under RESPA. In the policy statement, HUD asserts that
lender payments to mortgage brokers are not per se illegal, but rather must be
analyzed on a case-by-case basis. In determining whether lender-paid
compensation is permissible under RESPA, the policy statement sets forth a
two-part test: (i) whether the broker actually provided compensable goods,
facilities or services and (ii) whether the broker's total compensation is
reasonably related to the value of the goods, facilities or services it
provided. In the policy statement, HUD also stated that legislation to improve
RESPA is needed and that a reform package along the lines specified in the HUD
and Federal Reserve Board report remains the most effective way to resolve the
legal uncertainties under that statute. It is unknown at this time whether HUD's
October 1997 proposal or reform legislation will be adopted.
 
     The interest rates which the Company 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 the Company 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. The Company believes that it is
in compliance in all material respects with such regulations.
 
     As a condition to funding of its loans, the Company requires each borrower
to obtain and maintain in force a policy of insurance providing coverage for
improvements on any real property securing the borrower's loan. If the borrower
fails to provide 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. 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 the Company
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
the Company, class action lawsuits and administrative enforcement actions.
 
DEPARTMENT OF JUSTICE SETTLEMENT AGREEMENT
 
     In September 1996, AMC entered into a settlement agreement with the U.S.
Department of Justice (the "DOJ") arising out of a DOJ investigation and
complaint which alleged that Long Beach Bank, F.S.B., during the period from
January 1991 through June 1994, charged certain African-American, Hispanic,
female and older borrowers more than younger, white male borrowers in violation
of fair lending laws. AMC denied all
 
                                       17
<PAGE>   20
 
allegations in the complaint and all claims of discrimination. AMC 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, AMC 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. AMC 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, AMC also agreed to contribute an additional $1 million (payable over 3
years) to fund consumer education programs in conjunction with civil rights
groups. AMC has established all funds required by the settlement agreement.
 
     Pursuant to the settlement agreement, the Company, as a successor to AMC's
wholesale division, agreed to (i) document any price exceptions from the
Company's rate sheet on broker-sourced loans, (ii) periodically review the
results of its broker-sourced lending operations for its compliance with fair
lending laws (but in no event shall the Company be required to disclose any
documents or information therewith, including the identities of any brokers with
whom it does business), (iii) retain all loan application files submitted for
mortgage loans and all loan-rider documents and notices relevant to any pricing
decisions until September 1999 and report to the DOJ semi-annually on compliance
with the settlement agreement, and (iv) provide to brokers information about the
Company's fair-lending and pricing procedures and an opportunity to participate
in fair-lending training. Any failure of the Company to comply with the
requirements of the DOJ settlement agreement could allow the DOJ to seek
injunctive relief against the Company.
 
     In addition, in connection with the Company's direct-sourced mortgage
lending, the Company is 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. The Company believes
that it is in compliance in all material respects with the settlement agreement.
The Company's obligations under the settlement agreement terminate in September
1999.
 
ENVIRONMENTAL MATTERS
 
     In the course of its business, the Company has acquired, and may acquire in
the future, properties securing loans that are in default. It is possible that
hazardous substances or waste, contaminations, pollutants or sources thereof
could be discovered on such properties after acquisition by the Company. In such
event, the Company may be required by law to remove such substances from the
affected properties at its sole cost and expense. There can be no assurance that
(i) the cost of such removal would not substantially exceed the value of the
affected properties or the loans secured by the properties, (ii) the Company
would have adequate remedies against the prior owner or other responsible
parties, or (iii) the Company would not find it difficult or impossible to sell
the affected properties either prior to or following such removal.
 
EMPLOYEES
 
     As of February 28, 1999, the Company had a total of 866 employees. None of
the Company's employees is covered by a collective bargaining agreement. The
Company considers its relations with its employees to be good.
 
CERTAIN FACTORS AND TRENDS AFFECTING THE COMPANY AND ITS BUSINESS
 
     Certain disclosures made by the Company in this report and in other reports
and statements released by the Company are and will be forward-looking in
nature, such as comments which express the Company's opinion about trends and
factors which may impact future operating results. Disclosures which use words
such as the Company "believes," "anticipates," "expects" and similar expressions
are intended to identify forward-looking statements. Such statements are subject
to certain risks and uncertainties which could cause actual results to differ
materially from expectations. Any such forward-looking statements, whether made
in this
 
                                       18
<PAGE>   21
 
report or elsewhere, should be considered in context with the various
disclosures made by the Company about its business including the factors
discussed below.
 
  Economic Slowdown and Decline in Collateral Value May Adversely Affect Volume
of Loans
 
     Periods of economic slowdown may reduce the demand for mortgage loans as
people elect not to purchase new homes due to economic uncertainty and also may
adversely affect the financial condition of potential borrowers so that they do
not meet the Company's underwriting criteria. In addition, economic slowdowns
may cause a decline in real estate values. Any material decline in real estate
values will reduce the ability of borrowers to use home equity to support
borrowings by negatively affecting loan-to-value ratios of the home equity
collateral. To the extent that the loan-to-value ratios of prospective
borrowers' home equity collateral do not meet the Company's underwriting
criteria, the volume of loans originated by the Company could decline. A decline
in loan origination volumes could have a material adverse effect on the
Company's operations and financial condition.
 
  Focus on Credit Impaired Borrowers May Result in Increased Delinquency Rates,
Foreclosures and Losses
 
     The Company is a lender in the subprime mortgage banking industry, which
means that the Company focuses its marketing efforts on borrowers who may be
unable to obtain mortgage financing from conventional mortgage sources.
Approximately 5% of the total principal amount of loans originated or purchased
by the Company in 1998 were to borrowers with a Company risk classification of
"D," which includes borrowers with numerous derogatory credit items up to and
including a bankruptcy in the most recent twelve month period. Loans made to
such borrowers may entail a higher risk of delinquency and higher default
frequency 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 default after the loans are sold could adversely
affect the pricing of the Company's future loan sales, the ability of the
Company to sell its loans in the future, and the market value of the Company's
loans held for sale.
 
  Loss of Funding Sources Could Adversely Affect Results of Operations
 
     The Company funds substantially all of the loans it originates or purchases
through the Facility and other borrowings. These borrowings will be repaid with
the proceeds received by the Company from selling such loans. Banks and other
creditors offering financing to mortgage lenders, such as the Company, have been
concerned over financial difficulties experienced by certain specialty finance
companies during 1998 and 1999. These difficulties include a lack of liquidity
caused by secondary market conditions and other factors and have led to the
bankruptcy filings of a few mortgage lenders. As a result, mortgage warehouse
lenders have been more cautious with respect to borrowings offered to mortgage
lenders, especially those specializing in subprime loans. Any failure to renew
or obtain adequate funding under the Facility, or other borrowings, or any
substantial reduction in the size of, or prices received in, the markets for the
Company's loans, could have a material adverse effect on the Company's results
of operations and financial condition. In the long term, to the extent that the
Company is not successful in maintaining or replacing the Facility, it would
likely have to curtail its loan production activities, thereby having a material
adverse effect on the Company's results of operations and financial condition.
See "Management's Discussion and Analysis of Financial Condition, Results of
Operations, Liquidity and Capital Resources." See "Business -- Financing and
Sale of Loans -- Warehouse Financing Facility."
 
  Reliance on Secondary Purchasers of Loans Could Adversely Affect Results of
Operations
 
     Gain on sales of loans generated by the Company's loan sales has
represented the primary source of the Company's revenues and net income.
Furthermore, the Company has relied almost entirely on proceeds from loan sales
to generate cash for repayment of borrowings under the Warehouse Financing
Facility. The Company has historically sold substantially all of its loan
originations in the secondary market to a number of
 
                                       19
<PAGE>   22
 
   
institutional purchasers. During 1998, prices received by the Company in its
whole loan sale transactions declined from levels previously realized. This
decline resulted in part from widening spreads in the asset-backed capital
markets and excess inventory of subprime loans. There can be no assurance that
the Company will be able to sell its loans in the secondary market at prices
near the levels achieved during 1998 or 1997. 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.
    
 
  Elimination of Lender Payments to Brokers Could Adversely Affect Results of
Operations
 
   
     Lawsuits have been filed against several mortgage lenders, 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. In a majority of these cases,
courts have declined to grant class certification, holding that it is necessary
to analyze the facts of each transaction to determine whether the lender-paid
fee, either alone or in combination with borrower-paid fees, constitutes a
reasonable payment for goods, facilities or services provided. In March 1999,
HUD clarified its position on lender payments to mortgage brokers further
undermining class action lawsuits alleging that all lender-paid fees are per se
illegal. See "Business -- Regulation." 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 legislation, 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.
    
 
  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 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,
financial condition and liquidity. See "Management's Discussion and Analysis of
Financial Condition, Results of Operations, Liquidity and Capital Resources."
    
 
                                       20
<PAGE>   23
 
  Risk of Competition in New Markets
 
     As the Company expands its retail origination and broker-sourced operations
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.
 
  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 entered into an agreement with AMC pursuant to which it sub-services
loans originated or purchased by the Company after the Reorganization. If AMC
fails to meet the servicing performance criteria set forth in the relevant
servicing agreements governing the loans, the Company's servicing rights could
be terminated. Any termination of servicing rights could have a material adverse
effect on the Company's results of operations and financial condition.
 
  Impairment of Value of Loan Servicing Rights; Declining Interest Rates
 
     The Company records gain on sales of loans based in part on the fair value
of retained servicing rights related to such loans. The fair value of such
servicing rights are in turn based in part on projected loan prepayment and
credit loss rates. Higher than anticipated rates of loan prepayment or credit
loss may be caused by, among other factors, a material decline in the level of
interest rates and could require the Company to write down the value of such
servicing rights which could have a material adverse effect on the Company's
results of operations and financial condition.
 
  Dependence Upon Independent Mortgage Brokers
 
     The Company depends on independent mortgage brokers, and, to a lesser
extent, smaller mortgage companies and commercial banks, for a substantial
portion of 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, most of whom are not obligated by contract or
otherwise to continue to do business with the Company. In addition, the Company
expects the volume of broker-sourced loans purchased by the Company to increase.
The Company's future operating and financial results may be more susceptible to
fluctuations in the volume and cost of its broker-sourced loans resulting from,
among other things, competition from other purchasers of such loans.
 
  Risks Related to Representations and Warranties in Loan Sales
 
     The Company engages in bulk loan sales pursuant to agreements that
generally require the Company to repurchase or substitute loans in the event of:
a breach of a representation or warranty made by the Company to the loan
purchaser, any misrepresentation during the mortgage loan origination process
or, in some cases, upon any fraud or first payment default on such mortgage
loans.
 
     For loans the Company purchases from mortgage companies, banks and other
originators, the Company generally limits the potential remedies of the
institutions to which the Company later sells the loans to the potential
remedies the Company receives from the parties from whom the Company purchased
the loans. However, in some cases, the remedies available to a purchaser of
loans from the Company may be broader than those available to the Company
against the originators of such loans, and, even where this is not the case,
should a purchaser enforce its remedies against the Company, the Company may not
always be able to enforce its remedies against the related originators.
 
                                       21
<PAGE>   24
 
     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 34% of the dollar volume of loans originated or purchased by
the Company during 1998 was 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 1998. Although the Company
has a nationwide independent broker network, developing nationwide retail
operations and a regional processing center network, the Company is likely to
continue to have a significant amount of its loan originations and purchases in
California for the foreseeable future, primarily because California represents a
significant portion of the national mortgage marketplace. Consequently, the
Company's results of operations and financial condition are dependent upon
general trends in the California economy and its residential real estate market.
The California economy experienced a slowdown or recession in recent years that
has been accompanied by a sustained decline in the California real estate
market. Residential real estate market declines may adversely affect the values
of the properties securing loans such that the principal balances of such loans
will equal or exceed the value of the mortgaged properties. Reduced collateral
value will adversely affect the volume of the Company's loans as well as the
pricing of the Company's loans and the Company's ability to sell its loans. See
"-- Economic Slowdown and Decline in Collateral Value May Adversely Affect
Volume of Loans" and "-- Focus on Credit Impaired Borrowers May Result in
Increased Delinquency Rates, Foreclosures and Losses."
 
     In addition, California historically has been vulnerable to certain natural
disaster risks, such as earthquakes and erosion-caused mudslides, which are not
typically covered by the standard hazard insurance policies maintained by
borrowers. Uninsured disasters may adversely impact borrowers' ability to repay
loans made by the Company. Because the Company sells its loans on a forward
basis, it is not exposed to the risk of loan delinquencies and defaults (except
to the extent they affect servicing rights) unless the Company is required to
repurchase or substitute a loan due to a breach of a representation or warranty
in connection with a loan sale, or, under certain circumstances, due to fraud or
default on the first payment due after sale. However, any sustained period of
increased delinquencies or defaults could adversely affect the pricing of the
Company's loan sales and the ability of the Company to sell its loans. The
existence of adverse economic conditions or the occurrence of such natural
disasters in California could have a material adverse effect on the Company's
results of operations and financial condition.
 
  Ability of the Company to Implement its Growth Strategy
 
     The Company's growth strategy involves expanding its broker-sourced loan
business through increased penetration into existing markets and expansion into
new markets and growing its 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 its 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, (iii) continue to expand in the face
of increasing competition from other mortgage lenders, and (iv) finance
increased loan production with additional warehouse lines or other borrowing.
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."
 
ITEM 2. PROPERTIES
 
     The Company's corporate headquarters are located in Orange, California,
where it leases approximately 80,600 square feet of office space. The facilities
are covered by several leases that, in general, expire in 2001 and 2002, and
have an option to renew for five years. The current annual rent of such space is
approximately $1.5 million and the related leases provide for certain scheduled
increases in annual rent. The Company also
 
                                       22
<PAGE>   25
 
leases or subleases space for eleven Regional Processing Centers and 72 account
executive field offices all in the United States.
 
     The Company believes its facilities are both suitable and adequate for the
current business activities conducted at its existing corporate headquarters,
Regional Processing Centers and account executive field offices. As part of the
Company's geographic expansion, the Company anticipates leasing additional
office space in the future.
 
ITEM 3. LEGAL PROCEEDINGS
 
     Although the Company is currently not a party to any material litigation it
may be subject to various routine legal proceedings arising out of the ordinary
course of its business.
 
     When the Company operated as a division of AMC, it was involved in various
lawsuits incidental to its business, none of which had a material adverse effect
on the Company. In connection with the Reorganization, the Company did not
assume any liabilities that arose out of the lending activities of AMC,
including liabilities related to the broker-sourced mortgage loan operations,
nor has the Company agreed to indemnify AMC against any such liabilities.
 
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
     No matters were submitted to a vote of the Company's security holders
during the quarter ended December 31, 1998.
 
                                    PART II
 
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
 
     In April 1997, the Company's common stock began trading under the symbol
LBFC on the Nasdaq National Market. The following table sets forth the range of
high and low closing sale prices of the Company's common stock for the periods
indicated:
 
<TABLE>
<CAPTION>
                                                        HIGH            LOW
                                                       -------        -------
<S>                                                    <C>            <C>
1998
Fourth Quarter.......................................  $ 8.125        $ 4.625
Third Quarter........................................   11.188          6.688
Second Quarter.......................................   14.125         10.250
First Quarter........................................   13.313          9.875
 
1997
Fourth Quarter.......................................  $15.063        $ 9.875
Third Quarter........................................   13.563          8.750
Second Quarter.......................................    8.875          6.500
</TABLE>
 
     No dividends were declared during the period covered by the above table.
The Company does not anticipate declaring dividends in the near future. Any
decision made by the Company's Board of Directors to declare dividends in the
future will depend upon the Company's future earnings, capital requirements,
financial condition and other factors deemed relevant by the Company's Board of
Directors.
 
     On March 5, 1999, the Company had approximately 33 stockholders of record
of its common stock. The Company believes its common stock is beneficially held
by more than 3,000 stockholders.
 
     The Company is authorized to repurchase up to 2.5 million shares of the
Company's common stock through the end of September 1999 pursuant to a stock
repurchase plan adopted by the Board of Directors in October 1997. During 1998,
the Company used $21.2 million of available liquidity to purchase an additional
 
                                       23
<PAGE>   26
 
2.1 million shares of common stock. The Company has spent $24.5 million and has
repurchased 2.4 million shares since the plan's inception.
 
ITEM 6. SELECTED FINANCIAL DATA
 
                            SELECTED FINANCIAL DATA
            (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND SHARE DATA)
 
<TABLE>
<CAPTION>
                                                       YEAR ENDED DECEMBER 31,
                                      ----------------------------------------------------------
                                         1998         1997         1996        1995       1994
                                      ----------   ----------   ----------   --------   --------
<S>                                   <C>          <C>          <C>          <C>        <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................  $  132,650   $   92,666   $   51,160   $ 31,873   $ 22,364
Expenses............................      82,618       50,833       35,188     21,912     22,328
Net earnings........................  $   30,019   $   24,644   $    9,392   $  5,792   $     22
Basic earnings per share:
  Net earnings......................  $     1.27   $     0.99          n/m        n/m        n/m
  Average number of common shares...      23,706       24,976          n/m        n/m        n/m
Diluted earnings per share:
  Net earnings......................  $     1.22   $     0.96          n/m        n/m        n/m
  Average number of common shares...      24,613       25,653          n/m        n/m        n/m
Return on average assets............       32.15%         n/m          n/m        n/m        n/m
Return on average equity............       12.94%         n/m          n/m        n/m        n/m
Loans originated and purchased......  $2,575,965   $1,685,742   $1,058,122   $592,542   $565,547
Loan sales..........................   2,521,606    1,679,522    1,029,789    580,366    562,054
G&A as a % of originations..........        2.82%        2.72%        3.29%      3.70%      3.95%
Gain on sale as a % of loans sold...        4.87%        5.28%        4.92%      5.46%      3.86%
Net earnings as a % of production...        1.17%        1.46%        0.89%      0.98%      0.00%
</TABLE>
 
---------------
n/m -- Not meaningful as this includes periods prior to the initial public
offering.
 
<TABLE>
<CAPTION>
                                                          AS OF DECEMBER 31,
                                      ----------------------------------------------------------
                                         1998         1997         1996        1995       1994
                                      ----------   ----------   ----------   --------   --------
<S>                                   <C>          <C>          <C>          <C>        <C>
STATEMENT OF FINANCIAL CONDITION
  DATA:
Cash and cash equivalents...........  $   24,941   $   38,782   $       --   $     --   $     --
Loans held for sale.................      59,148       17,241       49,580     21,342     10,364
Capitalized mortgage servicing
  rights............................       9,806        3,054           --         --         --
Deferred income taxes...............      32,523       34,400        2,120        882         --
Total assets........................     328,595      248,088       79,750     24,778     12,529
Warehouse financing facility........     211,787      146,271       72,829     20,613     11,483
Total liabilities...................     228,969      157,343       78,613     23,046     13,391
Stockholders' and divisional equity
  (deficit).........................      99,626       90,745        1,137      1,732       (862)
 
OPERATING DATA:
States in which loans were
  originated........................          50           48           43         35         27
Account Executives at year end......         327          232          120         64         79
Independent broker relationships....      12,500       10,000        7,000      5,000      4,000
Book value per share at year-end....  $     4.41   $     3.67          n/m        n/m        n/m
Equity to Asset Ratio at year-end...       30.32%       36.58%         n/m        n/m        n/m
</TABLE>
 
                                       24
<PAGE>   27
 
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION, RESULTS OF
        OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES
 
     Management's discussion and analysis of financial condition, results of
operations, liquidity and capital resources contained within this report should
be read in conjunction with the Company's Consolidated Financial Statements. The
Notes to the Consolidated Financial Statements define certain terms that are
used throughout this discussion and provide information on the Company's initial
public offering and the basis of presentation.
 
GENERAL
 
     The Company is a specialty finance company engaged in the business of
originating, purchasing and selling subprime residential mortgage loans secured
by one- to four-unit family residences. The Company's core borrower base
consists of individuals who do not qualify as traditional "A" credit borrowers
because their credit history, debt to income ratio or other factors do not
conform to standard agency lending criteria. The Company originates loans
through independent mortgage brokers and, to a lesser extent, purchases loans
from mortgage companies and commercial banks. Substantially all of the Company's
loan originations and purchases have been sold in the secondary market through
loan sales in which the Company disposes of its economic interest in the loans
for cash, except for the related servicing rights, which it has generally
retained. There may be some instances when all servicing rights are sold. See
"Business."
 
     Prior to May 1997, the Company operated as the Wholesale Division of a
company now known as Ameriquest Mortgage Company ("AMC"). In May of 1997, AMC
reorganized (the "Reorganization") its business operations by transferring
certain assets, liabilities and personnel relating to the Company and
approximately $40.0 million in cash (less approximately $2.0 million in related
expenses) to the Company in exchange for 24,999,999 shares of common stock.
Immediately after the Reorganization, the initial public offering of 25,000,000
shares of LBFC common stock was completed. The Reorganization has been accounted
for in manner similar to a pooling of interests and therefore, the historical
cost basis of the assets and liabilities transferred to the Company was carried
over from AMC.
 
     Because the Reorganization was accounted for in a manner similar to a
pooling of interests, the information contained within this report includes the
following: (i) for the year ended December 31, 1997, combined results of
operations represent activity for the Wholesale Division of AMC from January 1,
1997 through May 1, 1997 and activity for the Company from May 2, 1997 through
December 31, 1997; and (ii) for the year ended December 31, 1996, results of
operations represent activity solely for the Wholesale Division of AMC. All of
the benefits, rights and obligations relating to the operations and net earnings
of the Wholesale Division of AMC, up to the date of the Reorganization, remained
with AMC.
 
                                       25
<PAGE>   28
 
     The financial statements of the Company, up to the date of the
Reorganization, have been prepared in part from records maintained by AMC. The
historical financial statements of the Company, up to the date of the
Reorganization, may not necessarily be indicative of the conditions that would
have existed if the Company had operated as an independent entity. The financial
statements, up to the date of the Reorganization, reflect key assumptions
regarding the allocation of certain revenue and expense items and certain
balance sheet accounts, many of which could be material. In particular, in cases
involving assets, liabilities, revenues and expenses not specifically
identifiable to any particular division of AMC, 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. A summary of the revenues, expenses and net earnings for the years
ended December 31, 1998, 1997 and 1996 follows:
 
<TABLE>
<CAPTION>
                                                             1997
                                           ----------------------------------------
                                            WHOLESALE      THE COMPANY
                                           DIVISION OF    MAY 2 THROUGH
                                 1998          AMC        DEC. 31, 1997    COMBINED    1996
                               --------    -----------    -------------    --------   -------
                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                            <C>         <C>            <C>              <C>        <C>
Revenues.....................  $132,650      $25,772         $66,894       $92,666    $51,160
Expenses.....................    82,618       15,841          34,992        50,833     35,188
Net earnings.................    30,019        5,947          18,697        24,644      9,392
Basic earnings per share.....      1.27         0.24            0.75          0.99        n/a
Diluted earnings per share...      1.22         0.24            0.72          0.96        n/a
</TABLE>
 
     The primary components of the Company's revenues are gain on sales of loans
and net interest income. Gain on sales of loans consists of: (i) the excess of
the cash selling price over the outstanding principal balance of the loan (the
"Gross Cash Premium"), minus (ii) the fees and other compensation paid to
independent mortgage brokers and other lenders, plus (iii) capitalized servicing
rights, and plus (iv) points and fees received from the borrower, offset by
incremental direct loan origination costs. The Gross Cash Premium plus
capitalized servicing rights equals the "Gross Sales Premium." Gross Sales
Premiums are affected by market conditions, loan type, credit quality, interest
rate and other factors as negotiated between the Company and independent
purchasers. The recorded net gain on sale of loans, as expressed as a percentage
of loans sold, is the "Net Premium" realized for that period.
 
     Net interest income represents the difference between the interest that is
earned on loans and other interest earning assets over the interest that is paid
under the revolving warehouse credit facility. Net interest income can be
affected by the volatility of interest rates, the level of interest earned on
interest earning assets, the cost of interest on the revolving warehouse credit
facility, the average amount of interest earning assets outstanding,
non-performing loans and the average amount of borrowings outstanding.
 
     Expenses include general and administrative expenses, provisions for
losses, sub-servicing costs and income tax expense. Prior to the Reorganization,
certain expenses, not specifically identifiable to any particular division of
AMC, were allocated to AMC's various divisions, including the Wholesale
Division.
 
     The Company generates its loan production through three channels:
broker-sourced, correspondent and consumer direct. The broker-sourced and
correspondent channels comprise wholesale production and the consumer direct
channel represents retail production (the "Retail Channel").
 
     The Company's primary channel of loan production is through its
relationship with a network of approved independent mortgage brokers. The
Company has established a sales force ("Account Executives") to serve as the
principal contact between the Company and the independent mortgage brokers. The
Company offers a variety of loan programs and products; however, all loans
originated by the Company are secured by first-lien mortgages on residential
properties consisting of one- to four-unit family residences. In addition the
Company purchases loans on a correspondent basis from other lenders. Loan
purchases totaled $296.3 million or 11.5% of production for the year ended
December 31, 1998, as compared to $151.8 million or 9.0% and $32.3 million or
3.1% for the years ended December 31, 1997 and 1996, respectively. In the fourth
quarter of 1997, the Company initiated its retail channel. The Company created
the retail channel in order to diversify its
 
                                       26
<PAGE>   29
 
   
production and to have direct interaction with borrowers at the time of
origination. During 1998, the retail channel generated $59.6 million of loans.
    
 
   
     The following table presents the Company's loan production by channel for
the years presented (in thousands):
    
 
   
<TABLE>
<CAPTION>
                                                    1998          1997          1996
                                                 ----------    ----------    ----------
<S>                                              <C>           <C>           <C>
Broker-sourced.................................  $2,220,096    $1,531,266    $1,026,390
Correspondent..................................     296,283       151,768        31,732
                                                 ----------    ----------    ----------
  Wholesale....................................   2,516,379     1,683,034     1,058,122
Retail.........................................      59,586         2,708            --
                                                 ----------    ----------    ----------
          Total................................  $2,575,965    $1,685,742    $1,058,122
                                                 ==========    ==========    ==========
</TABLE>
    
 
   
     The Company's geographic markets are divided into various regions. Once the
Company determines that the level of current and projected business from a
region warrants creation of a local presence, the Company establishes a regional
processing center in or near the region. At December 31, 1998 the Company had 11
regional processing centers located throughout the United States.
    
 
   
     The Company follows the practice of entering into forward commitments to
sell its production. These forward commitments are typically made for the next
30 to 180 days of production. Prior to entering into a forward commitment, the
Company evaluates prospective purchasers in order to assess their ability to
fulfill the terms of the agreement. In the event that the coupon rate or margin
of the loans originated and delivered to the purchaser are materially different
from the terms of the forward commitment, the sales price of the loans are
adjusted.
    
 
   
     The following table presents the Company's loan sales for the periods
indicated (dollars in thousands):
    
 
   
<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                 --------------------------------------
                                                    1998          1997          1996
                                                 ----------    ----------    ----------
<S>                                              <C>           <C>           <C>
Loan sales (principal balance).................  $2,521,606    $1,679,522    $1,029,789
Gain on sale of loans..........................     122,704        88,597        50,699
Gross Sales Premiums as a % of loans sold......       6.11%         6.47%         5.63%
Net gain on sale as a % of loans sold..........       4.87%         5.28%         4.92%
</TABLE>
    
 
   
     Loan sales have been made to institutional purchasers on a nonrecourse
basis pursuant to a purchase agreement containing customary representations and
warranties regarding underwriting criteria and the origination process. As of
December 31, 1998, the Company has not retained residual interests in the loans
that it sells other than servicing rights. In the future, however, the Company
may consider alternatives to whole loan sales, including securitizations,
depending on market conditions and available levels of whole loan executions.
The Company's focus in utilizing such a strategy would be to retain a positive
cash flow operating model. In the event of a breach of a representation or a
warranty, the Company may be required to repurchase or substitute a new loan.
The Company may also be required to repurchase or substitute a loan if the
borrower defaults on the first payment due after the loan is funded or if the
loan documentation contains fraudulent misrepresentations made by the borrower.
Such repurchase or substitution may result in the Company recording a reduction
in the gain on sale that it previously recognized and/or a loss. The Company
realizes that such repurchases are inherent in its operations and that the
Company may realize a reduction in the previously recognized gain on sale or
sustain a loss from such repurchases. The Company provides reserves to cover
such activities that arise in connection with originating loans and subsequently
selling them to investors. During 1998 the Company repurchased $81 million of
loans.
    
 
                                       27
<PAGE>   30
 
RESULTS OF OPERATIONS
 
   
  Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
    
 
   
     During 1998, net earnings increased $5.4 million, to $30.0 million, an
increase of 21.8% over $24.6 million of net earnings for the same period in
1997. The Company's net earnings per diluted share was $1.22 for the year ended
December 31, 1998, an increase of 27.1% over net earnings per diluted share of
$0.96 for the year ended 1997.
    
 
   
     The primary factors that led to the improvement in net earnings and net
earnings per share during 1998 as compared to 1997 included:
    
 
   
     - Increased loan production. Loan production increased by $890.2 million or
       52.8% to $2.6 billion during the year ended December 31, 1998 as compared
       to $1.7 billion for 1997.
    
 
   
     - Increased loan sales. Loans sold during the year ended December 31, 1998
       totaled $2.5 billion, an increase of $842.1 million or 50.1% over the
       same period of 1997.
    
 
   
     - Lower effective income tax rate. The income tax rate was 40.0% during the
       year ended December 31, 1998 as compared to 41.1% during the same period
       of 1997.
    
 
   
     - Lower level of shares outstanding. The decline in the average number of
       shares outstanding positively impacted net earnings per share. The
       average number of diluted shares outstanding declined to 24.6 million for
       year ended December 31, 1998, a decline of 1.1 million shares from the
       same period of 1997. The primary reason for the decline in the average
       number of shares is due to the Company repurchasing 2.4 million shares of
       its common stock, pursuant to its stock repurchase program.
    
 
   
     Revenues. The table below presents the Company's revenues by primary
component for the years indicated.
    
 
   
<TABLE>
<CAPTION>
                                                             1998         1997
                                                          ----------    ---------
                                                          (DOLLARS IN THOUSANDS)
<S>                                                       <C>           <C>
Gain on sale of loans...................................   $122,704      $88,597
Net interest income.....................................      6,787        3,354
Loan servicing and other fees on loans..................      4,922          946
Amortization of mortgage servicing rights...............     (1,763)        (231)
                                                           --------      -------
          Total revenues................................   $132,650      $92,666
                                                           ========      =======
</TABLE>
    
 
   
     Total revenues increased by approximately $40.0 million or 43.2% in 1998,
compared to 1997, primarily as a result of an increase in gain on sales of loans
of $34.1 million or 38.5% as compared to 1997. The primary factor contributing
to this increase was an increase in the amount of loans sold of 50.1% to $2.5
billion during 1998, as compared to the same period in 1997. Such increase was
partially offset by a decrease in Net Premiums on the sale of loans to 4.87%
during 1998, from 5.28% in 1997.
    
 
   
     The increase in the amount of loans sold resulted from an increase in loan
originations and purchases to $2.6 billion during year ended December 31, 1998,
from $1.7 billion during 1997. This trend reflects the Company's continued
growth of its broker-sourced business through penetration in existing markets
and expansion into new geographic markets. During 1998 the Company originated
loans in all 50 states compared to 48 states in 1997. Additionally, the Company
expanded its sales force to 327 at December 31, 1998, an increase of 40.9% over
the level in 1997.
    
 
   
     The table below presents the Company's revenues by reportable segment for
the years indicated. For 1997 the Company made certain estimates in order to
compute the revenues by using actual results from the Reorganization date to
December 31, 1997 to allocate revenues.
    
 
                                       28
<PAGE>   31
 
   
<TABLE>
<CAPTION>
                                                             1998         1997
                                                          ----------    ---------
                                                          (DOLLARS IN THOUSANDS)
<S>                                                       <C>           <C>
Broker-sourced..........................................   $106,956      $82,208
Correspondent...........................................     10,832        6,159
                                                           --------      -------
     Subtotal Wholesale.................................    117,788       88,367
                                                           --------      -------
Other...................................................     14,862        4,299
                                                           --------      -------
     Total revenues.....................................   $132,650      $92,666
                                                           ========      =======
</TABLE>
    
 
   
     Gain on sale of loans increased to $122.7 million during 1998, an increase
of $34.1 million over gain on sale of $88.6 million during 1997. The increase in
gain on sale during 1998 is due to an increase in the amount of loans sold,
partially offset by a decline in Gross Sales Premiums. The table below presents
the premiums received and fees paid by the Company and such amounts expressed as
a percentage of loans sold during the periods indicated.
    
   
    
 
   
<TABLE>
<CAPTION>
                                                      YEAR ENDED DECEMBER 31,
                                              ----------------------------------------
                                                    1998                   1997
                                              -----------------      -----------------
                                                       (DOLLARS IN THOUSANDS)
<S>                                           <C>        <C>         <C>        <C>
  Gross Sales Premium.......................  $154,068     6.11%     $108,585     6.47%
  Fees paid to brokers......................   (28,682)   (1.14)%     (17,927)   (1.07)%
  Fees paid to correspondents...............    (8,194)   (0.32)%      (4,849)   (0.29)%
  Points, fees and other....................     5,512     0.22%        2,788     0.17%
                                              --------               --------
  Net Premium...............................  $122,704     4.87%     $ 88,597     5.28%
                                              ========               ========
</TABLE>
    
 
   
     Net Premiums on the sale of loans decreased to 4.87% for the year ended
December 31, 1998, as compared to 5.28% in 1997. The decrease is the result of
lower Gross Sales Premiums, higher fees paid to brokers, and a larger volume of
correspondent business.
    
 
   
     The table below presents the premiums received and fees paid by reportable
segment of the Company and such amounts expressed as a percentage of loans sold
during 1998, dollars in thousands.
    
 
   
<TABLE>
<CAPTION>
                                                                 YEAR ENDED
                                                              DECEMBER 31, 1998
                                                              -----------------
<S>                                                           <C>        <C>
BROKER-SOURCED
  Gross Sales Premium.......................................  $131,784     6.05%
  Fees paid to brokers......................................   (28,682)   (1.32)%
  Points, fees and other....................................     3,854     0.18%
                                                              --------
  Net Premium...............................................  $106,956     4.91%
                                                              ========
CORRESPONDENT
  Gross Sales Premium.......................................  $ 19,063     6.60%
  Fees paid to correspondents...............................    (8,194)   (2.84)%
  Points, fees and other....................................       (37)   (0.01)%
                                                              --------
  Net Premium...............................................  $ 10,832     3.75%
                                                              ========
RETAIL
  Gross Sales Premium.......................................  $  3,221     5.70%
  Points, fees and other....................................     1,695     3.01%
                                                              --------
  Net Premium...............................................  $  4,916     8.70%
                                                              ========
</TABLE>
    
 
   
     Investor demand for the Company's loans, the level of available supply of
such products and the direction of mortgage interest rates all have a direct
impact on the negotiated Gross Cash Premiums. A recent decline in market pricing
for subprime mortgage loans has negatively affected the Gross Cash Premiums that
the Company will be able to receive on future loan sales. Planned expansion in
the retail loan origination channel, however, may mitigate this impact on the
Company's gain on sale since such originations do not result in any broker or
correspondent fees paid. There can be no assurance provided that the Company
will be able to
    
 
                                       29
<PAGE>   32
 
maintain its historical level of Gross Cash Premiums and Net Premiums or that it
will be able to generate sufficient volume in retail loan originations for the
Retail Channel to generate profitable operations.
 
     Loan servicing and other fees totaled $3.2 million during 1998, net of
amortization of mortgage servicing rights totaling $1.8 million. The Company
generally earns an annual 50 basis points on the outstanding principal balance
of each loan it services, and retains the right to receive late fees and other
charges in connection with the servicing of such loans. At December 31, 1998,
the outstanding balance of the servicing portfolio, including the loans
sub-serviced by AMC totaled $1.5 billion. Prior to the Reorganization, all
related loan servicing revenues were recognized by an affiliated division of
AMC. During the third quarter, the Company and AMC modified the existing loan
sub-servicing agreement, which provides the Company the right to begin servicing
its loans. The Company began its independent servicing operations on November 2,
1998. As of December 31, 1998, the Company was directly servicing loans with an
aggregate outstanding principal amount of $547 million.
 
     Net interest income totaled $6.8 million during 1998, an increase of $3.4
million compared to the same period in 1997. Such increase resulted from a
higher level of average loans held for sale during the period, partially offset
by a higher level of average borrowings under the revolving warehouse financing
facility. During 1997 the Company began utilizing its excess liquidity to fund a
portion of its loan originations. This strategy has resulted in higher levels of
return on its excess liquidity and has allowed the Company the flexibility to
transfer such loans to its warehouse line on a same-day basis.
 
     Expenses. The following table sets forth the components of the Company's
expenses for the periods indicated.
 
<TABLE>
<CAPTION>
                                                                 YEAR ENDED
                                                                DECEMBER 31,
                                                           ----------------------
                                                             1998         1997
                                                           ---------    ---------
                                                           (DOLLARS IN THOUSANDS)
<S>                                                        <C>          <C>
Compensation expense.....................................   $50,025      $32,229
Premises and equipment expenses..........................    11,487        4,141
Other general and administrative expenses................    11,039        7,206
                                                            -------      -------
Total direct expenses....................................    72,551       43,576
Allocated expenses from AMC..............................        --        2,294
                                                            -------      -------
Total general and administrative expenses................    72,551       45,870
Provision for losses.....................................     5,247        4,028
Sub-servicing costs......................................     4,820          935
                                                            -------      -------
          Total expenses.................................   $82,618      $50,833
                                                            =======      =======
</TABLE>
 
     The following table presents certain data and statistics on the Company's
general and administrative expenses for the periods indicated.
 
<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                   ---------------------------------------------
                                                           1998                    1997*
                                                   ---------------------   ---------------------
                                                                 % OF                    % OF
                                                   PER UNIT   PRODUCTION   PER UNIT   PRODUCTION
                                                   --------   ----------   --------   ----------
<S>                                                <C>        <C>          <C>        <C>
Broker-sourced...................................   $2,404       2.14%     $ 2,425       2.17%
Correspondent....................................      822       0.69          951       0.74
                                                    ------       ----      -------      -----
  Wholesale......................................    2,227       1.97        2,292       2.02
Retail...........................................    8,998       8.17       43,425      33.68
                                                    ------       ----      -------      -----
  Total Production...............................   $2,388       2.11%     $ 2,372       2.09%
                                                    ------       ----      -------      -----
Corporate support................................    1,232       1.09        1,153       1.02
                                                    ------       ----      -------      -----
Net general and administrative expenses..........   $3,188       2.82%     $ 3,080       2.72%
                                                    ======       ====      =======      =====
</TABLE>
 
---------------
* 1997 Production data is from the date of the Reorganization to December 31,
  1997.
 
                                       30
<PAGE>   33
 
     The total dollar amount of general and administrative expenses increased by
$26.7 million or 58.2% to $72.6 million during 1998, compared to the same period
in 1997. Additionally, the percentage of total general and administrative
expense to loan production increased to 2.82% during 1998 compared to 2.72%
during the same period 1997. The increase in general and administrative expenses
is due to: (i) costs relating to the increase in volume of loan production, (ii)
an increase in corporate infrastructure, (iii) the costs of initiating a retail
production channel, and (iv) the costs of initiating a loan servicing function.
During 1998 the Company added regional processing centers in Denver, Dallas,
Chicago and Portland in order to support loan production.
 
     Compensation expense increased by $17.8 million or 55.2% to $50.0 million
during 1998, compared to the same period in 1997. The primary reason for such
increase is attributable to increases in commissions paid to production
employees. Additionally, compensation expenses increased during 1998 as a result
of the increase in corporate staff to support the infrastructure of the Company
as an independent entity. The number of employees totaled 819 at December 31,
1998, versus 578 at December 31, 1997.
 
     Premises and equipment expenses increased by $7.3 million or 177.4% to
$11.5 million during 1998, compared to the same period in 1997. Such increases
reflect an increase in occupancy costs related to growth in personnel to support
the increased volume of loan production, initiating a loan servicing function as
well as an increase in headquarters space to support the Company's
infrastructure as an independent entity since the Reorganization.
 
     Other general and administrative expenses increased by $3.8 million or
53.2% to $11.0 million during 1998, compared to the same period in 1997. The
increase in other general and administrative expenses is primarily the result of
increased infrastructure and costs incurred in support of the Company's loan
production.
 
     Provision for losses increased to $5.2 million compared to $4.0 million for
the same period in 1997. The Company provides market valuation adjustments for
loans held for sale and for liabilities associated with (i) breaches of
representations and warranties, (ii) first payment defaults, and (iii)
repurchases of loans recorded as sold. At December 31, 1998, the Company had
$3.2 million of market valuation adjustments on loans held for sale and $2.0
million of liabilities for potential repurchases of loans. Prior to the
Reorganization, AMC allocated $2.8 million of provision for losses to the
Wholesale Division. This allocation related to losses sustained by the Wholesale
Division during April 1997 from the repurchase and sale of certain loans which
were originated by the Wholesale Division in previous years.
 
     As more fully discussed in Note 13 to the Company's Consolidated Financial
Statements, since the Reorganization, the Company has entered into an agreement
with AMC pursuant to which AMC agreed to sub-service mortgage loans originated
or purchased by the Company after the Reorganization. The Company has agreed to
pay AMC a 45 basis point annual servicing fee on the outstanding principal
balance of each loan sub-serviced. Such sub-servicing costs for 1998 and 1997
totaled $4.8 million and $935,000, respectively. The Company and AMC modified
the sub-servicing agreement during the third quarter of 1998. The Company
anticipates that its future sub-servicing cost will decline commensurate with
the decline in the volume of loans serviced by the sub-servicer.
 
     The table below presents the Company's expenses by reportable segment for
the years indicated. For 1997 the Company made certain estimates in order to
compute the expenses by using actual results from the Reorganization date to
December 31, 1997 to allocate expenses.
 
<TABLE>
<CAPTION>
                                                            1998          1997
                                                          ---------     ---------
                                                          (DOLLARS IN THOUSANDS)
<S>                                                       <C>           <C>
Broker-sourced..........................................   $42,673       $33,228
Correspondent...........................................     2,253         1,123
                                                           -------       -------
     Subtotal Wholesale.................................    44,926        34,351
                                                           -------       -------
Other...................................................    37,692        16,482
                                                           -------       -------
     Total Expenses.....................................   $82,618       $50,833
                                                           =======       =======
</TABLE>
 
                                       31
<PAGE>   34
 
  Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
 
     The Company had substantial growth during 1997 as a result of increased
loan originations and purchases in both existing and new markets. Net earnings
increased by $15.3 million or 162.4% to $24.6 million in 1997 from $9.4 million
in 1996.
 
     The primary factors that led to the improvement in net earnings recorded
during 1997 as compared to 1996 include:
 
     - Increased loan production. Loan production increased by $627.6 million or
      59.3% to $1.7 billion during the year ended December 31, 1997 as compared
      to the same period of 1996.
 
     - Increased loan sales. Loans sold during the year ended December 31, 1997
       totaled $1.7 billion, an increase of $649.7 million or 63.1% over the
       same period of 1996.
 
     - Higher premiums received on the sale of loans. Net Premiums on the sale
       of loans during the year ended December 31, 1997 totaled 5.28% as
       compared to 4.92% for the same period of 1996.
 
     - Improved operational efficiencies. General and administrative expenses as
       a percent of loan production declined to 2.72% during the year ended
       December 31, 1997, from 3.29% during the same period in 1996.
 
     Revenues. The following table sets forth the components of the Company's
revenues for the periods indicated:
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED
                                                              DECEMBER 31,
                                                           ------------------
                                                            1997       1996
                                                           -------    -------
                                                             (IN THOUSANDS)
<S>                                                        <C>        <C>
Gain on sale of loans....................................  $88,597    $50,699
Loan servicing and other fees, net.......................      715         --
Net interest income......................................    3,354        461
                                                           -------    -------
          Total revenues.................................  $92,666    $51,160
                                                           =======    =======
</TABLE>
 
     Total revenues increased by $41.5 million or 81.1% in 1997, compared to
1996, as a direct result of an increase in gain on sales of loans of $37.9
million or 74.8% in 1997, compared to 1996. The primary factors contributing to
this increase are: (i) an increase in loan sales of 63.1% to $1.7 billion in
1997, as compared to 1996, and (ii) an increase in the Net Premiums on the sale
of loans to 5.28% in 1997 from 4.92% in 1996.
 
     The increase in loan sales resulted from an increase in loan originations
and purchases to $1.7 billion in 1997 from $1.1 billion in 1996, which reflects
the Company's goal to profitably expand its broker-sourced business through
penetration in its existing markets and expansion into new geographic markets.
The number of Account Executives increased to approximately 232 at December 31,
1997 compared to approximately 120 at December 31, 1996. The Company's efforts
to expand the number of approved independent mortgage brokers resulted in
approximately 10,000 approved brokers at December 31, 1997 compared to
approximately 7,000 approved brokers at December 31, 1996. During 1997, the
Company originated loans in 48 states compared to 43 states during 1996. Loan
originations in California during 1997 represented 34.4% of total loan
production for the year.
 
     Net Premiums on the sale of loans increased in 1997 as a result of higher
Gross Sales Premiums negotiated on loans sold, partially offset by both higher
Broker Fees paid and a reduced level of capitalized mortgage servicing rights
recognized at the time of sale. Gross Cash Premiums on loans sold increased to
6.03% in 1997 compared to 4.77% in 1996, while at the same time, Broker and
Correspondent Fees increased to 1.36% of loans sold compared to 0.93% in 1996.
Capitalized mortgage servicing rights recognized at the time of sale dropped to
0.43% in 1997 from 0.90% in 1996, primarily due to an increase in the estimated
cost to service loans resulting from the need to contract with a sub-servicer
immediately following the Reorganization.
 
                                       32
<PAGE>   35
 
     Loan servicing and other fees totaled $715,000 in 1997, net of amortization
of mortgage servicing rights totaling $231,000. The Company generally earns an
annual 50 basis points on the outstanding principal balance of each loan it
services, and retains the right to receive late fees and other charges in
connection with the servicing of such loans. At December 31, 1997, the
outstanding balance of the servicing portfolio totaled $896.2 million, including
certain loans serviced on an interim basis until servicing is transferred to the
purchasing investor. Prior to the Reorganization, all related loan servicing
revenues were recognized by an affiliated division of AMC.
 
     Net interest income totaled $3.4 million in 1997, an increase of $2.9
million or 627.5%, compared to 1996. Such increase resulted from a higher level
of loans held for sale during the period, partially offset by a higher level of
advances under the revolving warehouse financing facility, coupled with
investment returns from the Company's short-term investment securities. During
1997, the Company began utilizing its excess liquidity to fund a portion of its
loan originations. This strategy resulted in higher levels of return on
investments and allowed the Company the flexibility to transfer such loans to
its warehouse line on a same-day basis.
 
     Expenses. The following table sets forth the components of the Company's
expenses for the periods indicated:
 
<TABLE>
<CAPTION>
                                                               YEAR ENDED
                                                              DECEMBER 31,
                                                           ------------------
                                                            1997       1996
                                                           -------    -------
                                                             (IN THOUSANDS)
<S>                                                        <C>        <C>
Compensation.............................................  $32,229    $17,168
Premises and equipment...................................    4,141      3,870
Other general and administrative.........................    7,206      4,900
                                                           -------    -------
     Total direct expenses...............................   43,576     25,938
Allocated expenses from AMC..............................    2,294      8,900
                                                           -------    -------
     Total general and administrative....................   45,870     34,838
Provision for losses.....................................    4,028        350
Sub-servicing costs......................................      935         --
                                                           -------    -------
          Total expenses.................................  $50,833    $35,188
                                                           =======    =======
</TABLE>
 
     Compensation expense increased 87.7% or $15.1 million in 1997 as compared
to 1996. The increased level of compensation expense represents 85.4% of the
total increase in direct general and administrative expenses in 1997 as compared
to 1996. The primary reason for such increase is growth in the number of
employees resulting from the Company's expansion of its loan production
capabilities. The number of employees totaled 578 at December 31, 1997, up from
338 at December 31, 1996. The increase in compensation expense is also
attributable to increases in commissions paid to production employees. Both the
growth in the employee base and the increased commissions are directly related
to increased loan production during 1997 as compared to 1996. Although total
general and administrative expenses increased in 1997, as compared to 1996, such
expenses declined as a percentage of loan production to 2.72% in 1997, as
compared to 3.29% in 1996.
 
     Premises and equipment expenses increased by $271,000 or 7.0%, to $4.1
million in 1997, as compared to $3.9 million in 1996, reflecting an increase in
occupancy costs related to growth in personnel forces to support the increased
loan production as well as an increase in headquarters' space to support the
Company as an independent entity since the Reorganization.
 
     Other general and administrative expenses increased by $2.3 million or
47.1% to $7.2 million in 1997, as compared to $4.9 million in 1996. The increase
in other general and administrative expenses is primarily the result of
increased infrastructure and indirect costs incurred in support of the Company's
loan production. As more fully discussed in the Notes to the Company's
Consolidated Financial Statements, since the Reorganization, the Company had
entered into several agreements with AMC, pursuant to which AMC provided data
processing, human resources and, through August 1997, mail room services to the
Company. The Company
 
                                       33
<PAGE>   36
 
has paid $1.1 million to AMC for such services during 1997 since the
Reorganization. The Company has developed an internal capacity for these
functions and has given AMC notice to curtail those agreements. Expenses as a
percent of production may increase due to the development of those independent
capabilities to replace contracted services initially being provided by AMC. In
addition, the Company provided certain services to AMC, as described in Note 13
to the Company's Consolidated Financial Statements. The Company has received
$440,000 from AMC for such services during 1997 since the Reorganization. The
Company has received notice from AMC to curtail those services.
 
     Prior to the Reorganization, the Wholesale Division received an allocation
of expenses from AMC, as detailed in Note 1 to the Company's Consolidated
Financial Statements. Immediately following the Reorganization, such allocations
ceased as the Company now incurs all of its expenses directly. In 1997, such
allocated expenses from AMC totaled $2.3 million compared to $8.9 million in
1996.
 
     Provision for losses increased to $4.0 million in 1997 compared to $350,000
in 1996. Prior to the Reorganization, the Wholesale Division received an
allocation from AMC based on the total provision for losses recorded by AMC.
Such allocation totaled $2.8 million in 1997 and is primarily the result of a
loss recorded by AMC related to the repurchase of certain loans in 1997.
Provision for losses totaling $1.2 million has been recorded by the Company
since the Reorganization to provide for any future losses resulting from
breaches of representations and warranties, first payment defaults, and other
factors.
 
     As more fully discussed in Note 13 to the Company's Consolidated Financial
Statements, since the Reorganization, the Company has entered into an agreement
with AMC pursuant to which AMC agreed to sub-service mortgage loans originated
or purchased by the Company after the Reorganization. The Company has agreed to
pay AMC a 45 basis point annual servicing fee on the outstanding principal
balance of each loan sub-serviced. Such sub-servicing costs in 1997 amounted to
$935,000.
 
Income Taxes
 
     The effective income tax rates for 1998, 1997 and 1996 were 40.0%, 41.1%
and 41.2%, respectively. Prior to the Reorganization, the Wholesale Division was
not a separate legal entity for tax purposes. Because the Wholesale Division was
part of AMC until the Reorganization, AMC is responsible for payment of federal
and state income taxes attributable to income earned by the Wholesale Division
of AMC prior to the Reorganization.
 
     As discussed in Note 9 to the Company's Consolidated Financial Statements,
the amortization of the deferred tax asset has no impact on the Company's
provision for income taxes, rather it reduces the amount of income taxes payable
to the Internal Revenue Service ("IRS").
 
FINANCIAL CONDITION
 
     A substantial portion of the Company's cash and cash equivalents are
maintained in accounts with its warehouse lender. The Company earns interest on
these funds at a yield that approximates the 30 day reserve adjusted London
Inter-Bank Offered Rate ("LIBOR"). At December 31, 1998, cash and cash
equivalents included $17.5 million in funds which were borrowed from its
warehouse lender for the funding of loans. Such advances were not utilized to
fund loans and were repaid to the warehouse lender the following business day.
 
     As discussed in more detail in Liquidity and Capital Resources, the Company
invests in securities which consist of high-quality, short-term securities.
 
     Loans held for sale totaled $59.1 million which is an increase of $41.9
million as of December 31, 1998, as compared to December 31, 1997. This increase
is a result of the increase in loan origination activity during 1998. Loans held
for sale is composed of recently originated loans that have not yet been
presented to an investor, and/or loans that have been repurchased from
investors. At December 31, 1998, $37.3 million of loans held for sale were
performing in accordance with their contractual terms. The aggregate principal
balance of loans held for sale at December 31, 1998 is net of a market valuation
adjustment of $3.2 million. The Company believes that these loans are carried at
the lower of aggregate cost or market.
 
                                       34
<PAGE>   37
 
     Receivable from the sales of loans represents the proceeds from the sales
of loans that have not been received by the Company from the purchaser. At
December 31, 1998, receivable from the sales of loans totaled $186.8 million
compared to $143.1 million at December 31, 1997. Such balances normally are
collected within a 30-day period from month-end. All of the proceeds related to
the receivable from the sales of loans at December 31, 1998 have been collected.
 
     At December 31, 1998, the Company had recorded $9.8 million of capitalized
servicing rights, net of amortization. Capitalized servicing rights are subject
to downward valuation in the event that the market value of the servicing is
lower than the recorded amounts, which typically occurs when the related loans
have higher ratios of loss (charge-offs) and/or rates of prepayment than had
been predicted at the time of sale.
 
     The warehouse financing facility increased $65.5 million over the 1997
year-end level as a result of an increase in the receivable from the sales of
loans over the same comparative period and increased origination volume.
Borrowings under the Facility are short-term and typically are repaid within 60
days.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     The Company had $24.9 million in cash and cash equivalents at December 31,
1998 reflecting continued positive cash flows generated since the
Reorganization. Prior to the Reorganization, all cash generated by the Wholesale
Division of AMC was collected by AMC, and as such, cash and cash equivalents for
the Company at any point prior to the Reorganization reflects a zero balance. At
December 31, 1998, the Company had borrowed $17.5 million on loans which had not
yet funded. These borrowings were repaid the following business day. At December
31, 1998, the Company had utilized $52.1 million of its liquidity to fund loans.
Sources of cash flow include loan sales, net interest income and borrowings.
Uses of cash include the funding of loan originations and purchases, repayment
of borrowings and related interest expenses, operating and administrative
expenses, income taxes, purchases of treasury stock, and capital expenditures.
 
     The Company funds its operations through its loan sales, revolving
warehouse credit facility, cash reserves and net earnings. Additionally, the
Company may utilize cash reserves to fund loan production in order to maximize
the return on excess liquidity. The Company repays borrowings with the proceeds
from loan sales. During the years ended December 31, 1998, 1997 and 1996, the
Company used cash in the amount of $2.6 billion, $1.7 billion and $1.1 billion,
respectively, for new loan originations and purchases. During the same periods,
the Company received cash proceeds from the sale of loans of $2.5 billion, $1.7
billion and $1.0 billion, respectively, representing the principal balance of
loans sold. The Company received cash proceeds from the premiums on such loans
sales of $137.4 million, $96.5 million and $48.7 million, respectively, for the
years ended December 31, 1998, 1997 and 1996.
 
     The Company has a number of sources for funding its loans: (i) a committed
$300 million revolving warehouse facility provided by a syndicate of banks, (ii)
an uncommitted $100 million repurchase facility, (iii) proceeds from the sale of
loans, and (iv) the Company's excess liquidity. These facilities bear interest
at a specified margin over one month LIBOR. The weighted average cost of funds
for these facilities was 6.86% at December 31, 1998. During February 1999, the
Company obtained an additional $100 million warehouse line from an investment
banker. This line bears interest at LIBOR plus 1.25%. The Company's borrowing
facilities have a variety of financial and compliance covenants and the Company
exceeded all of these covenants at December 31, 1998.
 
     The Company has adopted an investment program for available liquidity. The
objectives of this program are to preserve the capital of the Company while
maintaining flexibility for strategic opportunities. The Company's investment
strategy seeks to maximize returns within the policy's objectives.
 
     Pursuant to a stock repurchase plan adopted by the Board of Directors in
October 1997, the Company is authorized to repurchase up to 2.5 million shares
of the Company's common stock through the end of September 1999. During 1998,
the Company used $21.2 million of available liquidity to purchase an additional
2.1 million shares of its common stock. The Company has spent $24.5 million and
has repurchased 2.4 million shares since the plan's inception.
 
                                       35
<PAGE>   38
 
     The Company believes that sufficient cash from operations and borrowings
will be generated to fund operations. However, the Company's ability to continue
to originate and purchase loans is dependent in large part upon its ability to
sell the loans at a premium in order to generate cash proceeds to repay
borrowings under the warehouse financing facility, thereby creating borrowing
capacity to fund new originations and purchases. The value of and market for the
Company's loans are dependent upon a number of factors, including the
loan-to-value ratios and interest rates on the loans, general economic
conditions, interest rates and governmental regulations. Adverse changes in such
factors may affect the Company's ability to sell loans for acceptable prices
within a reasonable period of time. A prolonged, substantial reduction in the
size of the secondary market for loans of the type originated or purchased by
the Company may adversely affect the Company's ability to sell loans in the
secondary market with a consequent adverse impact on the Company's results of
operations, financial condition and ability to fund future originations and
purchases.
 
     During the third quarter of 1998, the Company entered into a forward sales
contract with an investment banking firm to sell $1.3 billion of its future loan
production to be delivered to the purchaser on or before March 31, 1999. At
December 31, 1998, the Company had delivered $1.0 billion of loans on this
commitment. The Gross Sales Premium that the Company will realize from this
commitment is dependent upon the type, quality, interest rate and other terms of
the loans delivered to the purchaser. Additionally the prices in secondary
market for subprime mortgage have recently constricted. Excess inventory of
subprime loans and widening spreads in the asset-backed capital markets have
caused pricing for loans, similar to those originated by the Company, to
substantially decline. There can be no assurance provided that after the
expiration of its forward sales commitment, that the Company will be able to
sell its loans in the secondary market at a price near levels achieved during
1998 or 1997. A material decline in such prices could have a material adverse
impact on the Company's profitability and liquidity.
 
  Year 2000
 
     The Company is aware on ensuing issues involving the upcoming date change
from December 31, 1999 to January 1, 2000 ("Year 2000") and the effect of such
change on the Company's information systems. The Company established a task
force to evaluate the internal information technology (IT) and non-IT systems
that could be affected by such date change and also identified the external
systems that are critical to the Company's operations. An assessment of the
readiness of the Company's suppliers is ongoing.
 
     During 1998, the Company implemented and upgraded several of its core
systems in its effort to establish fully independent operations from its
predecessor company. The discontinuation of the Administrative Services
Agreements was made possible by building an in-house IT infrastructure. This
infrastructure was designed to be fully compliant with the Year 2000 date
change. The software packages selected by the Company as part of establishing
independent operations was chosen in part based on being Year 2000 compliant.
This software includes the Company's accounting, treasury, human resources,
payroll, and network management software. The total expenditures during 1998
related to establishing independent IT systems approximate $2.5 million, of
which $1.0 million has been capitalized.
 
     The Company's plan for Year 2000 readiness has three phases. Phase one
involves identifying and remediating the internal systems and processes that
must be Year 2000 compliant. Phase one has been completed. Phase two consists of
testing both the internal and external systems as a whole, and has been
scheduled to be fully implemented by the end of first quarter 1999. The Company
intends to test its systems throughout 1999 to ensure that system and software
upgrades are fully compliant. Phase three consists of developing a contingency
plan for those external systems or suppliers that are critical for the Company
to operate, but are not yet Year 2000 compliant. The Company will finalize these
contingency plans during the second quarter of 1999.
 
     The Company does not anticipate the cost of addressing all the issues
associated with becoming Year 2000 compliant will have a material impact on its
financial condition, results of operations or liquidity in any single year. The
Company's estimates are based upon the assumption that its major third party
suppliers are or become Year 2000 compliant within the time frame outlined
above. The Company has requested that its
 
                                       36
<PAGE>   39
 
   
major third party suppliers provide details of their Year 2000 compliance
program and schedule of testing. In the event any of these vendors are unable to
become compliant the Company may incur additional costs.
    
 
   
     Although the Company has taken steps to identify, evaluate and remediate
its Year 2000 compliance issues, it is possible that certain of its suppliers
and/or systems may not be Year 2000 compliant by January 1, 2000. These
suppliers provide the Company with computer processing systems, banking and
financial systems, and utility infrastructure. In the event that any of these
suppliers and/or systems are not Year 2000 compliant as of January 1, 2000, the
Company may be exposed to an impairment of its: (i) operations, (ii) business
processes, (iii) ability to meet its financial obligations. The impairment in
any of these areas could have a material adverse effect on the Company's
financial condition, results of operations and liquidity. The Company is
assessing these risks and is creating contingency plans intended to address such
risks, and expects to have such plans in place by the end of the second quarter
of 1999.
    
 
   
ACCOUNTING CONSIDERATIONS
    
 
   
     In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, which is effective
for annual periods beginning after June 15, 1999. This statement establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
The Company is currently evaluating the effect this standard may have on the
Company's financial condition, results of operations and cash flows.
    
 
   
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
 
   
     The table below presents information about the Company's financial
instruments subject to market risk at December 31, 1998 including market value
and interest rate of these instruments. In addition, the table presents the
expected cash flows from these instruments. The contractual terms, accounting
policies, and other data concerning these instruments is disclosed in the
consolidated financial statements and accompanying notes. The Company's
receivable from the sales of loans and mortgage warehouse line of credit are
subject to interest rate risk; however, such obligations reprice frequently and
are short-term in duration and accordingly the risk is not material.
    
 
   
<TABLE>
<CAPTION>
  Market Risk Sensitive    DECEMBER 31, 1998   YEAR 1    YEAR 2    YEAR 3    YEAR 4    YEAR 5    THEREAFTER
       Instruments         -----------------   -------   -------   -------   -------   -------   ----------
                                                        (DOLLARS IN THOUSANDS)
<S>                        <C>                 <C>       <C>       <C>       <C>       <C>       <C>
ASSETS
Loans Held for Sale(a)
  Fair Value.............       $59,148
  Weighted average
     interest rate.......         10.41%        10.41%        --        --        --        --         --
  Expected cash flows....                      $59,148   $    --   $    --   $    --   $    --    $    --
Capitalized mortgage
  servicing rights(b)
  Fair Value.............       $ 9,806
  Weighted average
     interest rate.......         14.00%        14.00%    14.00%    14.00%    14.00%    14.00%     14.00%
  Expected cash flows....                      $ 2,119   $ 2,306   $ 1,762   $ 1,204   $   814    $ 1,601
</TABLE>
    
 
   
---------------
    
   
(a) See Notes 3, 6, and 15 to the consolidated financial statements for detailed
    information on the basis of determining fair value and for further
    information on this financial instrument.
    
 
   
(b) See Notes 3 and 5 to the consolidated financial statements for detailed
    information on the basis of determining fair value and for further
    information on this asset. The Company has provided its estimate of
    cashflows consistent with the assumptions that are utilized to value this
    asset. The interest rate for this asset represents the discount rate
    utilized to value the asset.
    
 
                                       37
<PAGE>   40
 
     The Company has exposure to market risk in a number of areas, including:
(1) the secondary market for subprime loans; (2) the origination market for
subprime mortgages; (3) the market for residential one-to four-unit
single-family real estate in those geographic regions where the Company
originates loans; (4) the interest rate environment for subprime mortgages and
the interest expense on the Company's borrowings; and (5) other markets risks
that are discussed in Item of 1 of the 1998 Report on Form 10-K under the
heading "Certain Factors and Trends Affecting the Company and Its Business", in
Management's Discussion and Analysis of Financial Condition, Results of
Operations, Liquidity and Capital Resources, and in Note 14 to the Company's
consolidated financial statements.
 
     The Company manages its market risks by entering into forward sale
commitments of loans 30-120 days in advance of funding the loans. At the time of
the forward sales commitment, the Company estimates its expected volume of loan
production and closely monitors the level of production against the amount of
the unfilled purchase commitments. The objective of this strategy is to have a
purchase commitment for each loan at the time of origination. The Company has
sought to mitigate its exposure to regional real estate recessions by expanding
its operations throughout the United States.
 
     During the latter part of 1998, the prices for subprime mortgages in the
secondary market constricted. Excess inventories and widening spreads in the
asset-backed capital markets caused the secondary market pricing for loans
similar to those originated by the Company to decline. During the third quarter
of 1998, the Company entered into forward sales contract with an investment
banking firm to sell $1.3 billion of its future loan production to be delivered
to the purchasor on or before March 31, 1999. At December 31, 1998, the Company
had delivered $1.0 billion of loans on this commitment; the Company delivered
the balance of the loans during the first quarter of 1999. There can be no
assurance provided that the Company will be able to sell its loans in the
secondary market at a price near historical levels. A material decline in such
prices could have a material adverse impact on the Company's profitability and
liquidity.
 
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
 
     See Consolidated Financial Statements beginning on Page F-1 of this Annual
Report on Form 10-K.
 
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE
 
     None.
 
                                    PART III
 
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
 
     The information required by this Item is set forth under the caption
"Executive Compensation and Other Information" in the Company's definitive Proxy
Statement (the "Proxy Statement"), which will be filed with the Securities and
Exchange Commission pursuant to Regulation 14A under the Securities and Exchange
Act of 1934 and is incorporated herein by reference.
 
ITEM 11. EXECUTIVE COMPENSATION
 
     The information required by this Item is set forth under the caption
"Executive Compensation and Other Information" in the Proxy Statement, which
will be filed with the Securities and Exchange Commission pursuant to Regulation
14A under the Securities and Exchange Act of 1934 and is incorporated herein by
reference.
 
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
 
     The information required by this Item is set forth under the caption
"Security Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement, which will be filed with the Securities and Exchange Commission
pursuant to Regulation 14A under the Securities and Exchange Act of 1934 and is
incorporated herein by reference.
 
                                       38
<PAGE>   41
 
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
 
     The information required by this Item is set forth under the caption
"Certain Relationships and Related Transactions" in the Proxy Statement, which
will be filed with the Securities and Exchange Commission pursuant to Regulation
14A under the Securities and Exchange Act of 1934 and is incorporated herein by
reference.
 
                                    PART IV
 
ITEM 14. FINANCIAL STATEMENT SCHEDULES, EXHIBITS AND REPORTS ON FORM 8-K
 
(a) 1. Financial Statements:
 
<TABLE>
<S>                                                             <C>
Consolidated Statements of Financial Condition:
  As of December 31, 1998 and 1997..........................     F-2
Consolidated Statements of Operations:
  For each of the three years in the period ended December
     31, 1998...............................................     F-3
Consolidated Statements of Stockholders' and Divisional
  Equity:
  For each of the three years in the period ended December
     31, 1998...............................................     F-4
Consolidated Statements of Cash Flows:
  For each of the three years in the period ended December
     31, 1998...............................................     F-5
Notes to the Consolidated Financial Statements:
  For each of the three years in the period ended December
     31, 1998...............................................     F-6
Independent Auditors' Report................................    F-27
</TABLE>
 
     2. Exhibits
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                        DESCRIPTION OF EXHIBIT
-------                       ----------------------
<S>        <C>
* 3.1      Amended and Restated Certificate of Incorporation of Long
           Beach Financial Corporation. (Incorporated by reference to
           Exhibit 3.1 to the Company's Registration Statement on Form
           S-1, Commission File No. 333-22013)
* 3.2      Bylaws of Long Beach Financial Corporation. (Incorporated by
           reference to Exhibit 3.2 to the Company's Registration
           Statement on Form S-1, Commission File No. 333-22013)
* 4.1      Specimen of the Common Stock of Long Beach Financial
           Corporation. (Incorporated by reference to Exhibit 4.1 to
           the Company's Registration Statement on Form S-1, Commission
           File No. 333-22013)
*10.1      Administrative Services Agreement among Long Beach Mortgage
           Company, Long Beach Financial Corporation and Ameriquest
           Mortgage Company. (Incorporated by reference to Exhibit 10.1
           to the Company's Quarterly Report on Form 10-Q filed with
           the Securities and Exchange Commission on June 12, 1997)
*10.2      Form of Master Sub-Servicing Agreement, between Long Beach
           Mortgage Company and Ameriquest Mortgage Corporation
           Company. (Incorporated by reference to Exhibit 10.2 to the
           Company's Registration Statement on Form S-1, Commission
           File No. 333-22013)
*10.3      4/97 Senior Secured Credit Agreement, among Ameriquest
           Mortgage Corporation and Texas Commerce Bank National
           Association, as Lender and Agent. (Incorporated by reference
           to Exhibit 10.3 to the Company's Registration Statement on
           Form S-1, Commission File No. 333-22013)
</TABLE>
 
                                       39
<PAGE>   42
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                        DESCRIPTION OF EXHIBIT
-------                       ----------------------
<S>        <C>
*10.4      Form of Director/Officer Indemnification Agreement.
           (Incorporated by reference to Exhibit 10.4 to the Company's
           Registration Statement on Form S-1, Commission File No.
           333-22013)
*10.5      Contribution Agreement, between Ameriquest Capital
           Corporation, Long Beach Mortgage Company, Long Beach
           Financial Corporation and Ameriquest Mortgage Corporation
           Company. (Incorporated by reference to Exhibit 10.5 to the
           Company's Quarterly Report on Form 10-Q filed with the
           Securities and Exchange Commission on June 12, 1997)
*10.6      1997 Stock Incentive Plan. (Incorporated by reference to
           Exhibit 10.6 to the Company's Registration Statement on Form
           S-1, Commission File No. 333-22013)
*10.7      Employment Agreement, between Long Beach Financial
           Corporation, Ameriquest Mortgage Corporation and M. Jack
           Mayesh. (Incorporated by reference to Exhibit 10.7 to the
           Company's Registration Statement on Form S-1, Commission
           File No. 333-22013)
*10.8      Employment Agreement, between Long Beach Financial
           Corporation, Ameriquest Mortgage Corporation and Edward
           Resendez. (Incorporated by reference to Exhibit 10.8 to the
           Company's Registration Statement on Form S-1, Commission
           File No. 333-22013)
*10.9      Employment Agreement, between Long Beach Financial
           Corporation, Ameriquest Mortgage Corporation and Frank J.
           Curry. (Incorporated by reference to Exhibit 10.9 to the
           Company's Registration Statement on Form S-1, Commission
           File No. 333-22013)
*10.10     Employment Agreement, between Long Beach Financial
           Corporation, Ameriquest Mortgage Corporation and James H.
           Leonetti. (Incorporated by reference to Exhibit 10.10 to the
           Company's Registration Statement on Form S-1, Commission
           File No. 333-22013)
*10.11     Employment Agreement, between Long Beach Financial
           Corporation, Ameriquest Mortgage Corporation and James J.
           Sullivan. (Incorporated by reference to Exhibit 10.11 to the
           Company's Registration Statement on Form S-1, Commission
           File No. 333-22013)
*10.12     Department of Justice Settlement Agreement. (Incorporated by
           reference to Exhibit 10.12 to the Company's Registration
           Statement on Form S-1, Commission File No. 333-22013)
*10.13     Employment Agreement, between Long Beach Financial
           Corporation, Long Beach Mortgage Company and William K.
           Komperda. (Incorporated by reference to Exhibit 10.13 to the
           Company's Quarterly Report on Form 10-Q filed with the
           Securities and Exchange Commission on June 12, 1997)
*10.14     Form of Amendment to Employment Agreement, among Long Beach
           Financial Corporation, Long Beach Mortgage Company and each
           of M. Jack Mayesh, Edward Resendez, Frank J. Curry, James H.
           Leonetti, and James J. Sullivan. (Incorporated by reference
           to Exhibit 10.14 to the Company's Quarterly Report on Form
           10-Q filed with the Securities and Exchange Commission on
           November 12, 1997)
*10.15     4/98 Amended and Restated Senior Secured Credit Agreement,
           among Long Beach Mortgage Company and Chase Bank of Texas,
           as Lender and Agent.
*10.16     Amended and Restated Employment Agreement, between Long
           Beach Financial Corporation, Long Beach Mortgage Company and
           M. Jack Mayesh.
</TABLE>
 
                                       40
<PAGE>   43
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                        DESCRIPTION OF EXHIBIT
-------                       ----------------------
<S>        <C>
*10.17     Amended and Restated Employment Agreement, between Long
           Beach Financial Corporation, Long Beach Mortgage Company and
           Edward Resendez.
*10.18     Amended and Restated Employment Agreement, between Long
           Beach Financial Corporation, Long Beach Mortgage Company and
           Frank J. Curry.
*10.19     Amended and Restated Employment Agreement, between Long
           Beach Financial Corporation, Long Beach Mortgage Company and
           William K. Komperda.
*10.20     Amended and Restated Employment Agreement, between Long
           Beach Financial Corporation, Long Beach Mortgage Company and
           James H. Leonetti.
*10.21     Amended and Restated Employment Agreement, between Long
           Beach Financial Corporation, Long Beach Mortgage Company and
           James J. Sullivan.
*10.22     Employment Agreement, between Long Beach Financial
           Corporation, Long Beach Mortgage Company and Elizabeth A.
           Wood.
*10.23     Supplement Agreement to Master Sub-Servicing Agreement
           between Long Beach Mortgage Company and Ameriquest Mortgage
           Company.
*10.24     Master Repurchase Agreement between Merrill Lynch Mortgage
           Capital Inc., Merrill Lynch Credit Corporation and Long
           Beach Mortgage Company.
10.25      Purchase and Sale Agreement between Salomon Brothers Realty
           Corp. and Long Beach Mortgage Company.
 27        Financial Data Schedule.
</TABLE>
 
---------------
 *  Previously filed.
 
(b) No reports on Form 8-K were filed during the quarter ended December 31,
    1998.
 
                                       41
<PAGE>   44
 
                                   SIGNATURES
 
     Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
 
   
Date: March 26, 1999
    
 
                                          LONG BEACH FINANCIAL CORPORATION
 
                                          By:      /s/ M. JACK MAYESH
                                            ------------------------------------
                                                       M. Jack Mayesh
                                            Chairman and Chief Executive Officer
 
     Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on date indicated.
 
   
<TABLE>
<CAPTION>
                       SIGNATURE                                      TITLE                   DATE
                       ---------                                      -----                   ----
<C>                                                       <S>                            <C>
 
                   /s/ M. JACK MAYESH                     Chairman of the Board of       March 26, 1999
--------------------------------------------------------  Directors and Chief Executive
                     M. Jack Mayesh                       Officer (Principal Executive
                                                          Officer)
 
                  /s/ EDWARD RESENDEZ                     President, Director            March 26, 1999
--------------------------------------------------------
                    Edward Resendez
 
                 /s/ JAMES H. LEONETTI                    Chief Financial Officer,       March 26, 1999
--------------------------------------------------------  Senior Vice President
                   James H. Leonetti                      (Principal Financial Officer)
 
                 /s/ DAVID E. ENGELMAN                    Director                       March 26, 1999
--------------------------------------------------------
                   David S. Engelman
 
                 /s/ RICHARD A. KRAEMER                   Director                       March 26, 1999
--------------------------------------------------------
                   Richard A. Kraemer
 
                /s/ C. STEPHEN MANSFIELD                  Director                       March 26, 1999
--------------------------------------------------------
                  C. Stephen Mansfield
</TABLE>
    
 
                                       42
<PAGE>   45
 
                                 EXHIBIT INDEX
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                        DESCRIPTION OF EXHIBIT
-------                       ----------------------
<S>        <C>
* 3.1      Amended and Restated Certificate of Incorporation of Long
           Beach Financial Corporation. (Incorporated by reference to
           Exhibit 3.1 to the Company's Registration Statement on Form
           S-1, Commission File No. 333-22013)
* 3.2      Bylaws of Long Beach Financial Corporation. (Incorporated by
           reference to Exhibit 3.2 to the Company's Registration
           Statement on Form S-1, Commission File No. 333-22013)
* 4.1      Specimen of the Common Stock of Long Beach Financial
           Corporation. (Incorporated by reference to Exhibit 4.1 to
           the Company's Registration Statement on Form S-1, Commission
           File No. 333-22013)
*10.1      Administrative Services Agreement among Long Beach Mortgage
           Company, Long Beach Financial Corporation and Ameriquest
           Mortgage Company. (Incorporated by reference to Exhibit 10.1
           to the Company's Quarterly Report on Form 10-Q filed with
           the Securities and Exchange Commission on June 12, 1997)
*10.2      Form of Master Sub-Servicing Agreement, between Long Beach
           Mortgage Company and Ameriquest Mortgage Corporation
           Company. (Incorporated by reference to Exhibit 10.2 to the
           Company's Registration Statement on Form S-1, Commission
           File No. 333-22013)
*10.3      4/97 Senior Secured Credit Agreement, among Ameriquest
           Mortgage Corporation and Texas Commerce Bank National
           Association, as Lender and Agent. (Incorporated by reference
           to Exhibit 10.3 to the Company's Registration Statement on
           Form S-1, Commission File No. 333-22013)
*10.4      Form of Director/Officer Indemnification Agreement.
           (Incorporated by reference to Exhibit 10.4 to the Company's
           Registration Statement on Form S-1, Commission File No.
           333-22013)
*10.5      Contribution Agreement, between Ameriquest Capital
           Corporation, Long Beach Mortgage Company, Long Beach
           Financial Corporation and Ameriquest Mortgage Corporation
           Company. (Incorporated by reference to Exhibit 10.5 to the
           Company's Quarterly Report on Form 10-Q filed with the
           Securities and Exchange Commission on June 12, 1997)
*10.6      1997 Stock Incentive Plan. (Incorporated by reference to
           Exhibit 10.6 to the Company's Registration Statement on Form
           S-1, Commission File No. 333-22013)
*10.7      Employment Agreement, between Long Beach Financial
           Corporation, Ameriquest Mortgage Corporation and M. Jack
           Mayesh. (Incorporated by reference to Exhibit 10.7 to the
           Company's Registration Statement on Form S-1, Commission
           File No. 333-22013)
*10.8      Employment Agreement, between Long Beach Financial
           Corporation, Ameriquest Mortgage Corporation and Edward
           Resendez. (Incorporated by reference to Exhibit 10.8 to the
           Company's Registration Statement on Form S-1, Commission
           File No. 333-22013)
*10.9      Employment Agreement, between Long Beach Financial
           Corporation, Ameriquest Mortgage Corporation and Frank J.
           Curry. (Incorporated by reference to Exhibit 10.9 to the
           Company's Registration Statement on Form S-1, Commission
           File No. 333-22013)
*10.10     Employment Agreement, between Long Beach Financial
           Corporation, Ameriquest Mortgage Corporation and James H.
           Leonetti. (Incorporated by reference to Exhibit 10.10 to the
           Company's Registration Statement on Form S-1, Commission
           File No. 333-22013)
*10.11     Employment Agreement, between Long Beach Financial
           Corporation, Ameriquest Mortgage Corporation and James J.
           Sullivan. (Incorporated by reference to Exhibit 10.11 to the
           Company's Registration Statement on Form S-1, Commission
           File No. 333-22013)
*10.12     Department of Justice Settlement Agreement. (Incorporated by
           reference to Exhibit 10.12 to the Company's Registration
           Statement on Form S-1, Commission File No. 333-22013)
</TABLE>
<PAGE>   46
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                        DESCRIPTION OF EXHIBIT
-------                       ----------------------
<S>        <C>
*10.13     Employment Agreement, between Long Beach Financial
           Corporation, Long Beach Mortgage Company and William K.
           Komperda. (Incorporated by reference to Exhibit 10.13 to the
           Company's Quarterly Report on Form 10-Q filed with the
           Securities and Exchange Commission on June 12, 1997)
*10.14     Form of Amendment to Employment Agreement, among Long Beach
           Financial Corporation, Long Beach Mortgage Company and each
           of M. Jack Mayesh, Edward Resendez, Frank J. Curry, James H.
           Leonetti, and James J. Sullivan. (Incorporated by reference
           to Exhibit 10.14 to the Company's Quarterly Report on Form
           10-Q filed with the Securities and Exchange Commission on
           November 12, 1997)
*10.15     4/98 Amended and Restated Senior Secured Credit Agreement,
           among Long Beach Mortgage Company and Chase Bank of Texas,
           as Lender and Agent.
*10.16     Amended and Restated Employment Agreement, between Long
           Beach Financial Corporation, Long Beach Mortgage Company and
           M. Jack Mayesh.
*10.17     Amended and Restated Employment Agreement, between Long
           Beach Financial Corporation, Long Beach Mortgage Company and
           Edward Resendez.
*10.18     Amended and Restated Employment Agreement, between Long
           Beach Financial Corporation, Long Beach Mortgage Company and
           Frank J. Curry.
*10.19     Amended and Restated Employment Agreement, between Long
           Beach Financial Corporation, Long Beach Mortgage Company and
           William K. Komperda.
*10.20     Amended and Restated Employment Agreement, between Long
           Beach Financial Corporation, Long Beach Mortgage Company and
           James H. Leonetti.
*10.21     Amended and Restated Employment Agreement, between Long
           Beach Financial Corporation, Long Beach Mortgage Company and
           James J. Sullivan.
*10.22     Employment Agreement, between Long Beach Financial
           Corporation, Long Beach Mortgage Company and Elizabeth A.
           Wood.
*10.23     Supplement Agreement to Master Sub-Servicing Agreement
           between Long Beach Mortgage Company and Ameriquest Mortgage
           Company.
*10.24     Master Repurchase Agreement between Merrill Lynch Mortgage
           Capital Inc., Merrill Lynch Credit Corporation and Long
           Beach Mortgage Company.
10.25      Purchase and Sale Agreement between Salomon Brothers Realty
           Corp. and Long Beach Mortgage Company.
 27        Financial Data Schedule.
</TABLE>
 
---------------
 *  Previously filed.
<PAGE>   47
 
                        LONG BEACH FINANCIAL CORPORATION
 
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Consolidated Statements of Financial Condition:
  As of December 31, 1998 and 1997..........................  F-2
Consolidated Statements of Operations:
  For each of the three years in the period ended December
     31, 1998...............................................  F-3
Consolidated Statements of Stockholders' and Divisional
  Equity:
  For each of the three years in the period ended December
     31, 1998...............................................  F-4
Consolidated Statements of Cash Flows:
  For each of the three years in the period ended December
     31, 1998...............................................  F-5
Notes to the Consolidated Financial Statements:
  For each of the three years in the period ended December
     31, 1998...............................................  F-6
Independent Auditors' Report................................  F-27
</TABLE>
 
                                       F-1
<PAGE>   48
 
                        LONG BEACH FINANCIAL CORPORATION
 
                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
                             (DOLLARS IN THOUSANDS)
 
                                     ASSETS
 
<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1998        1997
                                                              --------    --------
<S>                                                           <C>         <C>
Cash and cash equivalents...................................  $ 24,941    $ 38,782
Investment securities available for sale....................        --       3,793
Loans held for sale (Note 6)................................    59,148      17,241
Receivable from the sales of loans..........................   186,786     143,088
Premises and equipment, net (Note 4)........................     4,824       3,620
Deferred income taxes, net (Note 9).........................    32,523      34,400
Capitalized mortgage servicing rights (Note 5)..............     9,806       3,054
Prepaid expenses and other assets...........................    10,567       4,110
                                                              --------    --------
          Total assets......................................  $328,595    $248,088
                                                              ========    ========
 
                       LIABILITIES AND STOCKHOLDERS' EQUITY
 
Liabilities:
Warehouse financing facility (Note 7).......................  $211,787    $146,271
Accounts payable and accrued liabilities....................    17,182       8,280
Accrued income taxes payable (Note 9).......................        --       2,792
                                                              --------    --------
     Total liabilities......................................   228,969     157,343
 
Commitments and contingencies (Note 14).....................        --          --
 
Stockholders' equity (Notes 2 and 10):
Common stock, $.001 par value; 150.0 million shares
  authorized; 25.0 million shares issued: 22.6 million and
  24.7 million shares outstanding for 1998 and 1997,
  respectively..............................................        25          25
Additional paid in capital..................................    75,360      75,307
Retained earnings...........................................    48,716      18,697
Treasury stock, at cost; 2,400,682 and 300,000 shares for
  1998 and 1997, respectively...............................   (24,475)     (3,284)
                                                              --------    --------
     Total stockholders' equity.............................    99,626      90,745
                                                              --------    --------
          Total liabilities and stockholders' equity........  $328,595    $248,088
                                                              ========    ========
</TABLE>
 
        See accompanying notes to the consolidated financial statements.
                                       F-2
<PAGE>   49
 
                        LONG BEACH FINANCIAL CORPORATION
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
       FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
                (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                           1998       1997           1996
                                                         --------    -------         ----
<S>                                                      <C>         <C>        <C>
REVENUES:
Gain on sale of loans..................................  $122,704    $88,597       $50,699
Interest income, net of interest expense (Note 8)......     6,787      3,354           461
Loan servicing and other fees on loans.................     4,922        946            --
Amortization of mortgage servicing rights..............    (1,763)      (231)           --
                                                         --------    -------       -------
Net operating income...................................   132,650     92,666        51,160
EXPENSES:
Compensation expense...................................    50,025     32,229        17,168
Premises and equipment expenses........................    11,487      4,141         3,870
Other general and administrative expenses..............    11,039      7,206         4,900
Corporate administrative charges (Note 1)..............        --      2,294         8,900
Provision for losses...................................     5,247      4,028           350
Sub-servicing costs (Note 13)..........................     4,820        935            --
                                                         --------    -------       -------
Total expenses.........................................    82,618     50,833        35,188
                                                         --------    -------       -------
Earnings before income taxes...........................    50,032     41,833        15,972
Provision for income taxes (Note 9)....................    20,013     17,189         6,580
                                                         --------    -------       -------
Net earnings (Note 2)..................................  $ 30,019    $24,644       $ 9,392
                                                         ========    =======       =======
Basic earnings per share (Note 11).....................  $   1.27    $  0.99    Not Applicable
                                                         ========    =======
Diluted earnings per share (Note 11)...................  $   1.22    $  0.96    Not Applicable
                                                         ========    =======
</TABLE>
 
        See accompanying notes to the consolidated financial statements.
                                       F-3
<PAGE>   50
 
                        LONG BEACH FINANCIAL CORPORATION
 
         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' AND DIVISIONAL EQUITY
   
       FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
    
   
                             (DOLLARS IN THOUSANDS)
    
 
   
<TABLE>
<CAPTION>
                                          NUMBER OF
                                            SHARES             ADDITIONAL   DIVISIONAL
                                          OF COMMON   COMMON    PAID IN     (DEFICIT)    RETAINED   TREASURY
                                            STOCK     STOCK     CAPITAL       EQUITY     EARNINGS    STOCK      TOTAL
                                          ----------  ------   ----------   ----------   --------   --------   --------
<S>                                       <C>         <C>      <C>          <C>          <C>        <C>        <C>
BALANCE, JANUARY 1, 1996................               $--      $    --      $ 1,732     $    --    $     --   $  1,732
Net change in divisional deficit arising
  from intracompany transactions (Note
  1)....................................                --           --       (9,987)         --          --     (9,987)
Net earnings............................                --           --        9,392          --          --      9,392
                                          ----------   ---      -------      -------     -------    --------   --------
BALANCE, DECEMBER 31, 1996..............                --           --        1,137          --          --      1,137
Net earnings (Note 2)...................                --           --        5,947      18,697          --     24,644
Net change in divisional equity arising
  from intracompany transactions (Note
  1)....................................                --           --       (3,852)         --          --     (3,852)
Reorganization of Long Beach Financial
  Corporation (Note 1)..................  25,000,000    25       75,307       (3,232)         --          --     72,100
Purchase of treasury stock..............   (300,000)    --           --           --          --      (3,284)    (3,284)
                                          ----------   ---      -------      -------     -------    --------   --------
BALANCE, DECEMBER 31, 1997..............  24,700,000    25       75,307           --      18,697      (3,284)    90,745
Net earnings............................          --    --           --           --      30,019          --     30,019
Exercise of stock options...............       8,200    --           53           --          --          --         53
Purchase of treasury stock..............  (2,100,982)   --           --           --          --     (21,191)   (21,191)
                                          ----------   ---      -------      -------     -------    --------   --------
BALANCE, DECEMBER 31, 1998..............  22,607,218   $25      $75,360      $    --     $48,716    $(24,475)  $ 99,626
                                          ==========   ===      =======      =======     =======    ========   ========
</TABLE>
    
 
        See accompanying notes to the consolidated financial statements.
                                       F-4
<PAGE>   51
 
                        LONG BEACH FINANCIAL CORPORATION
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
       FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
                             (DOLLARS IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                         1998           1997           1996
                                                      -----------    -----------    -----------
<S>                                                   <C>            <C>            <C>
Cash Flows from Operating Activities:
Net earnings........................................  $    30,019    $    24,644    $     9,392
Adjustments to reconcile net earnings to net cash
  used in operating activities:
  Depreciation and amortization of premises,
     equipment and warehouse financing facility
     issuance costs.................................        2,537          1,106          1,270
  Loans originated and purchased for sale...........   (2,575,965)    (1,685,742)    (1,058,122)
  Proceeds from sales of loans held for sale........    2,521,606      1,679,522      1,029,789
  Noncash gain recognized on capitalization of
     mortgage servicing rights......................       (8,515)        (7,259)        (9,225)
  Amortization of capitalized mortgage servicing
     rights.........................................        1,763            231             --
  Deferred income taxes.............................        1,877          2,131         (1,238)
  Changes in:
     Receivable from sales of loans.................      (43,698)      (143,872)       (25,103)
     Accounts payable and accrued liabilities.......        8,902          5,894          3,351
     Accrued income taxes payable...................       (2,792)         2,792             --
  Other.............................................        5,123         (5,018)           (91)
                                                      -----------    -----------    -----------
       Net cash used in operating activities........      (59,143)      (125,571)       (49,977)
Cash Flows from Investing Activities:
  Purchases of premises and equipment...............       (2,868)        (2,278)        (1,232)
  Purchase of investment securities available for
     sale...........................................      (26,810)      (163,869)            --
  Maturity of investment securities available for
     sale...........................................       30,602        160,094             --
                                                      -----------    -----------    -----------
       Net cash provided by (used in) investing
          activities................................          924         (6,053)        (1,232)
Cash Flows from Financing Activities:
  Net change in warehouse financing facility........       65,516        135,568         51,971
  Cash provided to AMC prior to the
     Reorganization.................................           --         (3,852)        (9,987)
  Proceeds from mortgage servicing rights
     transferred to AMC (Note 1)....................           --          3,974          9,225
  Reorganization and capitalization of LBFC (Note
     1).............................................           --         38,000             --
  Purchase of treasury stock (Note 10)..............      (21,191)        (3,284)            --
  Proceeds from exercise of stock options...........           53             --             --
                                                      -----------    -----------    -----------
       Net cash provided by financing activities....       44,378        170,406         51,209
Net increase (decrease) in cash and cash
  equivalents.......................................      (13,841)        38,782             --
  Cash and cash equivalents, beginning of the
     year...........................................       38,782             --             --
                                                      -----------    -----------    -----------
  Cash and cash equivalents, end of the year........  $    24,941    $    38,782    $        --
                                                      ===========    ===========    ===========
Supplemental Disclosures of Cash Flow Information:
  Cash paid during the year for interest on
     warehouse financing facility...................  $    12,664    $     3,524    $     2,569
  Cash paid during the year for federal and state
     income taxes...................................       20,546          8,812             --
Supplemental Disclosures of Non-Cash Activities:
  Deferred tax asset................................           --         36,000             --
</TABLE>
 
        See accompanying notes to the consolidated financial statements.
                                       F-5
<PAGE>   52
 
                        LONG BEACH FINANCIAL CORPORATION
 
                 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
       FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
 
NOTE 1. DESCRIPTION OF THE BUSINESS, INITIAL PUBLIC OFFERING AND BASIS OF
PRESENTATION
 
  Description of the Business
 
     Long Beach Financial Corporation ("LBFC"), through its wholly-owned
subsidiary, Long Beach Mortgage Company ("LBMC") (collectively, the "Company"),
is currently engaged in the business of originating, purchasing and selling
subprime residential mortgage loans secured by one- to four-unit family
residences. The Company originates loans primarily through independent mortgage
loan brokers. The Company's core borrower base consists of individuals who do
not qualify as traditional "A" credit borrowers because their credit history,
debt to income ratio or other factors do not conform to standard agency lending
criteria.
 
     The Company has followed a strategy of selling substantially all of its
loan originations in the secondary market through loan sales for cash. Prior to
each fiscal quarter, the Company historically has obtained a purchase commitment
from one or more loan purchasers for the volume of loans expected to be
originated during such quarter.
 
     LBFC was incorporated in January 1997. At the time of incorporation, LBFC
was a wholly-owned subsidiary of a company now known as Ameriquest Mortgage
Company ("AMC"). AMC conducted its mortgage lending business through four
divisions: (i) the direct-sourced lending division, (ii) the broker-sourced
lending division, (iii) the loan sales division, and (iv) the loan servicing
division. LBFC was formed to facilitate the public sale of AMC's broker-sourced
lending division. All references to the "Wholesale Division" herein shall be
deemed to include the operations of the broker-sourced lending division of AMC
prior to the Reorganization (defined below).
 
  Initial Public Offering
 
     On April 28, 1997, LBFC's Registration Statement on Form S-1 under the
Securities Act of 1933, as amended (the "Registration Statement"), relating to
the initial public offering of its common stock, was declared effective. The
initial public offering of 22,504,000 shares of common stock closed at a price
of $6.50 per share on May 2, 1997. On May 14, 1997, the underwriters purchased
an additional 2,496,000 shares of common stock at a price of $6.50 per share
following their exercise of the overallotment option, resulting in a total of
25,000,000 shares sold in the initial public offering (the "Offering").
 
     On May 2, 1997, immediately prior to the closing of the initial public sale
of LBFC's common stock, AMC reorganized its business operations (the
"Reorganization") by transferring certain assets (including furniture, leasehold
improvements and equipment) and personnel relating to the broker-sourced lending
division and the loan sales division and approximately $40.0 million in cash
(less approximately $2.0 million in related expenses) to the Company in exchange
for 24,999,999 shares of common stock. The assets transferred to the Company
included loans in process as of May 2, 1997, but did not include loans funded or
servicing rights with respect to loans funded prior to May 2, 1997.
 
     Additionally, the Company acquired the going-concern value of the existing
and established approved customer base listing of independent brokers and the
sole right to the "Long Beach Mortgage Company" name. The Company did not assume
any liabilities of AMC other than certain liabilities associated with equipment
and property leases acquired by the Company and accrued vacation and other
employee benefits for personnel transferred to the Company. The Reorganization
has been accounted for in a manner similar to a pooling of interests; therefore,
the historical cost basis of the assets and liabilities transferred to the
Company was carried over from the Wholesale Division of AMC.
 
     The transfer of the assets and personnel described above by AMC to the
Company was treated for federal income tax purposes as a taxable sale of assets.
As a result, the tax basis of the assets transferred from AMC to
 
                                       F-6
<PAGE>   53
                        LONG BEACH FINANCIAL CORPORATION
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
       FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
 
the Company in the Reorganization was increased to their fair market value
(determined by reference to the initial public offering price.) As discussed
more fully in Note 9 to the Consolidated Financial Statements, such tax basis is
generally expected to produce a tax benefit to the Company in future tax years.
Accordingly, the Company recorded a deferred tax asset of $36.0 million (with a
corresponding credit to additional paid-in capital) for the tax effect of the
excess of the tax basis of the Company's assets following the Reorganization and
the Offering, over their net book value.
 
  Basis of Presentation
 
     The consolidated financial statements include the accounts of LBFC and its
subsidiary LBMC and are prepared in accordance with generally accepted
accounting principles. All significant intercompany accounts and transactions
have been eliminated in consolidation.
 
     The Company had no separate operations through the date of the
Reorganization and all rights, benefits and obligations relating to the
operations and net earnings of the Wholesale Division of AMC, up to the date of
the Reorganization, remained with AMC. However, because the Reorganization has
been accounted for in a manner similar to a pooling of interests, the results of
operations reported for the year ended December 31, 1997 include: (i) the
operating results of the Wholesale Division of AMC from January 1, 1997 through
May 1, 1997 (the "1997 Operating Results of the Wholesale Division of AMC"), and
(ii) the operating results of the Company from May 2, 1997 to December 31, 1997
(the "Company's Results of Operations"). Collectively, the combination of the
1997 Operating Results of the Wholesale Division of AMC and the Company's
Results of Operations represent the "Consolidated Results of Operations for the
Year Ended December 31, 1997."
 
     Cash flows for the year ended December 31, 1997 include: (i) cash flows of
the Wholesale Division of AMC from January 1, 1997 through May 1, 1997 (the
"1997 Cash Flows of the Wholesale Division of AMC"), and (ii) the Company's cash
flows from May 2, 1997 through December 31, 1997 (the "Company's Cash Flows").
Collectively, the combination of the 1997 Cash Flows of the Wholesale Division
of AMC and the Company's Cash Flows represent the "Consolidated Cash Flows for
the Year Ended December 31, 1997."
 
     Also included in the accompanying financial statements are: (i) the results
of operations for the Wholesale Division of AMC for the year ended December 31,
1996, and (ii) the cash flows of the Wholesale Division of AMC for the year
ended December 31, 1996. All such information included or used in the
preparation of this report has been prepared from records maintained by AMC and
provided to the Company by AMC.
 
     In connection with the Reorganization described above, AMC transferred to
the Company certain assets and liabilities relating to the Wholesale Division.
AMC, however, retained certain assets and liabilities reflected on the books of
the Wholesale Division as of May 1, 1997 including: (i) loans held for sale
totaling $39.3 million, (ii) receivables from the sales of loans totaling $25.9
million, (iii) servicing rights and (iv) borrowings under the warehouse
financing facility totaling $62.0 million. Accordingly, the balances of these
assets and liabilities at May 1, 1997 are not reflected in the beginning
balances of the Company as of May 2, 1997. The Consolidated Statements of
Stockholders' and Divisional Equity and Cash Flows reflect an adjustment to
eliminate these assets and liabilities retained by AMC. The Consolidated
Statements of Cash Flows include changes in balances from January 1, 1997
through May 1, 1997 combined with changes in balances from May 2, 1997 through
December 31, 1997.
 
     In the normal course of business prior to the reorganization on May 2,
1997, the Wholesale Division had various transactions with other divisions of
AMC that are material in amount. The financial statements and financial data of
the Wholesale Division of AMC included in the accompanying financial statements
reflect key assumptions regarding the allocation of certain revenue and expense
items and certain balance sheet
 
                                       F-7
<PAGE>   54
                        LONG BEACH FINANCIAL CORPORATION
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
       FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
 
accounts, many of which could be material. The financial data of the Wholesale
Division of AMC included in the accompanying consolidated financial statements
may not necessarily be indicative of the conditions that would have existed if
the Wholesale Division of AMC had operated as an independent entity.
 
     The accompanying consolidated financial statements include financial data
of the Wholesale Division of AMC and reflect the assets, liabilities, revenues
and expenses that were directly related to the continuing operations of the
Wholesale Division as they were operated by AMC prior to the Reorganization. In
cases involving assets, liabilities, revenues and expenses not specifically
identifiable to any particular division of AMC, certain allocations were made to
reflect the operations of the Wholesale Division. Allocations have been made
for, among other things, accounting, information services, legal, compliance,
and other executive and administrative services. 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 consolidated financial statements,
which are also based on the following assumptions:
 
     1. No cash balances were recorded as part of these historical financial
        statements as it was the practice of AMC not to maintain separate cash
        balances for the various divisions.
 
     2. The net change in divisional equity (deficit) arising from intracompany
        transactions, as reflected in the Consolidated Statements of
        Stockholders' and Divisional Equity, includes: (i) the aggregate
        intracompany allocations of costs and expenses incurred by the Wholesale
        Division and paid by AMC, (ii) cash generated by the Wholesale Division
        and collected by AMC during the periods presented, and (iii) cash
        advanced by AMC on behalf of the Wholesale Division. The net change in
        divisional equity (deficit) arising from intracompany transactions also
        includes all liabilities of the Wholesale Division, such as income taxes
        payable, that are not separate legal obligations of the Wholesale
        Division but have been charged to the Wholesale Division.
 
     The cash generated by the Company and collected by AMC consisted primarily
of proceeds from the sales of loans of $471.0 million and $1.0 billion for the
years ended December 31, 1997 and 1996, respectively. Advances by AMC on behalf
of the Company consisted primarily of the cash used to pay operating expenses
and fund loans. Also, AMC allocated a portion of the net borrowings under its
warehouse financing facility to the Company. Cash used to fund loans was $458.9
million and $1.1 billion for the years ended December 31, 1997 and 1996,
respectively.
 
     Total costs allocated to the Company by AMC for the years ended December
31, 1997 and 1996 were $2.3 million and $8.9 million, respectively. While the
Company believes that expenses reflected in the accompanying statements of
operations would not have been materially affected if it had operated as a stand
alone entity, no assurance can be given that such expenses are indicative of
expenses to be incurred in the future.
 
NOTE 2. 1997 STATEMENT OF OPERATIONS, PRESENTATION AND ANALYSIS OF PRO FORMA
OPERATIONS
 
     The consolidated statement of operations for the year ended December 31,
1997, presented in the accompanying financial statements includes the 1997
Operating Results of the Wholesale Division of AMC and the Company's Results of
Operations. All rights, benefits and obligations relating to the 1997 Operating
Results of the Wholesale Division of AMC up to the time of the Reorganization
remain with AMC.
 
     The rights to loans which were originated by the Wholesale Division but
remained unsold at May 2, 1997 were retained by AMC (the "Retained Loans"). The
costs relating to the production of these loans were incurred and recorded by
the Wholesale Division of AMC and are included in the 1997 Operating Results of
the Wholesale Division of AMC. These loans are included in loan production
amounts reported for the Company for the year ended December 31, 1997.
Subsequent to the Reorganization, the Company purchased
                                       F-8
<PAGE>   55
                        LONG BEACH FINANCIAL CORPORATION
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
       FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
 
the Retained Loans from AMC at the same price and at the same time that the
Company sold these loans to independent, third-party purchasers. Because the
gain from the sale of the Retained Loans was recorded after the Reorganization,
and because the Company's stockholders did not receive any of the benefit of
this gain, the Company did not include the gain from the sale of the Retained
Loans as part of the Company's Results of Operations. The principal amount of
the Retained Loans was approximately $33.8 million and the after-tax gain from
the sale of these loans was approximately $807,000. The gains from the sale of
the Retained Loans are not reflected either as income from the Wholesale
Division of AMC or as income from the Company.
 
     The following table presents separately the operations of the Wholesale
Division of AMC and the Company, and the combined effect of their results of
operations for the year ended December 31, 1997. Additionally, the gain from the
sale of the Retained Loans is presented for informational purposes, with
corresponding earnings and per share data presented on a pro forma basis.
 
<TABLE>
<CAPTION>
                                                                               1997
                                                          -----------------------------------------------
                                                              WHOLESALE            THE
                                                           DIVISION OF AMC       COMPANY       COMBINED
                                                          ------------------    ----------    -----------
                                                          (DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S>                                                       <C>                   <C>           <C>
REVENUES:
Gain on sale of loans...................................       $25,604           $62,993        $88,597
Interest income, net of interest expense................           168             3,186          3,354
Loan servicing and other fees on loans..................            --               946            946
Amortization of mortgage servicing rights...............            --              (231)          (231)
                                                               -------           -------        -------
Net operating income....................................        25,772            66,894         92,666
 
EXPENSES:
Compensation expense....................................         8,242            23,987         32,229
Premises and equipment expenses.........................         1,106             3,035          4,141
Other general and administrative expenses...............         1,391             5,815          7,206
Corporate administrative charges........................         2,294                --          2,294
Provision for losses....................................         2,808             1,220          4,028
Sub-servicing costs.....................................            --               935            935
                                                               -------           -------        -------
     Total expenses.....................................        15,841            34,992         50,833
                                                               -------           -------        -------
Earnings before income taxes............................         9,931            31,902         41,833
Provision for income taxes..............................         3,984            13,205         17,189
                                                               -------           -------        -------
Net earnings............................................       $ 5,947           $18,697        $24,644
                                                               =======           =======        =======
Basic net earnings per share............................       $  0.24           $  0.75        $  0.99
                                                               =======           =======        =======
Diluted net earnings per share..........................       $  0.24           $  0.72        $  0.96
                                                               =======           =======        =======
Pro forma net gain from sale of Retained Loans net of
  taxes.................................................           807                --            807
                                                               -------           -------        -------
Pro forma net earnings inclusive of gain from sale of
  Retained Loans........................................       $ 6,754           $18,697        $25,451
                                                               =======           =======        =======
Pro forma basic net earnings per share..................       $  0.27           $  0.75        $  1.02
                                                               =======           =======        =======
Pro forma diluted net earnings per share................       $  0.27           $  0.72        $  0.99
                                                               =======           =======        =======
</TABLE>
 
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
     Cash and Cash Equivalents -- Highly liquid investments with maturities of
three months or less when purchased are considered to be cash equivalents.
Because of the short maturities of these instruments, the carrying amount is a
reasonable estimate of fair value.
 
                                       F-9
<PAGE>   56
                        LONG BEACH FINANCIAL CORPORATION
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
       FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
 
   
     Investment Securities -- The Company has adopted an investment policy which
limits its investment activities to high-quality, short-term investments,
largely consisting of money market mutual funds, which limit their holdings to
government securities. At December 31, 1998 and 1997 the Company did not intend
to hold securities to maturity, nor did it engage in trading activities, and as
such, the Company's investment securities are classified as available for sale
and reported at fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders' equity, net of
deferred taxes. Gains or losses on the sales of investment securities available
for sale are determined on the specific identification method. Premiums and
discounts on investment securities are amortized or accreted using the interest
method over the expected lives of the related securities. Quoted market prices,
which approximated acquisition cost as of the balance sheet dates, are
reasonable estimates of the securities' fair value.
    
 
   
     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 management's
estimate of value that the Company could reasonably expect to obtain from a
sale, that is, other than in a forced or liquidation sale of the loans on an
aggregate basis.
    
 
   
     Provision for losses -- The Company provides market valuation adjustments
for loans held for sale and for liabilities associated with (i) breaches of
representations and warranties, (ii) first payment defaults, and (iii)
repurchases of loans recorded as sold.
    
 
   
     Receivable from Sales of Loans -- Receivable from sales of loans represents
proceeds due from certain sales transactions which were recorded in December
1998 and 1997. All amounts due to the Company have subsequently been collected.
    
 
   
     Real Estate Owned -- Real estate acquired in settlement of loans ("REO")
generally results when property collateralizing a loan is foreclosed upon or
otherwise acquired by the Company in satisfaction of the loan. Real estate
acquired through foreclosure is carried at fair value less costs to dispose.
Fair value is based on the net amount that the Company could reasonably expect
to receive for the asset in a sale between a willing buyer and a willing seller,
that is, other than in a forced or liquidation sale. Included in other assets at
December 31, 1998 is REO of approximately $1.5 million. The Company did not have
any REO at December 31, 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. Useful lives generally range from three to five years.
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.
 
   
     Income Taxes -- Deferred income tax assets and liabilities result from
revenues and expenses being recognized in different time periods for financial
reporting purposes than for income tax purposes. Deferred income taxes arise
from temporary differences and carryforwards which are tax-effected at the
enacted tax rates and subsequently adjusted for changes in tax laws and rates.
For more information on the Company's deferred tax asset, see Note 9 to the
Consolidated Financial Statements.
    
 
   
     Capitalized Mortgage Servicing Rights -- Effective January 1, 1997, the
Company adopted Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinquishments
of Liabilities," as amended by SFAS No. 127, which superseded SFAS No. 122,
"Accounting for Mortgage Servicing Rights." SFAS No. 125 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
    
                                      F-10
<PAGE>   57
                        LONG BEACH FINANCIAL CORPORATION
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
       FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
 
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.
 
   
     Under SFAS No. 125, servicing assets (the excess of benefits to be received
from servicing less adequate compensation to the servicer associated with such
servicing) are initially valued based on their relative fair values, if
practicable, at the date of sale of the related assets. Servicing assets are
required to be subsequently measured by (a) amortization in proportion to and
over the period of estimated net servicing income, and (b) assessment for asset
impairment based on their fair values. Retroactive application of this statement
was not permitted. The adoption of SFAS No. 125 did not have a material impact
on the Company's operating results or financial condition.
    
 
   
     The Company recognizes the amortization of capitalized mortgage servicing
rights as an offsetting component of revenues, against loan servicing and other
fees on loans. Impairment, if it occurs, is recognized in a valuation allowance
for such pool in the period of impairment. No impairment existed at December 31,
1998 or 1997.
    
 
   
     During 1996 and through May 1, 1997, immediately after sale of the loans,
the Wholesale Division of AMC transferred its servicing rights to an affiliated
division of AMC at their carrying value.
    
 
   
     Revenue Recognition -- Gain on sale of loans, representing the difference
between the total sales price received for the loans and the allocated cost of
the loans, is recognized when mortgage loans are sold and delivered to the
purchasers.
    
 
     Loan servicing and other fees on loans, representing servicing fee income,
late fees and other ancillary charges related to the Company's servicing
portfolio, are recorded as earned.
 
     Interest income, representing the interest earned on loans during the
warehousing period (the period prior to their sale) and the interest earned on
the Company's investment securities, is recorded as earned.
 
   
     Use of Estimates -- 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 may differ from those estimates.
    
 
   
     Reclassifications -- Certain reclassifications have been made to conform
the 1997 and 1996 consolidated financial statements to the 1998 presentation.
    
 
   
     Recent Accounting Developments -- In June 1997, the Financial Accounting
Standards Board ("FASB") issued SFAS No. 130, "Reporting Comprehensive Income,"
which is effective for annual periods beginning after December 15, 1997. This
statement requires that all items that are required to be recognized under
accounting standards as comprehensive income be reported in a financial
statement that is displayed with the same prominence as other items reported in
a financial statement. The adoption of SFAS No. 130 did not have a material
impact on the Company's financial statements. The Company does not have any
Other Comprehensive Income and therefore Comprehensive Income equals Net
Earnings.
    
 
   
     In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which is effective for annual and
interim periods beginning after December 15, 1997. This statement established
standards for the method in which public entities report information about
operating segments in annual financial statements and requires that those
enterprises report selected
    
 
                                      F-11
<PAGE>   58
                        LONG BEACH FINANCIAL CORPORATION
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
       FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
 
   
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
product and services, geographical areas, and major customers.
    
 
   
     In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is effective for annual periods
beginning after June 15, 1999. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities. The Company
is currently evaluating the effect this standard may have on the Company's
financial condition, results of operations and cash flows.
    
 
NOTE 4. PREMISES AND EQUIPMENT
 
     Premises and equipment at December 31 consists of the following:
 
   
<TABLE>
<CAPTION>
                                                            1998           1997
                                                          ---------      --------
                                                          (DOLLARS IN THOUSANDS)
<S>                                                       <C>            <C>
Furniture and equipment.................................   $ 4,503        $3,804
Leasehold improvements..................................     2,583           414
                                                           -------        ------
                                                             7,086         4,218
Less accumulated depreciation and amortization..........    (2,262)         (598)
                                                           -------        ------
                                                           $ 4,824        $3,620
                                                           =======        ======
</TABLE>
    
 
NOTE 5. CAPITALIZED MORTGAGE SERVICING RIGHTS
 
     The following is a summary of capitalized mortgage servicing rights
activity during the years ended December 31:
 
   
<TABLE>
<CAPTION>
                                                  1998       1997      1996
                                                --------   --------   -------
                                                   (DOLLARS IN THOUSANDS)
<S>                                             <C>        <C>        <C>
Balance at January 1..........................  $  3,054   $     --   $    --
Capitalization of mortgage servicing rights...     8,515      7,259     9,225
Amortization of mortgage servicing rights.....    (1,763)      (231)       --
Transfer of mortgage servicing rights to AMC
  (Note 1)....................................        --     (3,974)   (9,225)
                                                --------   --------   -------
Balance at December 31........................  $  9,806   $  3,054   $    --
                                                ========   ========   =======
Principal balance of loans serviced by the
  Company.....................................  $546,581   $     --   $    --
Principal balance of loans serviced by
  sub-servicer................................  $972,893   $896,233   $    --
</TABLE>
    
 
   
Primary assumptions utilized in determining the value of servicing rights at
December 31, 1998 and 1997:
    
 
   
     Range of CPR 18% - 35% depending on product type
    
   
     Discount rate 14%
    
   
     Servicing fees 50 basis points
    
 
   
NOTE 6. LOANS HELD FOR SALE
    
 
   
     Loans held for sale are comprised of three types of loans: (i) loans which
the Company anticipates delivering in satisfaction of its forward sale
commitments, which totalled $4.5 million at December 31, 1998 (ii) other
performing loans that it anticipates selling to a second tier investor outside
of its forward sale commitment, and which totalled $32.8 million at December 31,
1998, (iii) non-performing loans. At December 31, 1998 and 1997 $23.9 million
and $2.1 million of loans held for sale were non-performing. The Company
anticipates that its expected resolution of non-performing loans may include:
(i) cure and/or sale, (ii) repayment by the borrower, (iii) negotiated
settlement between the Company and borrower and,
    
 
                                      F-12
<PAGE>   59
                        LONG BEACH FINANCIAL CORPORATION
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
       FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
 
   
(iv) foreclosure of the related collateral by the Company. Loans held for sale
are valued at the lower of aggregate cost or market value. At December 31, 1998,
loans held for sale are presented net of a $3.2 million market valuation
adjustment.
    
 
   
NOTE 7. WAREHOUSE FINANCING FACILITY
    
 
   
     The Company utilizes a committed warehouse financing facility funded by a
national banking association and a syndicate of lenders. This facility, which
commenced in April 1997, initially provided for a borrowing capacity of $200
million and was increased to $250 million in January 1998 and to $300 million in
April 1998. The facility expires on April 16, 2000 and is collateralized by
loans held for sale. The facility bears interest at either a fixed rate, a
floating rate based on the London Interbank Offered Rate ("LIBOR") for U.S.
dollar deposits, or a combination of the two, at the option of the Company.
    
 
     The following table presents data on the warehouse financing facility of
the Company for the years ended December 31:
 
   
<TABLE>
<CAPTION>
                                                       1998        1997        1996
                                                     --------    --------    --------
                                                          (DOLLARS IN THOUSANDS)
<S>                                                  <C>         <C>         <C>
Weighted-average interest rate for the period......      6.91%       7.17%       7.28%
Weighted-average interest rate at the end of the
  period...........................................      6.47%       7.23%       7.25%
Weighted-average amount outstanding for the
  period...........................................  $179,457    $ 90,184    $ 97,714
Maximum amount outstanding at any month-end........  $299,535    $146,271    $170,102
</TABLE>
    
 
   
     The Warehouse Financing Facility contains a number of financial covenants
including: (i) the Company must maintain adjusted tangible net worth equal to at
least $30 million, plus 25% of cumulative positive net earnings, (ii)
delinquencies on the Company's mortgage servicing portfolio not exceed 12% and
(iii) the ratio of total liabilities to adjusted tangible net worth may not
exceed 10:1. The Warehouse Financing Facility also contains other affirmative,
negative and financial covenants typical of similar credit facilities. The
Company was in compliance with all such covenants at December 31, 1998.
    
 
   
     The Company has access to a $100 million uncommitted warehouse line from an
investment banking firm. The line expires in September 1999 and at December 31,
1998 the Company had no outstanding balance on this line. The maximum
outstanding balance at any month-end during 1998 was $95 million. The
uncommitted facility contains several financial covenants including: (i) the
Company maintains tangible net worth equal to a least $35 million, and (ii) the
ratio of total debt to tangible net worth may not exceed 10:1. The uncommitted
facility also contains other affirmative, negative and financial covenants
typical of similar credit facilities. The Company was in compliance with all of
its debt covenants at December 31, 1998.
    
 
   
     The Company recorded interest expense related to the amortization of
warehouse financing issuance costs of $901,000, $415,000, and $245,000 for the
years ended December 31, 1998, 1997 and 1996, respectively. Unamortized
warehouse financing issuance costs were $157,000 and $280,000 at December 31,
1998 and 1997 respectively, and are a component of other assets on the
consolidated statements of financial condition.
    
 
                                      F-13
<PAGE>   60
                        LONG BEACH FINANCIAL CORPORATION
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
       FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
 
NOTE 8. INTEREST INCOME, NET OF INTEREST EXPENSE
 
     The components of interest income, net of interest expense for the years
ended December 31, are presented in the table that follows:
 
<TABLE>
<CAPTION>
                                                         1998       1997       1996
                                                       --------    -------    -------
                                                           (DOLLARS IN THOUSANDS)
<S>                                                    <C>         <C>        <C>
Interest on loans....................................  $ 19,959    $ 9,456    $ 3,275
Interest on investments..............................       947      1,036         --
                                                       --------    -------    -------
          Subtotal interest income...................    20,906     10,492      3,275
Interest expense.....................................   (14,119)    (7,138)    (2,814)
                                                       --------    -------    -------
Interest income, net of interest expense.............  $  6,787    $ 3,354    $   461
                                                       ========    =======    =======
</TABLE>
 
NOTE 9. INCOME TAXES
 
     In connection with the Reorganization, AMC transferred certain tangible and
intangible assets to the Company, and immediately thereafter sold shares of the
Company's common stock in the Offering. The transfer of these assets and
personnel was treated, for federal income tax purposes, as a taxable sale of
assets. As a result, the tax basis of the assets transferred from AMC to the
Company in the Reorganization was increased to their fair market value
(determined by reference to the initial public offering price.) In general,
Section 197 of the Internal Revenue Code ("IRC") allows for the amortization
over a 15-year period of intangible assets (including goodwill and going concern
value) acquired in a transaction such as the Reorganization. The so-called
"anti-churning" rules set forth in Section 197(f)(9) of the IRC, however,
prohibit the amortization of goodwill, going concern value and intangible
assets, the useful lives of which cannot be determined with reasonable accuracy
where such assets are transferred between related parties and the transferor
held or used such intangible assets at any time on or after July 25, 1991, and
on or before August 10, 1993.
 
     The Company believes that the anti-churning rules should not apply to any
intangible assets (whether goodwill, going concern value or otherwise)
transferred from AMC to the Company in the Reorganization. Because the Internal
Revenue Service ("IRS") could assert that the anti-churning rules apply to the
Reorganization, the Company will limit the value of the deferred tax asset that
is recorded, solely for financial accounting and reporting purposes, to the
amount that would be recorded assuming the application of the anti-churning
rules. The Company, using an independent third party, has appraised the value of
certain intangible assets transferred in the Reorganization that are of a type
not subject to the anti-churning rules -- i.e., assets that can be valued and to
which the Company can reasonably ascertain useful lives ("Amortizable
Intangibles"). Based in part upon such valuation, the Company recorded a $36.0
million net deferred tax asset solely for financial accounting and reporting
purposes. No assurance can be given, however, that the IRS will not challenge
the value of the Amortizable Intangibles. If such a challenge were successful,
the Company may be prevented from realizing all or a portion of the future tax
benefits reflected by the net deferred tax asset. Any adjustment to the net
deferred tax asset, arising from IRS challenge or other ruling concerning the
deductibility of the deferred tax asset or the valuation of the Amortizable
Intangibles, will be charged or credited to additional paid-in capital and will
have no impact on earnings.
 
     Based upon the offering price of $6.50 per share, the excess of the tax
basis of the Company's net assets over their net book value was approximately
$117.5 million, resulting in a gross deferred tax asset of $47.0 million. The
Company recorded a net deferred tax asset of $36.0 million to take into account
the potential that the IRS may disallow some portion of the resulting deduction.
For income tax purposes, the Company is amortizing over a 15-year period the
intangible assets acquired from AMC in the Reorganization. The Company believes
that based upon historical earnings levels it is probable that the Company will
generate
 
                                      F-14
<PAGE>   61
                        LONG BEACH FINANCIAL CORPORATION
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
       FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
 
sufficient taxable income to realize the benefits associated with the net
deferred tax asset through future tax deductions. As the Company realizes the
benefits associated with the deferred tax asset, there will be a corresponding
reduction in income taxes payable by the Company. As the deferred tax benefit is
realized through a reduction in the current tax payable, the statement of
operations will reflect an offsetting charge to the amount of the deferred tax
benefit, resulting in no effect on net income. If the Company determines that
estimated future earnings are not sufficient to realize the deferred tax
benefit, the Company will establish a valuation allowance for the impairment of
the deferred tax assets, through a charge to the income tax provision, which
will result in a reduction of net earnings.
 
     The income tax provision (benefit) consists of the following, for the years
ended December 31:
 
<TABLE>
<CAPTION>
                                                     1998      1997      1996
                                                    -------   -------   -------
                                                      (DOLLARS IN THOUSANDS)
<S>                                                 <C>       <C>       <C>
Current:
  Federal.........................................  $14,725   $12,622   $ 5,895
  State...........................................    3,411     2,436     1,923
                                                    -------   -------   -------
                                                     18,136    15,058     7,818
Deferred:
  Federal.........................................    1,506       605    (1,135)
  State...........................................      371     1,526      (103)
                                                    -------   -------   -------
                                                      1,877     2,131    (1,238)
                                                    -------   -------   -------
Provision for income taxes........................  $20,013   $17,189   $ 6,580
                                                    =======   =======   =======
</TABLE>
 
     The reconciliation of statutory tax rates to the Company's effective income
tax rate follows, for the years ended December 31:
 
<TABLE>
<CAPTION>
                                                     1998      1997      1996
                                                     ----      ----      ----
<S>                                                  <C>       <C>       <C>
Federal income tax at statutory rates..............  35.0%     35.0%     35.0%
State taxes, net of federal tax benefits...........   5.0       6.0       7.4
Other..............................................    --       0.1      (1.2)
                                                     ----      ----      ----
                                                     40.0%     41.1%     41.2%
                                                     ====      ====      ====
</TABLE>
 
                                      F-15
<PAGE>   62
                        LONG BEACH FINANCIAL CORPORATION
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
       FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
 
     Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the net deferred tax assets (liabilities) are as follows, at
December 31:
 
   
<TABLE>
<CAPTION>
                                                             1998         1997
                                                           ---------    ---------
                                                           (DOLLARS IN THOUSANDS)
<S>                                                        <C>          <C>
Deferred tax assets:
  Mark to market.........................................   $    --      $   428
  Goodwill...............................................    32,855       37,557
  Vacation accrual.......................................       300          186
  Reserves...............................................     1,182          371
  State taxes............................................        85           32
  Depreciation...........................................       323          122
                                                            -------      -------
                                                             34,745       38,696
Deferred tax liabilities:
  Deferred state taxes...................................    (2,185)      (3,690)
  Other..................................................       (37)        (606)
                                                            -------      -------
                                                             (2,222)      (4,296)
                                                            -------      -------
Deferred tax asset, net..................................   $32,523      $34,400
                                                            =======      =======
</TABLE>
    
 
   
NOTE 10. STOCKHOLDERS' EQUITY
    
 
   
     Common Stock -- The Company is authorized to issue 150.0 million shares of
$0.001 par value common stock. At December 31, 1998 and 1997, the Company had
22.6 million and 24.7 million shares outstanding, respectively.
    
 
   
     Common Stock Repurchase Plan -- In October 1997, the Board of Directors
authorized a stock repurchase plan which permits the repurchase on the open
market of up to 2.5 million shares of the Company's common stock, or 10% of the
current shares outstanding, through the end of September 1999. The Company had
repurchased a total of 2.4 million and 300,000 shares of stock as of December
31, 1998 and 1997 respectively, which are included in treasury stock.
    
 
     Preference Share Purchase Rights -- In October 1997, the Board of Directors
authorized a stockholder rights plan, which provides for the distribution to the
Company's stockholders of one preferred stock purchase "right" for each
outstanding share of common stock owned. The rights will trade with the
Company's common stock and will not be exercisable until the occurrence of
certain takeover related events. The rights can be redeemed by the Company at
any time, and will otherwise expire on November 9, 2007.
 
     Preferred Stock -- The Company is authorized to issue 25.0 million shares
of $0.001 par value preferred stock. No preferred shares are outstanding and the
Company has no current plan to issue any such shares.
 
   
NOTE 11. EARNINGS PER SHARE
    
 
   
     SFAS No. 128, Earnings per Share, requires computation of earnings per
share ("EPS") using basic and diluted methodologies. Basic EPS excludes any
dilution and is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if common stock equivalents
were exercised and converted into common stock or resulted in the issuance of
common stock that then shared in the earnings of the entity.
    
 
                                      F-16
<PAGE>   63
                        LONG BEACH FINANCIAL CORPORATION
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
       FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
 
     The Company did not have independent operations through the date of the
Reorganization, and all rights, benefits and obligations relating to the net
earnings of the Wholesale Division up to the date of the Reorganization remained
with AMC. Additionally, only one share of LBFC's common stock was issued and
outstanding until the Reorganization and no shares were issued or outstanding at
any time prior to 1997.
 
     Earnings per share data for 1997 was prepared under the assumption that the
Company's 25,000,000 shares of common stock were issued and outstanding as of
January 1, 1997 through December 31, 1997, less the impact of stock repurchases
during the fourth quarter of 1997, and by using the common stock equivalents for
all stock options issued by the Company from the Reorganization through December
31, 1997.
 
     A reconciliation of the numerators and denominators used in basic and
diluted EPS computations for the periods indicated follows:
 
<TABLE>
<CAPTION>
                                                               WHOLESALE            THE          COMBINED
                                            YEAR ENDED      DIVISION OF AMC       COMPANY       RESULTS OF
                                           DECEMBER 31,    JANUARY 1 THROUGH   MAY 2 THROUGH    OPERATIONS
                                               1998         MAY 1, 1997(A)     DEC. 31, 1997   DEC. 31, 1997
                                           -------------   -----------------   -------------   -------------
<S>                                        <C>             <C>                 <C>             <C>
COMPUTATION OF BASIC EARNINGS PER SHARE
Net earnings available to common
  shareholder............................   $30,019,000       $ 5,947,000       $18,697,000     $24,644,000
                                            ===========       ===========       ===========     ===========
Average common shares outstanding........    23,706,357        25,000,000        24,771,135      24,975,781
                                            ===========       ===========       ===========     ===========
Basic earnings per share.................   $      1.27       $      0.24       $      0.75     $      0.99
                                            ===========       ===========       ===========     ===========
 
COMPUTATION OF DILUTED EARNINGS PER SHARE
Net earnings available to common
  shareholder............................   $30,019,000       $ 5,947,000       $18,697,000     $24,644,000
                                            ===========       ===========       ===========     ===========
Average common shares outstanding........    23,706,357        25,000,000        24,771,135      24,975,781
Common stock equivalents -- stock
  options................................       907,126                --           998,716         677,257
                                            -----------       -----------       -----------     -----------
Average diluted common shares............    24,613,483        25,000,000        25,769,851      25,653,038
                                            ===========       ===========       ===========     ===========
Diluted earnings per share...............   $      1.22       $      0.24       $      0.72     $      0.96
                                            ===========       ===========       ===========     ===========
</TABLE>
 
---------------
(a) Represents per share data on the assumption that the Company's shares of
    common stock were issued and outstanding during the entire period from
    January 1, 1997 through May 1, 1997.
 
NOTE 12. EMPLOYEE BENEFITS
 
     Defined Contribution Plan -- The Company has a 401(k) defined contribution
plan for all eligible employees. Employees may generally contribute up to 15% of
qualifying compensation each year, and the Company, at its discretion, may make
employer contributions to participants. Employees become vested in the Company's
contribution at a rate of 20% each year, with complete vesting after five years.
The Company made no contributions to the plan during 1998 or 1997 and therefore,
no contribution expense was recognized. The Company's cost for the plan was not
material for the years ended December 31, 1998, 1997 and 1996.
 
     Deferred Compensation -- The Company has established a deferred
compensation plan which permits certain officers and key employees of the
Company to elect to defer portions of their compensation. There was no liability
related to this plan as of December 31, 1998 and 1997.
 
     Stock Options -- The Company's 1997 Stock Incentive Plan (the "Plan")
provides for a total of 3.0 million shares for issuance. Options granted under
the Plan may be incentive stock options or non-qualified stock options. The
exercise price of both types of options may not be less than 100% of the fair
market value of the shares on the date of grant.
 
                                      F-17
<PAGE>   64
                        LONG BEACH FINANCIAL CORPORATION
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
       FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
 
     The options issued to officers and other employees vest 20% per year over a
five year period and expire on the earlier of ten years from the date of grant
or thirty days after a holder's termination of service. Options issued to
non-employee directors vest ratably each year over a three year period.
 
     The following is a summary of stock option information and weighted-average
exercise prices for the Company's stock option plan as of December 31, 1998 and
1997 and changes during the years then ended are as follows:
 
<TABLE>
<CAPTION>
                                                           NUMBER      PRICE
                                                          ---------    ------
<S>                                                       <C>          <C>
Outstanding at January 1, 1997..........................         --    $   --
  Options granted.......................................  2,808,000      6.84
  Options canceled......................................    (20,000)     6.50
                                                          ---------
Outstanding at December 31, 1997........................  2,788,000    $ 6.84
                                                          =========
Outstanding at January 1, 1998..........................  2,788,000    $ 6.84
  Options granted.......................................    155,600     12.04
  Options exercised.....................................     (8,200)     6.50
  Options canceled......................................    (41,000)     8.80
                                                          ---------
Outstanding at December 31, 1998........................  2,894,000    $ 7.09
                                                          =========
</TABLE>
 
     The number of options exercisable at December 31, 1998, was 550,160 with a
weighted average exercise price of $6.84. There were no exercisable options at
December 31, 1997.
 
     In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation." This Statement establishes a fair value based accounting method
for stock-based compensation plans and encourages (but does not require)
employers to adopt the new method in place of the provisions of APB Opinion No.
25, "Accounting for Stock Issues to Employees." The Company has elected to adopt
the disclosure-only provisions of SFAS No. 123 and will, therefore, continue to
account for its stock incentive plan based on the methodologies presented in APB
Opinion No. 25. No compensation expense was recognized during 1998 or 1997 for
options granted under the Company's stock incentive plan.
 
     Had compensation cost for the stock incentive plan been determined based on
the fair value provisions of SFAS No. 123, pro forma net earnings and pro forma
basic and diluted earnings per share for the periods indicated would have been
reduced to the amounts that follow:
 
<TABLE>
<CAPTION>
                                                         YEAR ENDED
                                                        DECEMBER 31,
                                                   ----------------------
                                                     1998         1997
                                                   ---------    ---------
                                                   (DOLLARS IN THOUSANDS)
<S>                                                <C>          <C>
Net Earnings
  As reported....................................   $30,019      $24,644
  Pro forma......................................    28,752       23,460
Basic earnings per share
  As reported....................................      1.27         0.99
  Pro forma......................................      1.21         0.94
Diluted earnings per share
  As reported....................................      1.22         0.96
  Pro forma......................................      1.17         0.91
</TABLE>
 
                                      F-18
<PAGE>   65
                        LONG BEACH FINANCIAL CORPORATION
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
       FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
 
     The fair value of each option grant, $3.65 and $3.60 for options granted in
1998 and 1997 respectively, is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions:
 
<TABLE>
<CAPTION>
                                                        YEAR ENDED
                                                       DECEMBER 31,
                                                    ------------------
                                                     1998       1997
                                                    -------    -------
<S>                                                 <C>        <C>
Dividend yield....................................       --         --
Expected volatility...............................     50.0%      49.4%
Risk-free interest rate...........................     5.66%      6.75%
Expected life of option...........................  5 years    5 years
</TABLE>
 
NOTE 13. AGREEMENTS WITH RELATED PARTIES
 
     Administrative Services Agreements -- On April 28, 1997, the Company and
AMC entered into an administrative services agreement under which AMC agreed to
provide various services to the Company, including certain employee benefits
administration services, information services and data processing functions and,
through August 1997, mail room services. The agreement had a one year term from
the effective date of the Reorganization, unless earlier terminated by the
Company upon 30 days written notice. In February 1998, the Company terminated
this agreement, effective March 1, 1998. The Company incurred charges of
$250,000 and $1.1 million for the years ended December 31, 1998 and 1997,
respectively, pursuant to this agreement.
 
     In addition, on April 28, 1997, the Company and AMC entered into a second
administrative services agreement pursuant to which the Company agreed to assist
AMC in selling the mortgage loans originated by AMC and provide investor
coordination and information for the existing loan portfolio as well as new loan
originations. The agreement had a one-year term from the effective date of the
Reorganization, unless earlier terminated by AMC upon 30 days written notice. In
February 1998, AMC terminated this agreement, effective March 1, 1998. The
Company received $110,000 and $440,000 during the years ended December 31, 1998
and 1997, respectively, pursuant to this agreement.
 
     Loan Sub-servicing Agreement -- On April 28, 1997, the Company and AMC
entered into a three year loan sub-servicing agreement pursuant to which AMC
agreed to sub-service mortgage loans originated or purchased by the Company
after the Reorganization. Sub-servicing activities include collecting and
remitting loan payments, accounting for principal and interest, holding escrow
or impound funds for payment of taxes and insurance, if applicable, making
required inspections of the mortgaged property, contacting delinquent borrowers,
and supervising foreclosures and property dispositions. The agreement provides
that either party has the right to terminate the agreement effective at any time
after November 2, 1998, upon six months prior written notice to the other party.
During the third quarter of 1998, the Company and AMC modified the existing loan
sub-servicing agreement, which provided the Company the right to begin its
servicing operations, on November 2, 1998. The Company has incurred charges of
$4.8 million and $935,000 during the years ended December 31, 1998 and 1997,
respectively, pursuant to this agreement. The balance of the sub-serviced loan
portfolio at December 31, 1998 and 1997 totaled $972.9 million and $896.2
million, respectively. In January 1999, the Company transferred $550 million of
loans from the subservicer to its own servicing operation.
 
     Income Taxes -- In connection with the Reorganization, AMC agreed to
indemnify and hold the Company harmless from any tax liability attributable to
periods ending on or before the Reorganization. For periods ending after the
Reorganization, the Company pays its tax liability directly to the appropriate
taxing authorities.
 
                                      F-19
<PAGE>   66
                        LONG BEACH FINANCIAL CORPORATION
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
       FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
 
     The agreements between the Company and AMC were developed in the context of
a related party relationship and, therefore, may not necessarily reflect the
same business terms as might have been obtained in arm's length negotiations
between independent parties.
 
   
NOTE 14. COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF RISK
    
 
   
     Leases -- 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, 1998, 1997
and 1996 was $2.9 million, $1.7 million and $1.4 million, respectively.
    
 
   
     The future minimum lease payments are as follows (in thousands):
    
 
   
<TABLE>
<S>                                                           <C>
Year ending December 31:
  1999......................................................  $2,845
  2000......................................................   2,510
  2001......................................................   2,040
  2002......................................................   1,110
  2003......................................................     222
                                                              ------
                                                              $8,727
                                                              ======
</TABLE>
    
 
   
     The Company routinely enters into noncancelable lease agreements for
furniture and equipment used in the normal course of business. The following
table sets forth the minimum lease obligations under lease commitments in effect
at December 31, 1998:
    
 
   
<TABLE>
<CAPTION>
                                            CAPITALIZED   OPERATING   TOTAL
                                            -----------   ---------   ------
                                                 (DOLLARS IN THOUSANDS)
<S>                                         <C>           <C>         <C>
Year ending December 31:
  1999....................................     $170        $1,733     $1,903
  2000....................................      170         1,342      1,512
  2001....................................      111           446        557
  2002....................................       46            17         63
  2003....................................        2            --          2
                                               ----        ------     ------
                                                499         3,538      4,037
Less amounts representing interest........      (66)           --        (66)
                                               ----        ------     ------
                                               $433        $3,538     $3,971
                                               ====        ======     ======
</TABLE>
    
 
   
     The capital lease obligations are included in accrued liabilities in the
accompanying consolidated statements of financial condition. As of December 31,
1998, the net book value of furniture and equipment under capital lease was
$411,000.
    
 
     The Company has negotiated employment agreements with certain officers.
These agreements provide for the payment of base salaries, performance bonuses
subject to certain restrictions, and the payment of severance benefits upon
termination.
 
     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 be liable for the unpaid
principal and interest on defaulted loans or other loans if there has been a
breach of representations 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
 
                                      F-20
<PAGE>   67
                        LONG BEACH FINANCIAL CORPORATION
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
       FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
 
risk and credit risk in excess of the amount recognized in the consolidated
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,
commitments outstanding do not necessarily represent future cash requirements.
 
     The Company had commitments to fund loans of $460.2 million and $331.0
million at December 31, 1998 and 1997, respectively. The Company's loan purchase
commitments totaled $54.3 million and $19.7 million at December 31, 1998 and
1997, respectively. The Company has entered into forward loan sale contracts
under which it has committed to deliver $1.3 billion in loans, with the related
commitment expiration dates varying from February 28, 1999 through March 31,
1999. At December 31, 1998, the Company had delivered $1.0 billion of loans on
this commitment.
 
  Contingencies
 
     In September 1996, AMC entered into a settlement agreement with the U.S.
Department of Justice ("DOJ") arising out of a DOJ investigation and complaint
which alleged that AMC 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. AMC denied all
allegations in the complaint and all claims of discrimination. AMC 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 insupportable. Nonetheless, to
avoid costly, protracted litigation, AMC 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. AMC 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, AMC also agreed to contribute an additional $1 million (payable over 3
years) to fund consumer education programs in conjunction with civil rights
groups. AMC has established all funds required by the settlement agreement.
Pursuant to the settlement agreement, the Company, as successor to AMC, has
agreed to (i) document any price exceptions from the Company's rate sheet on
broker-sourced loans, (ii) periodically review the results of its broker-sourced
lending operations for its compliance with fair lending laws but in no event
shall the Company be required to disclose any documents or information
therewith, including the identities of any brokers with who 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 $1,065,000 in 1996, 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 consolidated statement of operations.
 
     When the Company operated as a division of AMC, 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 did not assume any
liabilities that arose out of the lending activities of AMC, including
liabilities related to the broker-sourced mortgage loan operations, nor has the
Company agreed to indemnify AMC against any such liabilities.
                                      F-21
<PAGE>   68
                        LONG BEACH FINANCIAL CORPORATION
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
       FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
 
     The Company is a party to various routine legal proceedings arising out of
the ordinary course of its business. Management believes that none of these
actions, individually or in the aggregate, will have a material adverse effect
on the consolidated financial condition or results of operations of the Company.
 
  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 7)
and internally generated funds. 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 those warehouse financing facilities, 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 consolidated results of operations and financial condition. To the
extent that the Company is not successful in maintaining or replacing existing
financing, it would have to curtail its loan production activities, thereby
having a material adverse effect on the Company's consolidated 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.
 
     Approximately 33.8% and 34.4% of the dollar volume of loans originated or
purchased by the Company were secured by properties located in California for
the years ended December 31, 1998 and 1997, respectively. No other state
contained properties securing more than 10% of the dollar volume of loans
originated or purchased by the Company during the years ended December 31, 1998
and 1997. 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-22
<PAGE>   69
                        LONG BEACH FINANCIAL CORPORATION
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
       FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
 
such loan purchasers or negotiate favorable terms for such loan purchasers, the
Company's consolidated results of operations and financial condition could be
materially adversely affected. Additionally, the secondary market for subprime
loans is volatile and prices for subprime loans have been depressed,
particularly since the beginning of the fourth quarter of 1998. In the event
that the secondary market for the Company's loans remains in a depressed state,
the sales premiums that the Company has historically received from the sale of
its loans may not be achievable. Such a decrease in pricing could have a
material adverse effect on the Company's profitability, liquidity and operating
performance.
 
     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, and 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, 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. In a majority of these cases,
courts have declined to grant class certification, holding that it is necessary
to analyze the facts of each transaction to determine whether the lender-paid
fee, either alone or in combination with borrower-paid fees, constitutes a
reasonable payment for goods, facilities or services provided. In March 1999,
HUD clarified its position on lender payments to mortgage brokers further
undermining class action lawsuits alleging that all lender-paid fees are per se
illegal. See "Business -- Regulation." 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 legislation, 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.
 
                                      F-23
<PAGE>   70
                        LONG BEACH FINANCIAL CORPORATION
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
       FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
 
   
NOTE 15. FAIR VALUE OF FINANCIAL INSTRUMENTS
    
 
     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
(dollars in thousands):
 
   
<TABLE>
<CAPTION>
                                                             1998                     1997
                                                    ----------------------   ----------------------
                                                    CARRYING    ESTIMATED    CARRYING    ESTIMATED
                                                     AMOUNT     FAIR VALUE    AMOUNT     FAIR VALUE
                                                    --------    ----------   --------    ----------
<S>                                                 <C>         <C>          <C>         <C>
Assets:
  Cash and cash equivalents.....................    $ 24,941     $ 24,941    $ 38,782     $ 38,782
  Investment securities available for sale......    $     --     $     --    $  3,793     $  3,793
  Loans held for sale...........................    $ 59,148     $ 59,148    $ 17,241     $ 17,429
  Receivable from the sales of loans............    $186,786     $186,786    $143,088     $143,088
Liabilities:
  Warehouse financing facility..................    $211,787     $211,787    $146,271     $146,271
Off-Balance sheet unrealized gains (losses):
  Loan origination commitments..................    $     --     $     --    $     --     $     --
</TABLE>
    
 
   
     Because of the short maturities of cash and cash equivalents, management
believes that their carrying amount is a reasonable estimate of fair value. The
estimated fair value of investment securities available for sale is based upon
quoted market prices. The estimated fair value of loans held for sale is
determined by outstanding commitments from investors, if any, or management's
estimate of value that the Company could reasonably expect to obtain from a
sale, that is, other than in a forced or liquidation sale of the loans on an
aggregate basis. Due to their short turnover rate, management believes that the
carrying amount of receivable from the sales of loans is a reasonable estimate
of fair value. 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
counterparts.
 
   
     The fair value estimates are based on pertinent information available to
management as of December 31, 1998 and 1997. 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.
    
 
   
NOTE 16. SEGMENT AND RELATED INFORMATION
    
 
   
     The Company has adopted SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information", which changes the way a company reports
information about its operating segments. The Company has two reportable
operating segments: Broker-sourced and Correspondent.
    
 
   
     The summarized financial information concerning the Company's reportable
segments is shown in the following table. "Other" represents corporate
administration, the retail segment, and other related items and
    
 
                                      F-24
<PAGE>   71
                        LONG BEACH FINANCIAL CORPORATION
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
       FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
 
   
results of ancillary operations. The Company made certain estimates in order to
compute revenues and expenses by reportable segment. Prior to the Reorganization
date in 1997, and for 1996, the Company utilized actual results from the
Reorganization date to December 31, 1997 to allocate revenues and expenses. The
accounting policies of the segments are the same as those described in the
summary of significant accounting policies described in Note 3.
    
 
   
<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                                 --------------------------------------
                                                    1998          1997          1996
                                                 ----------    ----------    ----------
                                                         (DOLLARS IN THOUSANDS)
<S>                                              <C>           <C>           <C>
Revenues:
  Broker-sourced...............................  $  106,956    $   82,208    $   47,175
  Correspondent................................      10,832         6,159         3,524
                                                 ----------    ----------    ----------
     Subtotal Wholesale........................     117,788        88,367        50,699
  Other........................................      14,862         4,299           461
                                                 ----------    ----------    ----------
          Total Revenues.......................  $  132,650    $   92,666    $   51,160
                                                 ==========    ==========    ==========
Expenses:
  Broker-sourced...............................  $   42,673    $   33,228    $   22,273
  Correspondent................................       2,253         1,123           235
                                                 ----------    ----------    ----------
          Subtotal Wholesale...................      44,926        34,351        22,508
  Other........................................      37,692        16,482        12,680
                                                 ----------    ----------    ----------
          Total Expenses.......................  $   82,618    $   50,833    $   35,188
                                                 ==========    ==========    ==========
</TABLE>
    
 
   
    
 
   
<TABLE>
Earnings (Loss) Before Income Taxes:
<S>                                              <C>           <C>           <C>
  Broker-sourced...............................  $   64,283    $   48,980    $   24,902
  Correspondent................................       8,579         5,036         3,289
                                                 ----------    ----------    ----------
     Subtotal Wholesale........................      72,862        54,016        28,191
  Other........................................     (22,830)      (12,183)      (12,219)
                                                 ----------    ----------    ----------
          Earnings before income taxes.........  $   50,032    $   41,833    $   15,972
                                                 ==========    ==========    ==========
Net Earnings (Loss):
  Broker-sourced...............................  $   38,570    $   28,854    $   14,643
  Correspondent................................       5,147         2,967         1,934
                                                 ----------    ----------    ----------
     Subtotal Wholesale........................      43,717        31,821        16,577
  Other........................................     (13,698)       (7,177)       (7,185)
                                                 ----------    ----------    ----------
          Net Earnings.........................  $   30,019    $   24,644    $    9,392
                                                 ==========    ==========    ==========
Loan Production:
  Broker-sourced...............................  $2,220,096    $1,531,266    $1,026,390
  Correspondent................................     296,283       151,768        31,732
                                                 ----------    ----------    ----------
     Subtotal Wholesale........................   2,516,379     1,683,034     1,058,122
  Other........................................      59,586         2,708            --
                                                 ----------    ----------    ----------
          Total Production.....................  $2,575,965    $1,685,742    $1,058,122
                                                 ==========    ==========    ==========
Assets:
  Broker-sourced...............................  $   53,270    $   15,491
  Correspondent................................       6,832           755
                                                 ----------    ----------
     Subtotal Wholesale........................      60,102        16,246
  Other........................................     268,493       231,842
                                                 ----------    ----------
          Total Assets.........................  $  328,595    $  248,088
                                                 ==========    ==========
</TABLE>
    
 
                                      F-25
<PAGE>   72
                        LONG BEACH FINANCIAL CORPORATION
 
           NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
       FOR EACH OF THE THREE YEARS IN THE PERIOD ENDED DECEMBER 31, 1998
 
NOTE 16. SELECTED QUARTERLY DATA (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                       FIRST     SECOND      THIRD     FOURTH
                                                      QUARTER    QUARTER    QUARTER    QUARTER
                                                      -------    -------    -------    -------
                                                      (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                   <C>        <C>        <C>        <C>
YEAR ENDED DECEMBER 31, 1998
Gain on sale of loans...............................  $23,925    $31,630    $31,098    $36,051
Net interest income.................................    1,370      1,666      1,996      1,755
Net operating income................................   25,861     34,102     34,298     38,389
General and administrative expenses.................   14,491     19,183     18,426     20,451
Provision for losses................................    1,400      1,000      1,100      1,747
Sub-servicing costs.................................      646      1,138      1,542      1,494
Earnings before income taxes                            9,324     12,781     13,230     14,697
Net earnings........................................  $ 5,410    $ 7,408    $ 8,257    $ 8,944
Basic earnings per share:
  Net earnings......................................  $  0.22    $  0.31    $  0.35    $  0.40
  Average number of common shares...................   24,498     24,236     23,506     22,607
Diluted earnings per share:
  Net earnings......................................  $  0.21    $  0.29    $  0.34    $  0.39
  Average number of common and equivalent shares....   25,674     25,478     24,433     22,767
 
YEAR ENDED DECEMBER 31, 1997
Gain on sale of loans...............................  $17,238    $19,941    $24,829    $26,589
Net interest income.................................      472        145      1,151      1,586
Net operating income................................   17,710     20,104     26,200     28,652
General and administrative expenses.................    9,639      9,581     11,947     14,703
Provision for losses................................      438      2,490        500        600
Sub-servicing costs.................................       --         46        294        595
Earnings before income taxes........................    7,633      7,987     13,459     12,754
Net earnings........................................  $ 4,568    $ 4,872    $ 7,859    $ 7,345
Basic earnings per share:
  Net earnings......................................  $  0.18    $  0.19    $  0.31    $  0.29
  Average number of common shares...................   25,000     25,000     25,000     24,904
Diluted earnings per share:
  Net earnings......................................  $  0.18    $  0.19    $  0.30    $  0.28
  Average number of common and equivalent shares....   25,000     25,310     26,075     26,126
</TABLE>
 
                                      F-26
<PAGE>   73
 
                          INDEPENDENT AUDITORS' REPORT
 
To the Board of Directors and Stockholders of
Long Beach Financial Corporation:
 
     We have audited the accompanying consolidated statements of financial
condition of Long Beach Financial Corporation and subsidiary (the "Company") as
of December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' and divisional equity and cash flows for each of the
three years in the period ended December 31, 1998. 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 consolidated financial statements present fairly, in
all material respects, the financial position of Long Beach Financial
Corporation and subsidiary as of December 31, 1998 and 1997, the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
 
     As more fully described in Note 1, the Company was a part of Ameriquest
Mortgage Company ("AMC") and had no separate legal status or existence through
May 1, 1997. The Company had various transactions with AMC, including various
expense allocations and reimbursements, that are material in amount. The
consolidated financial statements of the Company have been prepared from
separate records maintained by the Company, as well as from the records of AMC,
and may not necessarily be indicative of the conditions that would have existed
if the Company had operated as an independent entity.
 
DELOITTE & TOUCHE LLP
 
Costa Mesa, California
January 25, 1999
 
                                      F-27
<PAGE>   74
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                        DESCRIPTION OF EXHIBIT
-------                       ----------------------
<S>        <C>
* 3.1      Amended and Restated Certificate of Incorporation of Long
           Beach Financial Corporation. (Incorporated by reference to
           Exhibit 3.1 to the Company's Registration Statement on Form
           S-1, Commission File No. 333-22013)
* 3.2      Bylaws of Long Beach Financial Corporation. (Incorporated by
           reference to Exhibit 3.2 to the Company's Registration
           Statement on Form S-1, Commission File No. 333-22013)
* 4.1      Specimen of the Common Stock of Long Beach Financial
           Corporation. (Incorporated by reference to Exhibit 4.1 to
           the Company's Registration Statement on Form S-1, Commission
           File No. 333-22013)
*10.1      Administrative Services Agreement among Long Beach Mortgage
           Company, Long Beach Financial Corporation and Ameriquest
           Mortgage Company. (Incorporated by reference to Exhibit 10.1
           to the Company's Quarterly Report on Form 10-Q filed with
           the Securities and Exchange Commission on June 12, 1997)
*10.2      Form of Master Sub-Servicing Agreement, between Long Beach
           Mortgage Company and Ameriquest Mortgage Corporation
           Company. (Incorporated by reference to Exhibit 10.2 to the
           Company's Registration Statement on Form S-1, Commission
           File No. 333-22013)
*10.3      4/97 Senior Secured Credit Agreement, among Ameriquest
           Mortgage Corporation and Texas Commerce Bank National
           Association, as Lender and Agent. (Incorporated by reference
           to Exhibit 10.3 to the Company's Registration Statement on
           Form S-1, Commission File No. 333-22013)
*10.4      Form of Director/Officer Indemnification Agreement.
           (Incorporated by reference to Exhibit 10.4 to the Company's
           Registration Statement on Form S-1, Commission File No.
           333-22013)
*10.5      Contribution Agreement, between Ameriquest Capital
           Corporation, Long Beach Mortgage Company, Long Beach
           Financial Corporation and Ameriquest Mortgage Corporation
           Company. (Incorporated by reference to Exhibit 10.5 to the
           Company's Quarterly Report on Form 10-Q filed with the
           Securities and Exchange Commission on June 12, 1997)
*10.6      1997 Stock Incentive Plan. (Incorporated by reference to
           Exhibit 10.6 to the Company's Registration Statement on Form
           S-1, Commission File No. 333-22013)
*10.7      Employment Agreement, between Long Beach Financial
           Corporation, Ameriquest Mortgage Corporation and M. Jack
           Mayesh. (Incorporated by reference to Exhibit 10.7 to the
           Company's Registration Statement on Form S-1, Commission
           File No. 333-22013)
*10.8      Employment Agreement, between Long Beach Financial
           Corporation, Ameriquest Mortgage Corporation and Edward
           Resendez. (Incorporated by reference to Exhibit 10.8 to the
           Company's Registration Statement on Form S-1, Commission
           File No. 333-22013)
*10.9      Employment Agreement, between Long Beach Financial
           Corporation, Ameriquest Mortgage Corporation and Frank J.
           Curry. (Incorporated by reference to Exhibit 10.9 to the
           Company's Registration Statement on Form S-1, Commission
           File No. 333-22013)
</TABLE>
<PAGE>   75
 
<TABLE>
<CAPTION>
EXHIBIT
NUMBER                        DESCRIPTION OF EXHIBIT
-------                       ----------------------
<S>        <C>
*10.10     Employment Agreement, between Long Beach Financial
           Corporation, Ameriquest Mortgage Corporation and James H.
           Leonetti. (Incorporated by reference to Exhibit 10.10 to the
           Company's Registration Statement on Form S-1, Commission
           File No. 333-22013)
*10.11     Employment Agreement, between Long Beach Financial
           Corporation, Ameriquest Mortgage Corporation and James J.
           Sullivan. (Incorporated by reference to Exhibit 10.11 to the
           Company's Registration Statement on Form S-1, Commission
           File No. 333-22013)
*10.12     Department of Justice Settlement Agreement. (Incorporated by
           reference to Exhibit 10.12 to the Company's Registration
           Statement on Form S-1, Commission File No. 333-22013)
*10.13     Employment Agreement, between Long Beach Financial
           Corporation, Long Beach Mortgage Company and William K.
           Komperda. (Incorporated by reference to Exhibit 10.13 to the
           Company's Quarterly Report on Form 10-Q filed with the
           Securities and Exchange Commission on June 12, 1997)
*10.14     Form of Amendment to Employment Agreement, among Long Beach
           Financial Corporation, Long Beach Mortgage Company and each
           of M. Jack Mayesh, Edward Resendez, Frank J. Curry, James H.
           Leonetti, and James J. Sullivan. (Incorporated by reference
           to Exhibit 10.14 to the Company's Quarterly Report on Form
           10-Q filed with the Securities and Exchange Commission on
           November 12, 1997)
*10.15     4/98 Amended and Restated Senior Secured Credit Agreement,
           among Long Beach Mortgage Company and Chase Bank of Texas,
           as Lender and Agent.
*10.16     Amended and Restated Employment Agreement, between Long
           Beach Financial Corporation, Long Beach Mortgage Company and
           M. Jack Mayesh.
*10.17     Amended and Restated Employment Agreement, between Long
           Beach Financial Corporation, Long Beach Mortgage Company and
           Edward Resendez.
*10.18     Amended and Restated Employment Agreement, between Long
           Beach Financial Corporation, Long Beach Mortgage Company and
           Frank J. Curry.
*10.19     Amended and Restated Employment Agreement, between Long
           Beach Financial Corporation, Long Beach Mortgage Company and
           William K. Komperda.
*10.20     Amended and Restated Employment Agreement, between Long
           Beach Financial Corporation, Long Beach Mortgage Company and
           James H. Leonetti.
*10.21     Amended and Restated Employment Agreement, between Long
           Beach Financial Corporation, Long Beach Mortgage Company and
           James J. Sullivan.
*10.22     Employment Agreement, between Long Beach Financial
           Corporation, Long Beach Mortgage Company and Elizabeth A.
           Wood.
*10.23     Supplement Agreement to Master Sub-Servicing Agreement
           between Long Beach Mortgage Company and Ameriquest Mortgage
           Company.
*10.24     Master Repurchase Agreement between Merrill Lynch Mortgage
           Capital Inc., Merrill Lynch Credit Corporation and Long
           Beach Mortgage Company.
 10.25     Purchase and Sale Agreement between Salomon Brothers Realty
           Corp. and Long Beach Mortgage Company.
 27        Financial Data Schedule.
</TABLE>
 
---------------
 *  Previously filed.