<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 2, 1997
REGISTRATION NO. 333-25483
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
NEW CENTURY FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6162 33-0683629
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
ORGANIZATION)
</TABLE>
4910 BIRCH STREET, SUITE 100
NEWPORT BEACH, CALIFORNIA 92660
(714) 440-7030
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
BRAD MORRICE
NEW CENTURY FINANCIAL CORPORATION
4910 BIRCH STREET, SUITE 100
NEWPORT BEACH, CALIFORNIA 92660
(714) 440-7030
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
<TABLE>
<S> <C>
ROGER M. COHEN
DAVID A. KRINSKY BRUCE R. HALLETT
KAREN K. DREYFUS JAMES S. BRENNAN
O'MELVENY & MYERS LLP BROBECK, PHLEGER & HARRISON LLP
610 NEWPORT CENTER DRIVE, SUITE 1700 4675 MACARTHUR COURT, SUITE 1000
NEWPORT BEACH, CALIFORNIA 92660 NEWPORT BEACH, CALIFORNIA 92660
(714) 760-9600 (714) 752-7535
</TABLE>
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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- ------------------------------------------------------------------------------------------------
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE (1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value... 4,025,000 $10.50 $42,262,500 $12,806
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 2, 1997
3,500,000 SHARES
[LOGO OF New Century
FINANCIAL CORPORATION]
COMMON STOCK
Of the 3,500,000 shares of Common Stock offered hereby (the "Offering"),
2,900,000 are being sold by New Century Financial Corporation ("New Century" or
the "Company") and 600,000 are being sold by Cornerstone Fund I, L.L.C.
(individually, a "Selling Stockholder"). The Company will not receive any
proceeds from the sale of shares by the Selling Stockholder. Prior to the
Offering, there has been no public market for the Common Stock. It is currently
anticipated that the initial public offering price will be between $8.50 and
$10.50 per share. See "Underwriting" for a discussion of factors to be
considered in determining the initial public offering price.
Application has been made to have the Common Stock approved for quotation on
the Nasdaq National Market under the trading symbol "NCEN."
SEE "RISK FACTORS" COMMENCING ON PAGE 10 FOR A DISCUSSION OF MATERIAL RISKS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
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<TABLE>
<CAPTION>
Price to Underwriting Proceeds to Proceeds to Selling
Public Discount (1) Company (2) Stockholder
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............. $ $ $ $
Total (3)............. $ $ $ $
</TABLE>
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- --------------------------------------------------------------------------------
(1) See "Underwriting" for information relating to indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $800,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
232,500 additional shares of Common Stock, and the Selling Stockholder and
Cornerstone Equity Partners, L.L.C. (collectively, the "Selling
Stockholders") have granted the Underwriters a 30-day option to purchase up
to 292,500 additional shares of Common Stock, on the same terms and
conditions as set forth above, solely to cover over-allotments, if any. If
such options are exercised in full, the total Price to Public will be $ ,
Underwriting Discount will be $ , Proceeds to Company will be $ and
Proceeds to Selling Stockholders will be $ .
The shares of Common Stock are offered by the Underwriters named herein,
subject to receipt and acceptance by them and subject to their right to reject
any order in whole or in part. It is expected that delivery of the certificates
representing such shares will be made against payment therefore at the offices
of Montgomery Securities on or about , 1997.
-----------
Montgomery Securities Piper Jaffray Inc.
, 1997
<PAGE>
[ARTWORK MAP OF THE UNITED STATES, INDICATING, AS OF MAY 31, 1997, (I) THE
RETAIL SALES OFFICES OF THE COMPANY LOCATED IN ARIZONA (3), CALIFORNIA (15),
COLORADO, HAWAII (2), ILLINOIS (2), KANSAS, MINNESOTA (2), MISSOURI (3),
NEVADA, NEW MEXICO, OHIO (3), OREGON, PENNSYLVANIA (2), UTAH, WASHINGTON AND
WISCONSIN; (II) THE WHOLESALE SALES OFFICES OF THE COMPANY LOCATED IN ARIZONA,
CALIFORNIA (3), COLORADO, FLORIDA, GEORGIA, HAWAII, INDIANA, MINNESOTA,
MISSOURI (3), NEVADA, NEW MEXICO, OHIO (3), PENNSYLVANIA (2), TEXAS (2) AND
WASHINGTON; (III) THE REGIONAL OPERATING CENTERS OF THE COMPANY LOCATED IN
SOUTHERN CALIFORNIA, NORTHERN CALIFORNIA AND CHICAGO; (IV) THE SEVENTEEN (17)
STATES IN WHICH THE COMPANY ORIGINATES LOANS BUT NO OFFICES ARE LOCATED
(ALABAMA, ARKANSAS, IDAHO, IOWA, KENTUCKY, LOUISIANA, MASSACHUSETTS, MICHIGAN,
MONTANA, NORTH CAROLINA, NORTH DAKOTA, OKLAHOMA, SOUTH CAROLINA, TENNESSEE,
VIRGINIA, WEST VIRGINIA AND WYOMING); AND (V) THE LOCATION OF THE COMPANY'S
HEADQUARTERS IN ORANGE COUNTY, CALIFORNIA.]
----------------
The Company intends to furnish its stockholders annual reports containing
financial statements audited by an independent accounting firm, and quarterly
reports containing unaudited financial information for the first three
quarters of each fiscal year.
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE,
PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and Financial Statements,
including the Notes thereto, appearing elsewhere in this Prospectus. Except as
otherwise specified, all information in this Prospectus assumes no exercise of
the Underwriters' over-allotment option (see "Underwriting") and does not
include (i) 2,000,000 shares reserved for issuance under the Company's 1995
Stock Option Plan (the "Stock Option Plan") as of the closing of the Offering,
(ii) 127,500 shares subject to options granted or to be granted to two
executive officers and one non-employee director of the Company outside the
Stock Option Plan and (iii) 333,333 shares reserved for issuance pursuant to
warrants granted or to be granted to Comerica Incorporated. Unless otherwise
indicated, all references in this Prospectus to the "Company" or "New Century"
are to New Century Financial Corporation and its subsidiary, New Century
Mortgage Corporation.
THE COMPANY
New Century is a specialty finance company engaged in the business of
originating, purchasing, selling and servicing subprime mortgage loans secured
primarily by first mortgages on single family residences. See "Risk Factors--
Subprime Mortgage Banking Industry." The Company originates loans through
independent loan brokers (the "Wholesale Division") and through direct
solicitation of borrowers (the "Retail Division"). From the commencement of
lending operations in February 1996 through March 31, 1997, the Company
originated and purchased $607.5 million in mortgage loans. The Company's loan
originations and purchases have grown from $4.3 million for the first quarter
of 1996 to $250.6 million for the first quarter of 1997. The Company's
principal strategy is to continue to increase loan originations through
geographic expansion, high levels of service to brokers through its Wholesale
Division and increased consumer marketing through its Retail Division. New
Century has also implemented a loan sales strategy that includes both
securitizations and whole loan sales in order to advance the Company's goal of
enhancing profitability while managing cash flows. See "Business--General."
The Company's borrowers generally have substantial equity in the property
securing the loan, but are considered "subprime" borrowers because they have
impaired or limited credit profiles or higher debt-to-income ratios than
traditional mortgage lenders allow. See "Business--Underwriting." The Company's
borrowers also include individuals who, due to self-employment or other
circumstances, have difficulty verifying their income, and individuals who
prefer the prompt and personalized service provided by the Company. These types
of borrowers are generally willing to pay higher loan origination fees and
interest rates than those charged by conventional lending sources. Because
these borrowers typically use the proceeds of the Company's loans to
consolidate and refinance debt and to finance home improvements, education and
other consumer needs, the Company believes that its loan volume will be less
dependent on general levels of interest rates or home sales and therefore less
cyclical than conventional mortgage lending. Although the Company's
underwriting guidelines include five levels of risk classification,
approximately 54.1% of the principal balance of the loans originated and
purchased by the Company in 1996 were to borrowers within the Company's two
highest credit grades. See "Business--Loan Production by Borrower Risk
Classification." One important consideration in underwriting subprime loans is
the nature and value of the collateral securing the loans. The Company believes
that the amount of equity present in the real estate securing its loans,
together with the fact that approximately 88.2% of its loans originated and
purchased in the first quarter of 1997 were secured by borrowers' primary
residences, mitigates the risks inherent in subprime lending. The maximum loan-
to-value ratio allowed for first mortgage borrowers in the Company's highest
credit grade is 90% and second mortgages offered through the Company's recently
formed alternative mortgage products division (the "Alternative Mortgage
Products Division") include loans with loan-to-value ratios of up to 125% for
borrowers with good credit histories. However, the average loan-to-value ratio
on loans originated and purchased by the Company in 1996 was approximately
71.5%. Approximately 97.3% and 98.4% of the loans originated and purchased by
the Company during 1996 and the first quarter of 1997, respectively, were
secured by first mortgages, and the remainder of the loans the Company
originated and purchased in such periods were secured by second mortgages. See
"Business--General."
3
<PAGE>
The Wholesale Division originates loans through independent loan brokers and
accounted for $159.1 million, or 63.5%, of the Company's loan production during
the first quarter of 1997. As of May 31, 1997, the Wholesale Division
originated loans through its three regional operating centers located in
Southern California, Northern California and Chicago and through 23 additional
sales offices located in 15 states. Because brokers conduct their own marketing
and employ their own personnel to complete loan applications and maintain
contact with borrowers, originating loans through the Wholesale Division allows
the Company to increase its loan volume without incurring the higher marketing,
labor and other overhead costs associated with increased retail originations.
See "Business--Loan Originations and Purchases, --Geographic Distribution." The
Company also purchases loans through its correspondent program (the
"Correspondent Program") which operates as part of its Wholesale Division.
Loans purchased through the Correspondent Program accounted for $17.1 million,
or 6.8%, of the Company's loan production during the first quarter of 1997. See
"Business--Correspondent Program."
The Retail Division originates loans through the direct solicitation of
borrowers and accounted for $74.4 million, or 29.7%, of the Company's loan
production during the first quarter of 1997. As of May 31, 1997, the Retail
Division originated loans through a network of 15 sales offices located in
California and 25 sales offices located in 15 other states. By creating a
direct relationship with the borrower, retail lending creates a more
sustainable loan origination franchise and provides the Company with greater
control over the lending process. The Company also receives the origination
fees paid by the borrower on loans originated through the Retail Division,
which offsets the higher costs of retail lending and may contribute to
increased profitability and cash flow. See "Business--Loan Originations and
Purchases, --Geographic Distribution." The Company's retail marketing includes
high-volume targeted direct mail and more traditional marketing activities
conducted by retail loan officers, who seek to identify potential borrowers
through referral sources as well as individual sales efforts. See "Business--
Marketing."
The Company's seven senior executives have substantial mortgage banking
experience and have previously directed the national expansion of several
conventional and subprime mortgage companies, and the Company's current
underwriters have an average of 10 years of subprime mortgage lending
experience. The Company believes that its experienced underwriting personnel
have the ability to analyze the specific characteristics of each loan
application and make appropriate credit judgments in conjunction with the
Company's underwriting guidelines. Furthermore, all loan originations presently
require two underwriting approvals. See "Business--Underwriting Standards." In
addition to its thorough underwriting process, the Company maintains strong
controls throughout the lending process, including subjecting all loans to a
series of pre-funding and post-funding audits to verify the accuracy of the
loan application data and to assure compliance with the Company's underwriting
policies, procedures and guidelines. The Company believes that its underwriting
and review processes provide the necessary support to continue the Company's
rapid loan origination growth while maintaining loan quality.
New Century sells its mortgage loans through securitizations as well as
through bulk sales of whole loans to institutional purchasers. During 1996, the
Company sold $298.7 million of loans through whole loan sales transactions at a
weighted average sales price equal to 105.0% of the original principal balance
of the loans sold. As of May 31, 1997, the Company has securitized $228.4
million of its mortgage loans through two securitization transactions. Each of
these securitizations has been credit enhanced by an insurance policy provided
through a monoline insurance company allowing the senior certificates in the
related trusts to receive ratings of "AAA" from Standard & Poor's Ratings
Services and "Aaa" from Moody's Investors Service, Inc. The Company intends to
securitize a majority of its loans while continuing to sell a substantial
portion of its loans through whole loan sale transactions. See "Business--Loan
Sales and Securitizations."
Until February 1997, the Company sold all of its loan production on a
servicing-released basis. In connection with its first securitization in
February 1997, the Company retained the servicing rights on the loans sold
through the securitization. While retaining servicing rights as the master
servicer on the securitized loans,
4
<PAGE>
the Company currently outsources its servicing operations to Advanta Mortgage
Corp. USA ("Advanta"). As of March 31, 1997, the Company's servicing portfolio
consisted of 3,110 loans with an aggregate principal balance of approximately
$346.4 million, of which 2,255 loans with an aggregate principal balance of
approximately $248.6 million were being serviced on an interim basis. The
Company intends to develop its own servicing capability in the future in order
to manage the servicing relationship with its borrowers and oversee the
performance of its loans more directly. See "--Recent Developments" and
"Business--Loan Servicing and Delinquencies."
GROWTH AND OPERATING STRATEGIES
Increasing Growth of Retail Production. The Company will emphasize the growth
of retail loan production during 1997 through geographic expansion and
increased consumer marketing efforts. The Company has opened 20 retail sales
offices during the first five months of 1997 and intends to open 10 or more
additional retail sales offices during the remainder of 1997. See "Business--
Geographic Distribution." The Company targets markets for expansion based on
demographics and its ability to recruit sales office managers and other
qualified personnel in that market. The Company's geographic expansion plans
require additional capital and human resources and there can be no assurance
the Company will successfully implement its expansion plans. See "Risk
Factors--Ability to Sustain Growth and Rapid Geographic Expansion." The Company
also intends to increase its consumer marketing, which includes the use of
direct mail, a loans-by-mail program and more traditional marketing methods,
such as referrals and individual loan officer sales efforts. The Company has
increased the number of targeted direct mail pieces sent to retail borrowers
from approximately 750,000 mailers in January 1997 to approximately 1.4 million
mailers in May 1997 and intends to increase the number of targeted direct mail
pieces to over 2 million per month by the end of 1997. See "Business--Growth
and Operating Strategies."
Continuing Growth of Wholesale Production. The Company will continue the
growth of its Wholesale Division, primarily through geographic expansion and
greater penetration in existing markets. The Company intends to continue its
geographic expansion through the development of lending operations in the
Southeast and Northeast regions of the country where the Company has had
limited activity. See "Business--Geographic Distribution." In connection with
its expansion, the Company plans to open 5 or more additional wholesale sales
offices in markets surrounding the Company's existing and planned regional
operations centers and to increase the total number of account executives from
42 as of May 31, 1997 to approximately 80 by the end of 1997. The Company's
geographic expansion plans require additional capital and human resources and
there can be no assurance the Company will successfully implement its expansion
plans. See "Risk Factors--Ability to Sustain Growth and Rapid Geographic
Expansion, --Growth and Operating Strategies."
Enhancing Profitability while Managing Cash Flow. New Century has implemented
a loan sales strategy that includes both securitizations and whole loan sales
in order to advance the Company's goal of enhancing profits while managing cash
flows. Loan sales through securitizations permit the Company to enhance
operating profits and to benefit from future cash flows generated by the
residual interests retained by the Company (the "residual interests"). Whole
loan sale transactions enable the Company to generate current cash flow,
protect against the potential volatility of the securitization market and
reduce the risks inherent in retaining residual interests in securitizations.
The Company continually evaluates different securitization and financing
strategies which may improve its profitability and/or cash flow position. See
"Business--Growth and Operating Strategies."
Regionalizing Operations and Incentivizing Performance. New Century is
implementing a strategy of regionalizing operations support, which will place
Company decision makers closer to local brokers, enable the Company to refine
its procedures to reflect local market practices and conditions and enable the
Company to provide a higher level of service to brokers. The Company's
compensation structure, which includes stock options and cash incentives based
on both loan volume and loan quality for a large number of key employees,
incentivizes its employees to achieve the Company's performance goals. The
Company believes its compensation structure also enables it to attract and
retain key employees. See "Business--Growth and Operating Strategies."
5
<PAGE>
Expanding Product Offerings. The Company frequently reviews its products and
pricing for competitiveness and introduces new products to meet the needs of
its borrowers, brokers and correspondents. The Company recently commenced loan
originations through its Alternative Mortgage Products Division which offers
loans to borrowers meeting conventional mortgage lending standards and offers a
broad selection of second mortgage products, including loans with loan-to-value
ratios of up to 125% for borrowers with good credit histories. The Company
believes that these mortgage products will enable the Company to increase loan
production from brokers and correspondents who have customers seeking such
products and from borrowers identified through the Company's retail marketing
whose needs are not satisfied by the mortgage products offered by the Retail
Division. The Alternative Mortgage Products Division maintains separate
underwriting and loan processing staffs and the Company expects that the
mortgage loans originated through its Alternative Mortgage Products Division
will be sold by the Company on a broker or correspondent basis, rather than
through securitizations or servicing-retained sales. See "Business--Growth and
Operating Strategies."
The Company's headquarters are located at 4910 Birch Street, Suite 100,
Newport Beach, California 92660 and its telephone number is (714) 440-7030.
RECENT DEVELOPMENTS
Comerica Investment and Strategic Relationship. On May 30, 1997, the Company
sold 545,000 shares of Common Stock of the Company to Comerica Incorporated
("Comerica") for $4,087,500. Comerica is a bank holding company which had
assets of $34.9 billion at March 31, 1997 and the parent of Comerica Bank. In
connection with the sale of stock to Comerica, the Company and Comerica have
agreed to enter into certain arrangements concerning servicing and other
strategic relationships. In order to increase the likelihood of success of such
strategic relationships, the Company has issued warrants to purchase 100,000
shares of Common Stock to Comerica and has agreed to issue Comerica warrants to
purchase an additional 233,333 shares of Common Stock. The issuance of the
additional warrants is subject to the completion by Comerica of certain
performance events related to the strategic relationships. All of the warrants
are exercisable over five years at an exercise price equal to the initial
public offering price of the Company's Common Stock, subject to vesting in
equal installments on December 31, 1997, 1998 and 1999. Accelerated vesting
will occur upon (i) certain changes in control of the Company, or (ii) the
inclusion of the shares underlying the warrants in a registration statement,
subject to certain limitations, upon exercise of Comerica's registration
rights.
Pursuant to one of the strategic relationships, Comerica has agreed to act as
a sub-servicer for the Company, providing certain servicing functions with
respect to the Company's mortgage loans. The functions to be performed by
Comerica include payment processing, customer service, tax, insurance and
investor reporting. Comerica is a FNMA and FHLMC approved servicer and as of
March 31, 1997 serviced residential mortgage loans with a principal balance of
$4.1 billion and also serviced consumer loans with a principal balance of $4.4
billion. In connection with these arrangements, the Company will pay Comerica
one time set-up and removal fees for loans boarded on and removed from the
Comerica servicing system and a fixed monthly fee for each loan with respect to
which Comerica performs the specified subservicing functions.
The Company will continue to act as master servicer with respect to its
mortgage loans and intends to develop an in-house default management process,
including collections, delinquency management, foreclosure and REO disposition
services. The Company's senior management has substantial experience in
building and overseeing servicing operations, including subprime mortgage loan
default management, and plans to recruit additional personnel and install
appropriate systems before commencing servicing operations under the Comerica
agreement. This arrangement will allow the Company to utilize Comerica's
existing servicing expertise with respect to certain standardized servicing
functions, while allowing the Company to benefit from controlling the
collections and default management process. The Company will obtain approval of
any appropriate third parties, including rating agencies and monoline insurance
companies, before utilizing the new servicing platform for any
6
<PAGE>
existing or future securitizations. It is anticipated that servicing operations
under the Comerica agreement will begin by the end of 1997.
Comerica and the Company have also agreed to create a process to develop
leads for the Company's loan products through Comerica's existing bank and
mortgage company branch network. In consideration for the services to be
performed by Comerica with respect to such loans, the Company will pay Comerica
a fee based on the principal balance of the loans funded by the Company.
Comerica and the Company have also agreed to develop a process to identify
prospective Company borrowers within Comerica's existing consumer loan
portfolio and to develop a targeted list of such borrowers for the Company to
direct mail or telemarket. In connection with this arrangement, the Company
will pay Comerica a fee for the services performed by Comerica with respect to
each loan funded by the Company which was identified through Comerica's
consumer loan portfolio.
May 1997 Securitization. In May 1997, the Company completed its second public
securitization, involving approximately $129.3 million of loans. The May 1997
securitization was credit enhanced by an insurance policy provided through a
monoline insurance company allowing the senior certificates in the related
trust to receive ratings of "AAA" from Standard & Poor's Ratings Services and
"Aaa" from Moody's Investors Service, Inc.
Recent Loan Origination Volume. The Company originated and purchased $125.5
million in mortgage loans in the month of April 1997, including $34.2 million
through the Retail Division, $79.3 million through the Wholesale Division and
$12.0 million through the Correspondent Program. Total loan origination and
purchase volume in April represented an increase of approximately 50% over
average monthly volume during the first quarter of 1997.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company............. 2,900,000 shares
Common Stock offered by the Selling Stockholder. 600,000 shares
Common Stock outstanding after the Offering(1).. 13,892,373 shares
Use of Proceeds................................. To fund future loan
originations and purchases,
to fund securitization
transaction costs and for
general corporate purposes.
See "Use of Proceeds."
Nasdaq Symbol................................... "NCEN"
Risk Factors.................................... See "Risk Factors" for a
description of material risks
which should be considered
carefully in evaluating an
investment in the Common
Stock offered by this
Prospectus.
</TABLE>
- --------
(1) Excludes (i) 2,000,000 shares reserved for issuance under the Stock Option
Plan as of the closing of the Offering, including options to acquire
1,267,520 shares which have been granted under the Stock Option Plan, and
441,500 shares which will be granted upon the closing of the Offering, (ii)
options to acquire 127,500 shares which have been granted or will be
granted to two executive officers and one non-employee director of the
Company outside the Stock Option Plan and (iii) 333,333 shares reserved for
issuance pursuant to warrants granted or to be granted to Comerica.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(NOVEMBER 17, 1995) FOR THE QUARTER ENDED
THROUGH FOR THE YEAR ENDED -----------------------------
DECEMBER 31, 1995 DECEMBER 31, 1996 MARCH 31, 1996 MARCH 31, 1997
------------------- ------------------ -------------- --------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Gain on sale of loans.. $ -- $11,630 $ -- $10,012
Servicing income....... -- 29 -- 302
Interest income........ 14 2,846 39 2,271
----- ------- ------ -------
Total revenues......... 14 14,505 39 12,585
Operating expenses...... 95 12,200 899 8,539
----- ------- ------ -------
Earnings (loss) before
income taxes
(benefit).............. (81) 2,305 (860) 4,046
Income taxes (benefit).. 1 970 (362) 1,699
===== ======= ====== =======
Net earnings (loss)..... $ (82) $ 1,335 $(498) $ 2,347
===== ======= ====== =======
Pro forma primary
earnings (loss) per
share(5)............... $ 0.08 $(0.04) $ 0.16
Pro forma fully diluted
earnings (loss) per
share(5)............... $ 0.08 $(0.04) $ 0.16
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1997
-------------- -----------------------
PRO FORMA
1995 1996 ACTUAL AS ADJUSTED(1)
------ ------- -------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Loans receivable held for sale, net..... $ -- $57,990 $113,162 $113,162
Residual interests in securitization.... -- -- 13,243 13,243
Total assets............................ 3,151 64,638 133,582 133,582
Borrowings under warehouse lines of
credit................................. -- 41,702 65,803 37,178
Borrowings under aggregation lines of
credit................................. -- 13,957 44,731 44,731
Residual financing ..................... -- -- 7,248 7,248
Other borrowings........................ -- 1,326 3,119 1,869
Total stockholders' equity.............. 3,068 4,403 6,750 36,625
</TABLE>
<TABLE>
<CAPTION>
AS OF OR FOR THE PERIOD
FROM INCEPTION AS OF OR FOR THE
(NOVEMBER 17, 1995) AS OF OR QUARTER ENDED
THROUGH FOR THE YEAR ENDED -----------------------------
DECEMBER 31, 1995 DECEMBER 31, 1996 MARCH 31, 1996 MARCH 31, 1997
----------------------- ------------------ -------------- --------------
<S> <C> <C> <C> <C>
OPERATING STATISTICS:
Loan origination and
purchase activities:
Wholesale
originations.......... $ -- $287,992 $2,292 $159,075
Retail originations.... -- 66,487 2,001 74,384(2)
Correspondent
purchases............. -- 2,460 -- 17,111
----- -------- ------ --------
Total loan originations
and purchases(3)...... $ -- $356,939 $4,293 $250,570
Average principal
balance per loan....... $ -- $ 106 $ 110 $ 108
Percent of loans secured
by first mortgages..... -- 97.3% 96.5% 98.4%
Weighted average initial
loan-to-value ratio.... -- 71.5% 72.5% 70.9%
Originations by product
type(3):
Adjustable-rate
mortgages ("ARMs").... $ -- $264,510 $2,090 $187,987
Fixed rate mortgages... -- 92,429 2,203 62,583
Weighted average
interest rates:
Fixed-rate............. -- 10.4% 9.8% 9.9%
ARMs................... -- 9.3% 9.0% 9.2%
Margin-ARMs............ -- 7.0% 5.7% 7.0%
Loan sales:
Loans sold through
whole loan
transactions(3)....... $ -- $298,713 $ -- $ 95,716
Loans sold through
securitizations....... -- -- -- 99,132
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
AS OF OR FOR THE QUARTER ENDED
--------------------------------------------------------------------------------
MARCH 31, 1996 JUNE 30, 1996 SEPTEMBER 30, 1996 DECEMBER 31, 1996 MARCH 31, 1997
-------------- ------------- ------------------ ----------------- --------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Gain on sale of loans.. $ -- $ 830 $ 2,658 $ 8,142 $ 10,012
Servicing income....... -- -- 10 19 302
Interest income........ 39 248 560 1,999 2,271
------ ------- -------- -------- --------
Total revenues......... 39 1,078 3,228 10,160 12,585
Operating expenses...... 899 1,620 2,721 6,960 8,539
------ ------- -------- -------- --------
Earnings (loss) before
income taxes
(benefit).............. (860) (542) 507 3,200 4,046
Income taxes (benefit).. (362) (225) 213 1,344 1,699
------ ------- -------- -------- --------
Net earnings (loss)..... $ (498) $ (317) $ 294 $ 1,856 $ 2,347
====== ======= ======== ======== ========
Pro forma primary
earnings (loss) per
share(4)............... $(0.04) $ (0.03) $ 0.02 $ 0.13 $ 0.16
Pro forma fully diluted
earnings (loss) per
share(4)............... $(0.04) $ (0.03) $ 0.02 $ 0.13 $ 0.16
OPERATING STATISTICS:
Loan origination and
purchase activities:
Wholesale
originations.......... $2,292 $45,412 $104,392 $135,896 $159,075
Retail originations.... 2,001 7,120 18,956 38,410 74,384(2)
Correspondent
purchases............. -- -- -- 2,460 17,111
------ ------- -------- -------- --------
Total loan originations
and purchases(3)...... $4,293 $52,532 $123,348 $176,766 $250,570
Average principal
balance per loan....... $ 110 $ 115 $ 103 $ 105 $ 108
Percent of loans secured
by first mortgages..... 96.5% 97.4% 96.8% 97.7% 98.4%
Weighted average initial
loan-to-value ratio.... 72.5% 71.5% 71.9% 71.1% 70.9%
Originations by product
type(3):
ARMs................... $2,090 $35,340 $ 93,473 $133,607 $187,987
Fixed-rate mortgages... $2,203 $17,192 $ 29,875 $ 43,159 62,583
Weighted average
interest rates:
Fixed-rate............. 9.8% 10.3% 10.6% 10.3% 9.9%
ARMs................... 9.0% 9.4% 9.2% 9.4% 9.2%
Margin-ARMs............ 5.7% 6.9% 6.9% 7.1% 7.0%
Loan sales:
Loans sold through
whole loan
transactions.......... $ -- $28,822 $ 79,419 $190,472 $ 95,716(5)
Loans sold through
securitizations....... $ -- $ -- $ -- $ -- $ 99,132
Staffing and offices:
Total employees........ 53 105 178 333 462
Total wholesale account
executives............ 4 16 25 34 46
Total retail loan
officers.............. 6 20 24 58 105
Total regional
operating centers..... 2 3 3 3 3
Total wholesale sales
offices............... 1 1 5 12 18
Total retail sales
offices............... 2 5 8 20 30
</TABLE>
- --------
(1) Adjusted to reflect (i) the exercise of 304,501 warrants at an average
price of $3.50 per share, (ii) the sale of 545,000 shares of Common Stock
to Comerica at a price of $7.50 per share, less estimated expenses payable
by the Company, and (iii) the sale of 2,900,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $9.50 per
share (after deducting the underwriting discount and estimated expenses
payable by the Company), and the application of the estimated net proceeds
therefrom to reduce outstanding balances under the Company's warehouse
facilities and repay approximately $1.25 million outstanding under the
Company's revolving line of credit. Adjustments have not been made to
reflect the impact should the Underwriters' over-allotment option be
exercised.
(2) Includes $634,000 of loans originated through the Alternative Mortgage
Products Division.
(3) Excludes non-refundable fees and direct costs associated with the
origination or purchase of mortgage loans.
(4) Pro forma earnings (loss) per share has been computed by dividing pro forma
net earnings by the pro forma weighted average number of shares
outstanding. The pro forma weighted average number of shares includes all
options and warrants issued below the estimated initial public offering
price within one year prior to the filing of the Registration Statement for
the initial public offering and is calculated using the treasury stock
method. Historical earnings per share is not presented because it is not
indicative of the ongoing entity.
(5) Includes $2.8 million of loans repurchased and resold by the Company in the
first quarter of 1997.
9
<PAGE>
RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should consider
carefully the following factors, as well as the other information appearing
elsewhere in this Prospectus, in evaluating an investment in the Company. This
Prospectus may contain forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus.
LIMITED HISTORY OF OPERATIONS AND RAPID GROWTH
The Company commenced lending operations in February 1996 and has a limited
operating history. Although the Company has experienced rapid and substantial
growth in mortgage loan originations and total revenues since it commenced
operations, there can be no assurance that the Company can sustain these rates
of growth or that it will be able to create an infrastructure or recruit and
retain sufficient personnel to keep pace with a prolonged period of growth.
The inability of the Company to sustain or keep pace with its rate of growth
would have a material adverse effect on the Company's results of operations,
financial condition and business prospects. Unlike companies with longer and
more established operating histories, the historical financial and operating
performance of the Company may be of limited relevance in predicting future
performance. Since its incorporation in November 1995, the Company has
generated earnings for a limited period and there can be no assurance the
Company will generate earnings in the future. Further, the Company has
completed only two securitizations of its loans to date. There can be no
assurance that the Company will complete additional securitizations and the
failure to complete securitizations would have a material adverse effect on
the Company's results of operations, financial condition and business
prospects. See "Risk Factors--Ability to Sustain Growth."
LACK OF LOAN PERFORMANCE DATA
Prior to commencing its securitization program in February 1997, the Company
sold all of the loans it originated or purchased on a servicing-released
basis. The Company is unable to track the delinquency, loss and prepayment
experience of such loans in any meaningful fashion. Consequently, the Company
does not have representative historical delinquency, bankruptcy, foreclosure,
default or prepayment experience that may be referred to for purposes of
estimating the future delinquency, loss and prepayment experience of its
originated or purchased loans. Likewise, the Company does not have meaningful
delinquency, loss and prepayment data with respect to the loans included in
the Company's first and second securitizations, as these loans have been
outstanding for only a short period of time. In view of the Company's lack of
loan performance data, it is extremely difficult to validate the Company's
loss or prepayment assumptions used to calculate its gain on sale in
connection with its first and second securitizations or with future
securitizations. Any material difference between these assumptions and actual
performance could have a material adverse impact on the timing and/or receipt
of the Company's future revenues, the value of the residual interests held on
the Company's balance sheet and the Company's cash flow.
RAPID GEOGRAPHIC EXPANSION AND ABILITY TO SUSTAIN GROWTH
The Company has grown significantly since the commencement of lending
operations in February 1996 and no assurances can be given that the Company
can maintain this growth rate, successfully manage its infrastructure or
recruit and retain sufficient personnel. The Company intends to continue to
pursue a growth strategy for the foreseeable future, primarily through the
expansion of its Wholesale Division, Retail Division and Correspondent
Program. The growth strategy includes the planned geographic expansion of the
Wholesale and Retail Divisions through the opening of a substantial number of
new wholesale and retail sales offices in 1997 and the hiring of additional
personnel. Each of these expansion plans requires additional capital and human
resources and there can be no assurance that the Company will continue to
manage effectively its funding sources and information and operating systems,
that it will be able to successfully expand and operate such divisions and
programs profitably, that it will be able to identify and hire adequate
numbers of qualified employees to support its expansion plans or that
management will be able to manage the planned expansion effectively. In
addition,
10
<PAGE>
there can be no assurance that the Company will achieve its planned expansion
in a timely and cost-effective manner or, if achieved, that the expansion will
result in profitable operations. The failure of the Company to implement its
planned geographic expansion would have a material adverse effect on the
Company's results of operations, financial condition and business prospects.
The Company also plans to broaden its product offerings to include alternative
types of mortgage loans and other consumer loans. There can be no assurance
the Company can successfully broaden its product offerings and such failure to
broaden its product offerings could have a material adverse effect on the
Company's results of operations, financial condition and business prospects.
SUBPRIME MORTGAGE BANKING INDUSTRY
Lenders in the subprime mortgage banking industry make loans to borrowers
who have impaired or limited credit histories, limited documentation of income
and higher debt-to-income ratios than traditional mortgage lenders allow. The
subprime mortgage banking industry is subject to certain risks, including, but
not limited to, risks related to (i) making loans to lower credit grade
borrowers, (ii) increasing competition and (iii) the negative impact of
economic slowdowns or recessions. The failure of the Company to adequately
address the risks of subprime lending would have a material adverse impact on
the Company's results of operations, financial condition and business
prospects. See "Risk Factors--Risks Related to Lower Credit Grade Borrowers,
- --Economic Slowdown or Recession, --Competition."
RISKS RELATED TO LOWER CREDIT GRADE BORROWERS
Loans made to lower credit grade borrowers, including credit-impaired
borrowers, may entail a higher risk of delinquency and higher losses than
loans made to borrowers with better credit. Lower credit grade borrowers
include individuals who have impaired or limited credit profiles, including
open bankruptcies, limited documentation of income and/or higher debt-to-
income ratios than traditional mortgage lenders allow. Virtually all of the
Company's loans are made to borrowers who do not qualify for loans from
conventional mortgage lenders and approximately 20.5% of the loans originated
or purchased by the Company during the first quarter of 1997 were made to
borrowers in the Company's two lowest credit grade classifications. No
assurance can be given that the Company's underwriting criteria or methods
will afford adequate protection against the higher risks associated with loans
made to lower credit grade borrowers. In the event that loans sold by the
Company through securitizations or whole loan sales experience higher losses
than anticipated, the Company's results of operations, financial condition and
business prospects could be adversely affected. See "Business--Underwriting
Standards."
ACCESS TO FUNDING SOURCES
The Company requires access to short-term warehouse and aggregation credit
facilities in order to fund loan originations and purchases pending the
pooling and sale of such loans. The Company currently has an $85 million
warehouse line of credit led by First Bank National Association ("First
Bank"), which expires in May 1998, and has received a commitment letter from
First Bank proposing an increase in the Company's warehouse line limit to $150
million subject to the completion of the Offering. The Company intends to
agree to such proposal upon the closing of the Offering. The Company also has
a $175 million aggregation facility with Salomon Brothers ("Salomon"), which
may be terminated by Salomon on 28 days prior notice and a residual financing
agreement with Salomon pursuant to which Salomon will provide the Company with
financing upon the Company's retention of residual interests in
securitizations on which Salomon is the lead underwriter. The amount of
residual financing provided by Salomon upon each securitization is determined
pursuant to a formula set forth in the agreement and, in the event of a change
in the variables utilized by Salomon in determining such financing amount, the
Company may be required to repay some or all of any residual financing balance
outstanding. Any such repayment could have a material adverse effect on the
Company's results of operations, financial condition and business prospects.
The Company will need to add new credit facilities, as well as renew and
expand its existing credit facilities, in order to finance growing levels of
loan production and future securitization transactions.
Although the Company expects to be able to maintain and expand its existing
warehouse line of credit and aggregation facility, as well as its existing
residual financing arrangement, or to obtain replacement or additional
financing as the current arrangements expire or become fully utilized, there
can be no assurance that such
11
<PAGE>
financing will be available on favorable terms, if at all. In addition, there
can be no assurances that the Company will be able to continue to sell or
securitize its loans on favorable terms, if at all. To the extent that the
Company is unable to access adequate capital to fund its loan production or to
the extent that the Company is unable to access adequate capital to complete
the desired level of securitizations, the Company may have to curtail its loan
origination, purchase and securitization activities, which would have a
material adverse impact on the Company's ability to execute its growth and
operating strategies. The Company's results of operations, financial condition
and business prospects could suffer as a result. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition--Liquidity and
Capital Resources."
LIQUIDITY; NEGATIVE CASH FLOW
The Company's business requires substantial cash to support its operating
activities and growth plans. The Company's growing negative operating cash
flow position is primarily a function of its securitization strategy and rapid
growth. The Company records a residual interest in securitization and
recognizes a gain on sale when it effects a securitization, but only receives
the cash representing such gain over the life of the loans securitized. As a
result of its strategy to significantly grow its loan origination, purchase
and securitization programs, the Company expects that its operating uses of
cash will substantially exceed its operating sources of cash. This gap will
continue to increase to the extent that the Company's securitization volumes
increase, whether due to increased volumes of loan production or as a result
of a continued shift towards securitization in its loan sales mix. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Company intends to rely on secured and unsecured credit facilities
("credit facilities") and undertake public or private capital markets equity
or debt financings ("capital markets financings") in order to obtain funds to
finance the negative cash flow generated by its operations, securitization
strategy and expansion. There can be no assurances that the Company will be
able to renew, replace or add to its existing credit facilities, or that it
will be able to undertake capital markets financings on favorable terms, if at
all. If the Company is unable to obtain adequate financing, it may have to
curtail its growth plans or its securitization program. This may have a
significant adverse impact on the Company's results of operations, financial
condition and business prospects. In addition, to the extent that the Company
is unable to renew or expand its access to credit facilities, the Company may
have to undertake larger and/or more frequent capital markets financings than
anticipated. Capital markets financings may result in greater than anticipated
interest expense and shares outstanding, which may have a dilutive impact on
operating earnings or have a negative effect on the Company's financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
DEPENDENCE ON SECURITIZATIONS FOR FUTURE EARNINGS
The Company has completed only two securitizations to date and there can be
no assurance that the Company will complete additional securitizations. The
Company plans to pool and sell through securitizations a majority of the loans
it originates or purchases and expects that the gain on sale from such
securitizations will represent a significant portion of the Company's future
revenues and net earnings. The Company's ability to complete securitizations
of its loans will depend on a number of factors, including conditions in the
securities markets generally, conditions in the asset-backed securities market
specifically, the performance of the Company's portfolio of securitized loans
and the Company's ability to obtain credit enhancement. If the Company were
unable to securitize profitably a sufficient number of its loans in a
particular quarter, then the Company's revenues for such quarter would
decline, which could result in lower earnings or a loss reported for such
quarter. In addition, because the Company expects to use the proceeds
generated by securitizations to repay amounts outstanding under its warehouse
credit facility and aggregation facility, delays in closing a securitization
could adversely affect the Company's ability to access additional cash under
its credit facilities in order to fund additional loan origination and
purchases and could increase the Company's interest rate risk by increasing
the warehousing period for its loans.
12
<PAGE>
The Company relies on credit enhancements provided by monoline insurance
companies to guarantee senior certificates in the securitization trusts. Such
credit enhancements enable the Company to obtain an "AAA/Aaa" rating for such
senior certificates. If such insurance companies were unwilling to guarantee
the senior certificates in the Company's loan pools, the Company might be
unable to continue to sell its loans through securitizations, which could have
a material adverse effect on the Company's results of operations, financial
condition and business prospects. Although alternative structures to
securitization trusts may be available, there can be no assurances that the
Company can access these structures or that these structures will be
economically viable for the Company. The willingness of insurance companies to
credit enhance securitizations may also be adversely affected by any future
poor performance of the Company's securitization trusts or the securitization
trusts of others. The inability of the Company to complete future
securitizations for any reason would have a material adverse effect on the
Company's results of operations, financial condition and business prospects.
DEPENDENCE ON WHOLE LOAN SALES FOR FUTURE EARNINGS
The gain on sale generated by whole loan sales also represents a source of
the Company's future earnings. In 1996, the Company sold all of its loan
originations and purchases in the secondary market to a limited number of
institutional purchasers and plans to sell a significant number of loans it
originates or purchases through whole loan sales in the future. There can be
no assurance that such purchasers will continue to purchase the Company's
loans and to the extent that the Company could not successfully replace such
loan purchasers, the Company's results of operations, financial condition and
business prospects could be materially and adversely affected. Further,
adverse conditions in the asset-backed securitization market could negatively
impact the ability of the Company to complete whole loan sales, as many of the
Company's whole loan purchasers securitize the loans they purchase from the
Company.
RESIDUAL INTERESTS IN SECURITIZATIONS
The Company plans to derive a substantial portion of its revenue and
earnings by recognizing gain on sale of loans through securitizations. In a
securitization, the Company sells loans that it has originated or purchased to
a trust for a cash purchase price and an interest in the loans securitized
called residual interests. Management believes that it has made reasonable
estimates of the present value of the residual interests on its balance sheet.
The Company projects the expected cash flows over the life of the residual
interests, using prepayment and default assumptions that market participants
would use for similar financial instruments that are subject to prepayment,
credit and interest rate risks. The Company then determines the present value
of these cash flows using an interest rate commensurate with the risks
involved. If the Company's actual experience differs materially from the
assumptions used in the determination of the present value of the residual
interests, future cash flows and earnings could be negatively impacted. The
Company could also be required to reduce the fair value of its residual
interests on its balance sheet, which could decrease the residual financing
available to the Company under the Salomon residual financing facility.
Furthermore, because the Company does not have meaningful loan performance
data, the Company's assumptions are not based on the actual performance of its
loans but on available historical loss data for comparable portfolios of loans
and the specific characteristics of the loans included in the Company's
securitizations. To the Company's knowledge, there is currently no active
market for the sale of these residual interests. No assurance can be given
that the residual interests could be sold at their stated value, if at all.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Loan Sales and Securitizations."
The documents governing the Company's February and May 1997 securitizations
require the trustee to obtain certain over-collateralization levels through
initial funding or retention of residual interest distributions, which reduces
the principal balances of the senior certificates issued by the related trust
while diverting cash that would otherwise flow to the Company. The Company
continues to be subject to the risks of default and foreclosure following the
sale of loans through securitization to the extent such losses reduce the
residual interest distributions. If losses exceed the current period residual
interest distributions, an insurance policy will fund the losses and the
insurer will be reimbursed from future residual interest distributions. Over-
collateralization levels could change throughout the life of the
securitization based upon the loss and delinquency experience and other
13
<PAGE>
loan performance variables with respect to the securitized pool of loans,
which could negatively impact cash flows to the Company. Any such change in
the Company's cash flows could have a material adverse effect on the Company's
results of operations, financial condition and business prospects. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Loan Sales and Securitizations."
DEPENDENCE ON WHOLESALE BROKERS
The Company depends primarily on independent mortgage brokers and, to a
lesser extent, on correspondent lenders, for the origination and purchase of
its wholesale mortgage loans, which constitute a significant portion of the
Company's loan production. These independent mortgage brokers deal with
multiple lenders for each prospective borrower. The Company competes with
these lenders for the independent brokers' business on pricing, service, loan
fees, costs and other factors. The Company's competitors also seek to
establish relationships with such brokers, who are not obligated by contract
or otherwise to do business with the Company. The Company's future results of
operations and financial condition may be vulnerable to changes in the volume
and cost of its wholesale loans resulting from, among other things,
competition from other lenders and purchasers of such loans.
ELIMINATION OF LENDER PAYMENTS TO BROKERS
Class-action lawsuits have been filed against a number of mortgage lenders
alleging that such lenders have violated the Federal Real Estate Settlement
Procedures Act ("RESPA") by making certain payments to independent mortgage
brokers. These lawsuits have generally been filed on behalf of a purported
nationwide class of borrowers and allege that payments made by a lender to a
broker in addition to payments made by the borrower to a broker are prohibited
by RESPA, and are therefore illegal. If these cases are resolved against the
lenders, it may cause an industry-wide change in the way independent mortgage
brokers are compensated. The Company's broker compensation programs permit
such payments. Future regulatory interpretations or judicial decisions may
require the Company to change its broker compensation programs or subject it
to material monetary judgments or other penalties. Any such changes or
penalties may have a material adverse effect on the Company's results of
operations, financial condition and business prospects. See "Business--
Regulation."
ECONOMIC SLOWDOWN OR RECESSION
The risks associated with the Company's business are more acute during
periods of economic slowdown or recession because these periods may be
accompanied by decreased demand for consumer credit and declining real estate
values. Declining real estate values reduce the ability of borrowers to use
home equity to support borrowings by negatively affecting loan-to-value ratios
of the home equity collateral. In addition, because the Company makes a
substantial number of loans to credit-impaired borrowers, the actual rates of
delinquencies, foreclosures and losses on such loans could be higher during
economic slowdowns. Any sustained period of increased delinquencies,
foreclosures or losses could adversely affect the Company's ability to sell
loans or the prices the Company receives for its loans.
CHANGES IN INTEREST RATES
The Company's profitability may be directly affected by changes in interest
rates, which affect the Company's ability to earn a spread between the
interest received on its loans and its funding costs. The revenues of the
Company may be adversely affected during any period of unexpected or rapid
change in interest rates. For example, a substantial and sustained increase in
interest rates could adversely affect the demand for the Company's products.
In addition, the Company's adjustable-rate mortgage loans have a life rate cap
above which the interest rate on the loan may not rise. In the event of
general interest rate increases, the rate of interest on these mortgage loans
could be limited, while the rate payable on the senior certificates
representing interests in a securitization trust into which such loans are
sold may be uncapped, which would reduce the amount of cash the Company
receives over the life of its residual interests, thereby requiring the
Company to reduce the fair value of such residual interests. Furthermore, a
significant decrease in interest rates could increase the rate at which
14
<PAGE>
loans are prepaid, which would also reduce the amount of cash the Company
receives over the life of its residual interests. Either of these events could
require the Company to reduce the fair value of its residual interests, which
would have a material adverse effect on the Company's results of operations,
financial condition and business prospects.
Adjustable-rate mortgage loans ("ARMs") (which include loans that have
initial fixed-rate terms of up to three years) originated or purchased by the
Company totaled $188.0 million in principal during the first quarter of 1997.
Substantially all such ARMs included an initial interest rate, or "teaser"
rate, significantly below the fully indexed interest rate at origination.
Borrowers may encounter financial difficulties as a result of increases in the
interest rate over the life of these loans or may prepay such loans earlier
than expected, which would reduce the amount of cash the Company receives over
the life of its residual interests and could require the Company to reduce the
fair value thereof, which would have a material adverse effect on the
Company's results of operations, financial condition and business prospects.
During periods of rising interest rates, the value and profitability of the
Company's loans may be negatively impacted, from the date of origination or
purchase until the date the Company sells or securitizes such loans. The
market values of fixed-rate mortgage loans are more sensitive to changes in
market interest rates than are the market values of ARMs. The Company from
time to time may use various hedging strategies to provide a level of
protection against such interest rate risks on its fixed-rate mortgage loans.
While the Company believes its hedging strategies are cost-effective and
provide some protection against interest rate risks, no hedging strategy can
completely protect the Company from such risks. No assurance can be given that
such hedging transactions will offset the risks of changes in interest rates,
and it is possible that there will be periods during which the Company could
incur losses after accounting for its hedging activities. Further, the Company
does not believe that hedging against the interest rate risks associated with
ARMs is cost effective and the Company does not utilize the hedging strategies
described above with respect to these loans, which constitute the majority of
the Company's loan production. See "Business--Interest Rate Risk Management."
QUARTERLY FLUCTUATIONS IN EARNINGS
The Company's revenues and net earnings have fluctuated in the past and are
expected to fluctuate in the future as a result of a number of factors,
including the size and timing of securitizations and whole loan sales,
expansion costs incurred by the Company and the volume of loan originations
and purchases. If the Company were unable to securitize profitably a
sufficient number of its loans in a particular quarter, or were unable to
complete a sufficient number of whole loan sales, then the Company's revenues
for such quarter would decline, which could result in lower earnings or a loss
reported for such quarter and have a material adverse effect on the Company's
results of operations, financial condition and business prospects.
COMPETITION
The Company faces intense competition in the business of originating,
purchasing and selling mortgage loans. Competition among industry participants
can take many forms, including convenience in obtaining a loan, customer
service, marketing and distribution channels, amount and term of the loan,
loan origination fees and interest rates. Many of the Company's competitors
are substantially larger and have considerably greater financial, technical
and marketing resources than the Company. The Company's competitors in the
industry include other consumer finance companies, mortgage banking companies,
commercial banks, credit unions, thrift institutions, credit card issuers and
insurance companies. In the future, the Company may also face competition from
government-sponsored entities, such as the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation. These government-
sponsored entities may enter the subprime mortgage market and target potential
customers in the Company's highest credit grades, who constitute a significant
portion of the Company's customer base.
The current level of gains realized by the Company and its competitors on
the sale of subprime mortgage loans could attract additional competitors into
this market. Certain large finance companies and conforming mortgage
originators have announced their intention to originate non-conforming
mortgage loans, and some of
15
<PAGE>
these large mortgage companies, thrifts and commercial banks have begun
offering non-conforming loan products to customers similar to the borrowers
targeted by the Company. In addition, establishing a broker-sourced loan
business requires a substantially smaller commitment of capital and human
resources than a direct-sourced loan business. This relatively low barrier to
entry permits new competitors to enter this market quickly and compete with
the Company's wholesale lending business.
Additional competition may lower the rates the Company can charge borrowers,
thereby potentially lowering the gain on future loan sales. Increased
competition may also reduce the volume of the Company's loan origination and
loan sales and increase the demand for the Company's experienced personnel and
the potential that such personnel will leave the Company for the Company's
competitors.
Fluctuations in interest rates and general and localized economic conditions
may also affect the competition the Company faces. Competitors with lower
costs of capital have a competitive advantage over the Company. During periods
of declining rates, competitors may solicit the Company's customers to
refinance their loans. In addition, during periods of economic slowdown or
recession, the Company's borrowers may face financial difficulties and be more
receptive to the offers of the Company's competitors to refinance their loans.
The Company plans to expand into new geographic markets, where it will face
additional competition from lenders already established in these markets.
There can be no assurance that the Company will be able to successfully
compete with these lenders.
CONTINGENT RISKS
Although the Company sells substantially all of the mortgage loans it
originates or purchases, the Company retains some degree of credit risk on
substantially all of the loans it sells. During the period of time that the
loans are held for sale, the Company is subject to the various business risks
associated with the lending business, including borrower default, foreclosure
and the risk that a rapid increase in interest rates would result in a decline
of the value of loans held for sale to potential purchasers.
In connection with its securitizations, the Company is required to
repurchase or substitute loans in the event of a breach of a representation or
warranty made by the Company. While the Company may have recourse to the
sellers of loans it purchased, there can be no assurance of the sellers'
abilities to honor their respective obligations to the Company. Likewise, in
connection with its whole loan sales, the Company enters agreements which
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 early default on such mortgage loans. The
remedies available to a purchaser of mortgage loans from the Company are
generally broader than those available to the Company against the sellers of
such loans, and if a purchaser enforces its remedies against the Company, the
Company may not be able to enforce whatever remedies the Company may have
against such sellers.
In addition, borrowers, purchasers of the Company's loans, monoline
insurance carriers and trustees in the Company's securitization may make
claims against the Company arising from alleged breaches of fiduciary
obligations, misrepresentations, errors and omissions of employees, officers
and agents of the Company, including appraisers, incomplete documentation and
failure by the Company to comply with various laws and regulations applicable
to its business. Any claims asserted in the future may result in liabilities
or legal expenses that could have a material adverse effect on the Company's
results of operations, financial condition and business prospects.
RISKS ASSOCIATED WITH SERVICING
The Company currently contracts for the servicing of all loans it
originates, purchases and holds for sale with Advanta pursuant to an interim
servicing agreement (the "Advanta Interim Agreement"). In addition, Advanta
subservices each public securitization of the Company's loans pursuant to the
related pooling and
16
<PAGE>
servicing agreement and a corresponding subservicing agreement between the
Company and Advanta (the "Advanta Securitization Agreement"). As with any
external service provider, the Company is subject to risks associated with
insufficient or untimely services. Many of the Company's borrowers require
notices and reminders to keep their loans current and to prevent delinquencies
and foreclosures. Any failure of the servicer to adequately service the
Company's loans could cause a substantial increase in the Company's
delinquency or foreclosure rate, which could adversely affect the Company's
ability to access equity or debt capital resources, and which could therefore
have a material adverse effect on the Company's results of operations,
financial condition and business prospects.
Under the Advanta Interim Agreement and the Advanta Securitization
Agreement, if the Company terminates either of such agreements without cause
or transfers the servicing of any amount of the mortgage loans serviced by
Advanta to another servicer, the Company must pay Advanta certain penalties,
fees and costs. Depending on the size of the Company's loan portfolio serviced
by Advanta at any point in time, the termination or transfer penalties that
the Company would be obligated to pay Advanta may be substantial. With respect
to mortgage loans securitized by the Company, the Company will not be able to
terminate the servicer without the approval of the trustee for such
securitization.
On March 17, 1997, Advanta Corp., the parent of Advanta, announced that it
was considering strategic alternatives, including the possibility of selling
all or part of its businesses, as a result of increased losses from credit
card loans. Although the management of Advanta Corp. stated that its mortgage
business was performing well, there can be no assurance that a sale by Advanta
Corp. of all or some of its businesses, including its Advanta servicing
operations, would not have an adverse effect upon the servicing of the
Company's loans.
The Company intends to establish in-house servicing operations to service
the loans it originates and purchases and to engage Comerica to perform
specified servicing functions. See "Prospectus Summary--Recent Developments--
Comerica Investment and Strategic Relationship." There can be no assurance
that the Company will anticipate and respond effectively to all of the demands
that servicing its loans will have on the Company's management, infrastructure
and personnel. The failure of the Company to meet the challenges of servicing
its loans could have a material adverse effect on the Company's results of
operations, financial condition and business prospects. The Company will also
remain subject to risks associated with insufficient or untimely services from
Comerica as an external service provider. In addition, any change in servicing
operations may result in greater delinquencies and losses on related loans,
which would adversely impact the value of the residual interests held by the
Company in connection with its securitizations.
RISKS ASSOCIATED WITH HIGH LOAN-TO-VALUE LOAN PRODUCTS
The Company recently commenced loan originations through its Alternative
Mortgage Products Division which offers loans to borrowers meeting
conventional mortgage lending standards and offers a broad selection of second
mortgage products, including loans with loan-to-value ratios of up to 125%.
Although the Company acts as a broker or correspondent in the sale of all of
its high loan-to-value loan products, rather than selling such loans through
securitizations or servicing-retained sales, the Company is subject to the
risk of borrower default and foreclosure on these loans during the period of
time that the loans are held for sale or if the Company is required to
repurchase any such loans. To the extent that borrowers with high loan-to-
value ratios default on their loan obligations while the loans are held by the
Company, the Company would be unable to rely on equity in the collateral
property to reduce the Company's loss exposure. Under these circumstances, the
Company might be required to absorb any losses and such absorption, if the
losses exceed the Company's reserves for such losses, could have a material
adverse effect on the Company's financial condition, results of operations and
business prospects.
DEPENDENCE ON A LIMITED NUMBER OF KEY PERSONNEL
The Company is dependent upon the continued services of Robert K. Cole, Brad
A. Morrice, Edward F. Gotschall and Steven G. Holder, the Chief Executive
Officer, President, Chief Operating Officer--Finance/Administration and Chief
Operating Officer--Production/Operations of the Company, respectively. The
loss of their services could have a material adverse effect on the Company's
results of operations, financial
17
<PAGE>
condition and business prospects. The Company currently has a $1 million key-
man life insurance policy for each of these executive officers. In addition,
the Company has entered into employment agreements with Messrs. Cole, Morrice,
Gotschall and Holder. See "Management--Executive Compensation."
CONCENTRATION OF OPERATIONS IN CALIFORNIA
Approximately 49.8% of the dollar volume of loans originated or purchased by
the Company during the first quarter of 1997 were secured by properties
located in California. Although the Company has expanded its office network
outside California and plans further expansion outside California in the
future, the Company's sales loan originations and purchases may remain
concentrated in California for the foreseeable future. Consequently, the
Company's results of operations, financial condition and business prospects
are dependent on the California economy and its residential real estate
market. Over the last several years, the California economy experienced an
economic slowdown or recession and a sustained decline in the California real
estate market. Residential real estate market declines may adversely affect
the values of the properties securing mortgage loans. A decline in the value
of the mortgaged properties may result in the principal balances of such
loans, together with any primary financing on the mortgaged properties, to
equal or exceed the value of the mortgaged properties. In addition, California
is vulnerable to certain natural disaster risks, such as earthquakes and
mudslides. These disasters are not typically covered by the standard hazard
insurance policies maintained by borrowers and may adversely impact borrowers'
ability to repay loans made by the Company. The existence of adverse economic
conditions or the occurrence of such natural disasters in California could
have a material adverse effect on the Company's results of operations,
financial condition and business prospects. See "Business--Geographic
Distribution."
ENVIRONMENTAL LIABILITIES
The Company may acquire real property securing loans that are in default and
there is a risk that hazardous substances or waste, contaminants or pollutants
could be discovered on such properties after the Company acquires them. The
Company might be required to remove such substances from the affected
properties at its sole cost and expense, and the cost of such removal may
substantially exceed the value of the affected properties or the loans secured
by such properties. Furthermore, the Company may not have adequate remedies
against the prior owners or other responsible parties to recover its costs.
Finally, the Company may find it difficult or impossible to sell the affected
real properties either prior to or following any such removal.
LEGISLATIVE OR REGULATORY RISKS
The consumer financing industry is a highly regulated industry. The
Company's business is subject to extensive and complex rules and regulations
of, and examinations by, various federal, state and local government
authorities. These rules and regulations impose obligations and restrictions
on the Company's loan originations, credit activities and secured
transactions. In addition, these rules limit the interest rates, finance
charges and other fees the Company may assess, mandate extensive disclosure to
the Company's customers, prohibit discrimination and impose multiple
qualification and licensing obligations on the Company. The Company's loan
origination activities are subject to the laws and regulations in each of the
states in which those activities are conducted. For example, state usury laws
limit the interest rates the Company can charge on its loans. The Company's
lending activities are also subject to various federal laws, including the
Truth in Lending Act, the Homeownership and Equity Protection Act of 1994, the
Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Real Estate
Settlement Procedures Act and the Home Mortgage Disclosure Act. Failure to
comply with any of these requirements may result in, among other things, loss
of approved status, demands for indemnification or mortgage loan repurchases,
certain rights of rescission for mortgage loans, class action lawsuits,
administrative enforcement actions and civil and criminal liability.
Because the Company's business is highly regulated, the laws, rules and
regulations applicable to the Company are subject to regular modification and
change. In addition, various laws, rules and regulations currently are
proposed, which, if adopted, could impact the Company. There can be no
assurance that these
18
<PAGE>
proposed laws, rules and regulations, or other such laws, rules or
regulations, will not be adopted in the future. Such adoption could make
compliance much more difficult or expensive, restrict the Company's ability to
originate, broker, purchase or sell loans, further limit or restrict the
amount of commissions, interest and other charges earned on loans originated,
brokered, purchased or sold by the Company, or otherwise adversely affect the
results of operations, financial condition and business prospects of the
Company.
Government officials, including members of Congress, have from time to time
suggested the elimination of the mortgage interest deduction for federal
income tax purposes. 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 consumer financing, could be eliminated or
seriously impaired by such government action. Accordingly, the reduction or
elimination of these tax benefits could have a material adverse effect on the
demand for loans of the kind offered by the Company.
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation (the "Certificate of
Incorporation") and its Bylaws (the "Bylaws") include provisions that could
delay, defer or prevent a takeover attempt that may be in the best interest of
stockholders. These provisions include the ability of the Board of Directors
to issue up to 7,500,000 shares of preferred stock (the "Preferred Stock")
without any further stockholder approval, a classified Board of Directors and
requirements that (i) stockholders give advance notice with respect to certain
proposals they may wish to present for a stockholder vote, (ii) stockholders
act only at annual or special meetings and (iii) two-thirds of all directors
approve a change in the number of directors of the Company. Issuance of
Preferred Stock could also discourage bids for the Common Stock at a premium
as well as create a depressive effect on the market price of the Common Stock.
In addition, under certain conditions, Section 203 of the Delaware General
Corporation Law (the "DGCL") would prohibit the Company from engaging in a
"business combination" with an "interested stockholder" (in general, a
stockholder owning 15% or more of the Company's outstanding voting stock) for
a period of three years unless the business combination is approved in a
prescribed manner. See "Description of Capital Stock."
CONTROL BY CERTAIN STOCKHOLDERS
Upon completion of the Offering, the existing stockholders of the Company
will beneficially own an aggregate of approximately 74.8% of the outstanding
shares of Common Stock (approximately 71.5% following the completion of the
Offering assuming the exercise of the Underwriters' over-allotment option in
full). Accordingly, such persons, if they were to act in concert, would have
majority control of the Company, with the ability to approve certain
fundamental corporate transactions (including mergers, consolidations and
sales of assets) and to elect all members of the Board of Directors. See
"Beneficial Ownership of Securities and Selling Stockholders" and
"Management--Board of Directors."
POSSIBLE VOLATILITY OF STOCK PRICE; EFFECT OF FUTURE OFFERINGS ON MARKET PRICE
OF COMMON STOCK
The market price of the Common Stock may experience fluctuations that are
unrelated to the operating performance of the Company. In particular, the
price of the Common Stock may be affected by general market price movements as
well as developments specifically related to the consumer finance industry and
the financial services sector such as, among other things, interest rate
movements, quarterly variations or changes in financial estimates by
securities analysts and a significant reduction in the price of the stock of
another participant in the consumer finance industry. In addition, the
Company's operating income on a quarterly basis is significantly dependent
upon the successful completion of the Company's loan sales and securitizations
in the market, and the Company's inability to complete these transactions in a
particular quarter may have a material adverse impact on the Company's results
of operations for that quarter and could, therefore, negatively impact the
price of the Common Stock.
The Company may increase its capital by making additional private or public
offerings of its Common Stock, securities convertible into its Common Stock,
preferred stock or debt securities. The actual or perceived
19
<PAGE>
effect of such offerings may be the dilution of the book value or earnings per
share of the Common Stock outstanding, which may result in the reduction of
the market price of the Common Stock.
ABSENCE OF PUBLIC MARKET
There is currently no trading market for the Common Stock and there can be
no assurance that an active trading market for the Common Stock will develop.
Although an application has been made to have the Common Stock approved for
quotation on Nasdaq, there can be no assurance that an active public trading
market for the Common Stock will develop after the Offering or that, if
developed, it will be sustained. The public offering price of the Common Stock
offered hereby was determined by negotiations among the Company and
representatives of the Underwriters and may not be indicative of the price at
which the Common Stock will trade after the Offering. See "Underwriting."
Consequently, there can be no assurance that the market price for the Common
Stock will not fall below the public offering price.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
13,892,373 shares of Common Stock. The 3,500,000 shares of Common Stock
offered in the Offering (4,025,000 shares if the Underwriters' over-allotment
option in the Offering is exercised in full) will be immediately eligible for
sale in the public market without restriction beginning on the date of this
Prospectus. Future sales of substantial amounts of Common Stock after the
Offering, or the perception that such sales could occur, could adversely
affect the market price of the Common Stock. No prediction can be made as to
the effect, if any, that future sales of shares, or the availability of shares
for further sale, will have on the market price of the Common Stock.
Additionally, 2,000,000 shares of Common Stock will be reserved for issuance
under the Stock Option Plan as of the closing of the Offering, including
outstanding options to acquire 1,267,520 shares which have been granted and
options to acquire 441,500 shares which will be granted upon the closing of
the Offering. In addition, options to acquire 127,500 shares of Common Stock
were granted or will be granted to two executive officers and one non-employee
director of the Company outside the Stock Option Plan and 333,333 shares of
Common Stock will be reserved for issuance under the Comerica warrants, of
which warrants to purchase 100,000 shares have been issued. The Company
intends to file a registration statement under the Securities Act to register
such shares of Common Stock reserved for issuance under its Stock Option Plan,
thus permitting the resales of such shares by non-affiliates in the public
market without restriction under the Securities Act of 1933, as amended (the
"Securities Act"). Such registration statement is expected to be filed shortly
after the date of this Prospectus.
The remaining 10,392,373 shares (10,099,873 shares if the Underwriters'
over-allotment option in the Offering is exercised in full) of Common Stock
held by the existing stockholders of the Company are "restricted securities"
as that term is defined in Rule 144 promulgated under the Securities Act and
are eligible for sale subject to the holding period, volume and other
limitations imposed thereby. In addition, certain existing stockholders have
registration rights with respect to shares of Common Stock which they own or
have a right to acquire.
The Company, certain existing stockholders of the Company and the executive
officers and directors of the Company have agreed with the Underwriters that,
subject to certain conditions, for a period of 180 days following the
commencement of this Offering, they will not sell, contract to sell or
otherwise dispose of any shares of Common Stock or rights to acquire such
shares (other than pursuant to employee plans) without the prior written
consent of Montgomery Securities on behalf of the Underwriters. See
"Underwriting."
SUBSTANTIAL AND IMMEDIATE DILUTION
The initial public offering price is substantially higher than the net
tangible book value per share of Common Stock. Investors purchasing shares of
Common Stock in the Offering will be subject to immediate dilution of $6.87
per share in net tangible book value. See "Dilution."
20
<PAGE>
ABSENCE OF DIVIDENDS
The Company does not anticipate declaring or paying any cash dividends on
the Common Stock following the Offering. Future dividend policy will depend on
the Company's earnings, capital requirements, financial condition and other
factors considered relevant by the Board of Directors. In addition, the
Company is prohibited under the terms of its current warehouse facility from
paying dividends without the prior approval of First Bank. See "Dividend
Policy" and "Management's Discussion and Analysis of Financial Condition and
Results of Operation--Liquidity and Capital Resources."
FORWARD-LOOKING STATEMENTS
This Prospectus may contain forward-looking statements that may be
identified by the use of forward-looking terminology such as "may," "will,"
"should," "expect," "anticipate," "estimate" or "continue" or the negative
thereof or other variations thereon or comparable terminology. The matters set
forth under "Risk Factors" constitute cautionary statements identifying
important factors with respect to any forward-looking statements, including
certain risks and uncertainties, that could cause actual results to differ
materially from those in such forward-looking statements.
21
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Common
Stock offered hereby (assuming an initial public offering price of $9.50 per
share and after deducting the estimated underwriting discount and expenses
payable by the Company), are estimated to be approximately $24.8 million. The
Company intends to apply the net proceeds from the Offering in the following
manner: (i) to fund loan originations and purchases; (ii) to fund
securitization transaction costs; and (iii) for general corporate purposes,
including costs related to expansion of the Retail and Wholesale Divisions.
Until the time that such proceeds are utilized, the net proceeds will be
invested in high quality, short-term investment instruments such as short-term
corporate investment grade or United States Government interest-bearing
securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain any earnings for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future. In addition, the Company is prohibited from paying dividends under its
current warehouse facility without the prior approval of First Bank. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DILUTION
As of March 31, 1997, the Company had a net tangible book value of $11.8
million, or $1.07 per share of Common Stock, after adjusting the net tangible
book value and number of shares outstanding to reflect the exercise of
warrants to purchase 304,501 shares of Common Stock and the sale of 545,000
shares of Common Stock of the Company to Comerica. Net tangible book value per
share is determined by dividing the net tangible book value of the Company
(total tangible assets less total liabilities) by the number of shares of
Common Stock outstanding as of March 31, 1997. After giving effect to the sale
by the Company of the shares of Common Stock offered by the Company hereby at
an assumed initial public offering price per share of $9.50 (after deducting
the estimated underwriting discount and offering expenses), the Company's net
tangible book value as of March 31, 1997 would have been $36.6 million or
$2.63 per share of Common Stock. This represents an immediate increase in net
tangible book value of $1.56 per share to existing stockholders and an
immediate dilution of $6.87 per share to new investors purchasing shares in
the Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $9.50
Pro forma net tangible book value per share before the Offer-
ing......................................................... $1.07
Increase per share attributable to new investors............. 1.56
-----
Pro forma net tangible book value per share after the Offer-
ing........................................................... 2.63 2.63
----- -----
Dilution per share to new investors............................ $6.87
=====
</TABLE>
22
<PAGE>
The following table sets forth on a pro forma basis, as of March 31, 1997,
the relative investments of all existing stockholders and new investors
purchasing shares of Common Stock from the Company in the Offering. The
calculations are based on an assumed initial public offering price of $9.50
per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1)...... 10,992,373 79.1% $ 8,303,254 23.2% $0.76
New investors.................. 2,900,000 20.9 27,550,000 76.8 9.50
---------- ----- ----------- ----- -----
Total...................... 13,892,373 100.0% $35,853,254 100.0% $2.58
========== ===== =========== ===== =====
</TABLE>
- --------
(1) Sales by the Selling Stockholder in the Offering will reduce the number of
shares held by existing stockholders to 10,392,373 shares, or 74.8% of the
total shares of Common Stock outstanding (10,099,873 shares, or 71.5% of
the total shares of Common Stock if the Underwriters' over-allotment
option is exercised in full), and will increase the number of shares held
by new investors to 3,500,000 shares, or 25.2% of the total shares of
Common Stock outstanding (4,025,,000 shares, or 28.5% of the total shares
of Common Stock if the Underwriters' over-allotment option is exercised in
full) after the Offering.
The foregoing table excludes (i) 2,000,000 shares reserved for issuance
under the Stock Option Plan as of the closing of the Offering, including
outstanding options to acquire 1,267,520 shares at a weighted average exercise
price of $5.17 per share which have been granted under the Stock Option Plan
and options to acquire 441,500 shares which will be granted upon the closing
of the Offering, (ii) options to acquire 120,000 shares at a weighted average
exercise price of $3.50 per share which have been granted to two executive
officers of the Company outside the Stock Option Plan, (iii) options to
acquire 7,500 shares at the initial public offering price which will be
granted to two non-employee directors of the Company outside the Stock Option
Plan, and (iv) 333,333 shares of Common Stock that will be reserved for
issuance pursuant to the Comerica warrants at the initial public offering
price, of which warrants to purchase 100,000 shares have been issued. To the
extent that any options of the Company are exercised, there will be further
dilution to new investors. See "Management--Stock Option Plan."
23
<PAGE>
CAPITALIZATION
The following table sets forth the pro forma capitalization of the Company
at March 31, 1997, after giving effect to the exercise of 304,501 warrants,
the sale of 545,000 shares of Common Stock to Comerica, the issuance of the
Common Stock offered hereby at an assumed public offering price of $9.50 per
share (after deducting the estimated underwriting discount and offering
expenses) and the application of the net proceeds to reduce borrowings under
warehouse and aggregation lines of credit and to repay approximately $1.25
million outstanding under the Company's revolving line of credit. This table
should be read in conjunction with the Company's Financial Statements and the
Notes thereto.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
--------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
DEBT:
Borrowings under warehouse and aggregation lines of
credit................................................. $110,534 $ 81,909
Residual financing...................................... 7,248 7,248
Other borrowings........................................ 3,119 1,869
-------- --------
Total debt............................................ 120,901 91,026
-------- --------
STOCKHOLDERS EQUITY:
Preferred stock, $0.01 par value; 7,320,000 shares
authorized and 7,500,000 shares authorized pro forma as
adjusted; 5,820,000 shares issued and outstanding and
none issued and outstanding pro forma as adjusted...... $ 58 $ --
Common Stock, $0.01 par value per share; 12,963,778
shares authorized and 45,000,000 shares authorized pro
forma as adjusted; 528,618 shares issued and
outstanding and 13,892,373 shares issued and
outstanding pro forma as adjusted(1)................... 6 139
Additional paid-in capital.............................. 3,086 32,886
Retained earnings, restricted........................... 3,600 3,600
-------- --------
Total stockholders' equity............................ 6,750 36,625
-------- --------
Total capitalization.................................. $127,651 $127,651
======== ========
</TABLE>
- --------
(1) Excludes (i) 2,000,000 shares reserved for issuance under the Stock Option
Plan as of the closing of the Offering, including outstanding options to
acquire 1,267,520 shares at a weighted average exercise price of $5.17 per
share which have been granted and options to acquire 441,500 shares which
will be granted upon the closing of the Offering, (ii) options to acquire
120,000 shares at a weighted average exercise price of $3.50 per share
which have been granted to two executive officers of the Company outside
the Stock Option Plan, (iii) options to acquire 7,500 shares at the
initial public offering price which will be granted to two non-employee
directors of the Company outside the Stock Option Plan, and (iv) 333,333
shares of Common Stock that will be reserved for issuance pursuant to the
Comerica warrants at the initial public offering price, of which warrants
to purchase 100,000 shares have been issued.
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated statements of operations and balance
sheet data as of December 31, 1996 and 1995 and for the year ended December 31,
1996 and for the period from November 17, 1995 (inception) to December 31, 1995
have been derived from the Company's financial statements audited by KPMG Peat
Marwick LLP, independent auditors, whose report with respect thereto appears
elsewhere herein. The following selected statements of operations and balance
sheet data as of March 31, 1996, June 30, 1996, and September 30, 1996 and
March 31, 1997 and for the quarters ended March 31, 1996, June 30, 1996,
September 30, 1996, December 31, 1996 and March 31, 1997 have been derived from
the unaudited financial statements of the Company and include all adjustments,
consisting only of normal recurring accruals, which management considers
necessary for a fair presentation of such financial information for those
periods. Such selected financial data should be read in conjunction with those
financial statements and the notes thereto and with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" also included
elsewhere herein.
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM INCEPTION
(NOVEMBER 17, 1995) FOR THE FOR THE QUARTER ENDED
THROUGH YEAR ENDED -----------------------------
DECEMBER 31, 1995 DECEMBER 31, 1996 MARCH 31, 1996 MARCH 31, 1997
--------------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Gain on sale of loans.. $ -- $11,630 $ -- $10,012
Servicing income....... -- 29 -- 302
Interest income........ 14 2,846 39 2,271
----- ------- ------ -------
Total revenues......... 14 14,505 39 12,585
Operating Expenses...... 95 12,200 899 8,539
----- ------- ------ -------
Earnings (loss) before
income taxes (benefit). (81) 2,305 (860) 4,046
Income taxes (benefit).. 1 970 (362) 1,699
----- ------- ------ -------
Net earnings (loss)..... $ (82) $ 1,335 $ (498) $ 2,347
===== ======= ====== =======
Pro forma primary
earnings (loss) per
share(5)............... $ 0.08 $(0.04) $ 0.16
Pro forma fully diluted
earnings (loss) per
share(5)............... $ 0.08 $(0.04) $ 0.16
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1997
-------------- -----------------------
PRO FORMA
1995 1996 ACTUAL AS ADJUSTED(1)
------ ------- -------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Loans receivable held for sale, net..... $ -- $57,990 $113,162 $113,162
Residual interests in securitization.... -- -- 13,243 13,243
Total assets............................ 3,151 64,638 133,582 133,582
Borrowings under warehouse lines of
credit................................. -- 41,702 65,803 37,178
Borrowings under aggregation lines of
credit................................. -- 13,957 44,731 44,731
Residual financing...................... -- -- 7,248 7,248
Other borrowings........................ -- 1,326 3,119 1,869
Total stockholders' equity.............. 3,068 4,403 6,750 36,625
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
AS OF OR FOR THE
PERIOD FROM INCEPTION AS OF OR FOR THE
(NOVEMBER 17, 1995) QUARTER ENDED
THROUGH AS OF OR FOR THE YEAR ENDED -----------------------------
DECEMBER 31, 1995 DECEMBER 31, 1996 MARCH 31, 1996 MARCH 31, 1997
--------------------- --------------------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATING STATISTICS:
Loan origination and
purchase activities:
Wholesale originations. $ -- $287,992 $2,292 $159,075
Retail originations.... -- 66,487 2,001 74,384(2)
Correspondent
purchases............. -- 2,460 -- 17,111
-------- -------- ------ --------
Total loan originations
and purchases(3)...... $ -- $356,939 $4,293 $250,570
Average principal
balance per loan....... $ -- $ 106 $ 110 $ 108
Percent of loans secured
by first mortgages..... -- 97.3% 96.5% 98.4%
Weighted average initial
loan-to-value ratio.... -- 71.5% 72.5% 70.9%
Originations by product
type(3):
ARMs................... $ -- $264,510 $2,090 $187,987
Fixed-rate mortgages... -- 92,429 2,203 62,583
Weighted average
interest rates:
Fixed-rate mortgages... -- 10.4% 9.8% 9.9%
ARMs................... -- 9.3% 9.0% 9.2%
Margin-ARMs............ -- 7.0% 5.7% 7.0%
Loan sales:
Loans sold through
whole loan
transactions(4)....... $ -- $298,713 $ -- $ 95,716
Loans sold through
securitizations....... -- -- -- 99,132
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
AS OF OR FOR THE QUARTER ENDED
--------------------------------------------------------------------------------
MARCH 31, 1996 JUNE 30, 1996 SEPTEMBER 30, 1996 DECEMBER 31, 1996 MARCH 31, 1997
-------------- ------------- ------------------ ----------------- --------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Gain on sale of loans.. $ -- $ 830 $ 2,658 $ 8,142 $ 10,012
Servicing income....... -- -- 10 19 302
Interest income........ 39 248 560 1,999 2,271
------ ------- -------- -------- --------
Total revenues......... 39 1,078 3,228 10,160 12,585
Operating Expenses...... 899 1,620 2,721 6,960 8,539
------ ------- -------- -------- --------
Earnings (loss) before
income taxes (benefit). (860) (542) 507 3,200 4,046
Income taxes (benefit).. (362) (225) 213 1,344 1,699
------ ------- -------- -------- --------
Net earnings (loss)..... $ (498) $ (317) $ 294 $ 1,856 $ 2,347
====== ======= ======== ======== ========
Pro forma primary
earnings (loss) per
share(4)............... $(0.04) $ (0.03) $ 0.02 $ 0.13 $ 0.16
Pro forma fully diluted
earnings (loss) per
share(4)............... $(0.04) $ (0.03) $ 0.02 $ 0.13 $ 0.16
OPERATING STATISTICS:
Loan origination
activities:
Wholesale originations. $2,292 $45,412 $104,392 $135,896 $159,075
Retail originations.... 2,001 7,120 18,956 38,410 74,384(2)
Correspondent
purchases............. -- -- -- 2,460 17,111
------ ------- -------- -------- --------
Total loan originations
and purchases(3)...... $4,293 $52,532 $123,348 $176,766 $250,570
Average principal
balance per loan....... $ 110 $ 115 $ 103 $ 105 $ 108
Percent of loans secured
by first mortgages..... 96.5% 97.4% 96.8% 97.7% 98.4%
Weighted average initial
loan-to-value ratio.... 72.5% 71.5% 71.9% 71.1% 70.9%
Originations by product
type(3):
ARMs................... $2,090 $35,340 $ 93,473 $133,607 $187,987
Fixed-rate mortgages... $2,203 $17,192 $ 29,875 $ 43,159 $ 62,583
Weighted average
interest rates:
Fixed-rate mortgages... 9.8% 10.3% 10.6% 10.3% 9.9%
ARMs................... 9.0% 9.4% 9.2% 9.4% 9.2%
Margin-ARMs............ 5.7% 6.9% 6.9% 7.1% 7.0%
Loan sales:
Loans sold through
whole loan
transactions.......... $ -- $28,822 $ 79,419 $190,472 $ 95,716(5)
Loans sold through
securitizations....... $ -- $ -- $ -- $ -- $ 99,132
Staffing and offices:
Total employees........ 53 105 178 333 462
Total wholesale account
executives............ 4 16 25 34 46
Total retail loan
officers.............. 6 20 24 58 105
Total regional
operating centers..... 2 3 3 3 3
Total wholesale sales
offices............... 1 1 5 12 18
Total retail sales
offices............... 2 5 8 20 30
</TABLE>
- -------
(1) Adjusted to reflect (i) the exercise of 304,501 warrants at an average
price of $3.50 per share, (ii) the sale of 545,000 shares of Common Stock
to Comerica at a price of $7.50 per share, less estimated expenses payable
by the Company, and (iii) the sale of 2,900,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $9.50 per
share (after deducting the underwriting discount and estimated expenses
payable by the Company), and the application of the estimated net proceeds
therefrom to reduce outstanding balances under the Company's warehouse
facilities and repay approximately $1.25 million outstanding under the
Company's revolving line of credit. Adjustments have not been made to
reflect the impact should the Underwriters' over-allotment option be
exercised.
(2) Includes $634,000 of loans originated through the Alternative Mortgage
Products Division.
(3) Excludes non-refundable fees and direct costs associated with the
origination or purchase of mortgage loans.
(4) Pro forma earnings (loss) per share has been computed by dividing pro
forma net earnings by the pro forma weighted average number of shares
outstanding. The pro forma weighted average number of shares includes all
options and warrants issued below the estimated initial public offering
price within one year prior to the filing of the Registration Statement
for the initial public offering and is calculated using the treasury stock
method. Historical earnings per share is not presented because it is not
indicative of the ongoing entity.
(5) Includes the $2.8 million of loans repurchased and resold by the Company
in the first quarter of 1997.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the preceding
Selected Consolidated Financial and Other Data and the Company's Financial
Statements and the Notes thereto and the other financial data included
elsewhere in this Prospectus.
GENERAL
New Century is a specialty finance company engaged in the business of
originating, purchasing, selling and servicing subprime mortgage loans secured
primarily by first mortgages on single family residences. See "Risk Factors--
Subprime Mortgage Banking Industry." The Company originates and purchases
loans through its Wholesale and Retail Divisions. From the commencement of
lending operations in February 1996 through March 31, 1997, the Company
originated and purchased $607.5 million in mortgage loans. The Company's loan
originations and purchases have grown from $4.3 million for the first quarter
of 1996 to $250.6 million for the first quarter of 1997. New Century's
borrowers generally have substantial equity in the property securing the loan,
but have impaired or limited credit profiles or higher debt-to-income ratios
than traditional mortgage lenders allow. The Company's borrowers also include
individuals who, due to self-employment or other circumstances, have
difficulty verifying their income, as well as individuals who prefer the
prompt and personalized service provided by the Company. Because these
borrowers typically use the proceeds of the Company's loans to consolidate and
refinance debt, and to finance home improvements, education and other consumer
needs, the Company believes that its loan volume will be less dependent on
general levels of interest rates or home sales and therefore less cyclical
than conventional mortgage lending.
LOAN ORIGINATIONS AND PURCHASES
As of March 31, 1997, the Company's Wholesale Division was operating through
three regional operating centers located in Southern California, Northern
California and Chicago, and through 18 additional sales offices located in 13
states. The Wholesale Division funded $159.1 million in loans, or 63.5%, of
the Company's total loan production during the first quarter of 1997. As of
March 31, 1997, the Retail Division was operating through 13 retail sales
offices in California, and 17 retail sales offices in 13 other states. The
Retail Division funded $74.4 million in loans, or 29.7%, of total loan
production during the first quarter of 1997. The Company expects to increase
the percentage of loans originated within the Retail Division in the future.
See "Risk Factors--Ability to Sustain Growth and Rapid Geographic Expansion."
Under the Correspondent Program, established in December 1996, the Company
purchases closed loans from other mortgage bankers and financial institutions.
This program is designed to complement wholesale production efforts and
accounted for $17.1 million, or 6.8%, of the Company's total loan production
during the first quarter of 1997.
28
<PAGE>
The following table summarizes the Company's loan originations and purchases
for the periods shown.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996 FOR THE QUARTER ENDED MARCH 31, 1997
------------------------------------------ -------------------------------------------
WHOLESALE RETAIL CORRESPONDENT TOTAL WHOLESALE RETAIL(1) CORRESPONDENT TOTAL
--------- ------- ------------- -------- --------- --------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal balance (in
thousands)............. $287,992 $66,487 $2,460 $356,939 $159,075 $74,384 $17,111 $250,570
Number of loans......... 2,611 745 22 3,378 1,486 687 154 2,327
Average principal
balance (in thousands). $ 110 $ 89 $ 112 $ 106 $ 107 $ 108 $ 111 $ 108
Weighted average
interest rates:
Fixed-rate............. 10.5% 10.1% 10.2% 10.4% 10.0% 9.7% 10.5% 9.9%
ARMs................... 9.4% 9.1% 10.3% 9.3% 9.4% 8.4% 10.1% 9.2%
Margin-ARMs............ 7.0% 6.9% 7.5% 7.0% 7.1% 7.0% 6.6% 7.0%
Weighted average initial
loan-to-value ratio(2). 71.4% 72.0% 67.8% 71.5% 70.5% 72.4% 68.7% 70.9%
Percentage of loans:
ARMs................... 79.2% 51.2% 94.5% 74.1% 81.8% 58.5% 84.5% 75.0%
Fixed-rate............. 20.8% 48.8% 5.5% 25.9% 18.2% 41.5% 15.5% 25.0%
Percentage of loans
secured by first and
second mortgages:
Percentage of loans
secured by first
mortgages............. 98.1% 93.8% 99.0% 97.3% 99.4% 95.7% 100.0% 98.4%
Percentage of loans
secured by second
mortgages............. 1.9% 6.2% 1.0% 2.7% 0.6% 4.3% -- 1.6%
</TABLE>
- --------
(1) Includes $634,000 of loans originated through the Alternative Mortgage
Products Division.
(2) The weighted average initial loan-to-value ratio of a loan secured by a
first mortgage is determined by dividing the amount of the loan by the
appraised value of the mortgaged property at origination. The weighted
average initial loan-to-value ratio of a loan secured by a second mortgage
is determined by taking the sum of the first and second mortgages and
dividing by the appraised value of the mortgaged property at origination.
The Company has increased its loan origination volume on a quarterly basis
in large part as a result of the significant expansion of the Wholesale and
Retail Divisions. The following table sets forth the quarterly loan production
results, the number of office locations and the number of sales professionals
at the end of each quarter by division:
<TABLE>
<CAPTION>
AS OF OR FOR THE QUARTER ENDED
--------------------------------------------------------------------------------
MARCH 31, 1996 JUNE 30, 1996 SEPTEMBER 30, 1996 DECEMBER 31, 1996 MARCH 31, 1997
-------------- ------------- ------------------ ----------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
WHOLESALE
Volume................. $2,292 $45,412 $104,392 $135,896 $159,075
Offices (including
regional operating
centers).............. 3 4 8 15 21
Account Executives..... 4 16 25 34 46
RETAIL
Volume................. $2,001 $ 7,120 $ 18,956 $ 38,410 $ 74,384(1)
Offices................ 2 5 8 20 30
Loan Officers.......... 6 20 24 58 105
CORRESPONDENT
Volume................. $ -- $ -- $ -- $ 2,460 $ 17,111
TOTAL
Volume................. $4,293 $52,532 $123,348 $176,766 $250,570
Offices................ 5 9 16 35 51
</TABLE>
- --------
(1) Includes $634,000 of loans originated through the Alternative Mortgage
Products Division.
29
<PAGE>
LOAN SALES AND SECURITIZATIONS
The Company completed the sale of loans through securitization in February
and May 1997 and anticipates that significant revenue will be generated from
the sale of mortgage-backed securities created through securitization
transactions in future periods. In a securitization, the Company sells loans
that it has originated or purchased to a trust for a cash purchase price and
an interest in the securitized loans called residual interests. The cash
purchase price is raised through the sale of senior certificates by the trust.
Following the securitization, purchasers of senior certificates receive the
principal collected, including prepayments, and the investor pass-through
interest rate on the principal balance, while the Company receives the cash
flows from the residual interests, after payment of servicing fees, guarantor
fees and other trust expenses, and provided that specified over-
collateralization requirements are met.
Residual interests in real estate mortgage investment conduits are recorded
on the Company's balance sheet as a result of the sale of loans through
securitization. At the closing of the securitization, the Company removes from
its balance sheet the mortgage loans held for sale and adds to its balance
sheet (i) the cash received and (ii) the estimated fair value of the residual
interests, which consists of (a) an over-collateralization amount ("OC") and
(b) a net interest receivable. ("NIR"). The excess of cash received and assets
retained by the Company over the carrying value of the loans sold, less
transaction costs, equals the gain on sale of loans recorded by the Company.
The recorded values of these residual interests are amortized as distributions
are received from the trust holding the respective loan pool.
Each OC represents the portion of the loans which are held by the trust as
over-collateralization for the senior certificates sold and, along with a
certificate guarantor insurance policy provided by a monoline insurance
company, serves as credit enhancement to the senior certificate holders. Each
OC initially consists of the excess of the principal balance of the
securitized loans less the principal balance of the senior certificates sold
to investors, which was 3% in the February 1997 securitization and 3.25% in
the May 1997 securitization. Each OC is required to be maintained at a
specified target level of the principal balance of the senior certificates,
which may be increased significantly in the event delinquencies and/or losses
exceed certain specified levels. Cash flows received by the trust in excess of
the obligations of the trust to the senior certificate holders and others are
deposited into the over-collateralization account until the target OC is
reached, at which point distributions of excess cash are made to the Company
as the holder of the residual interests.
The Company allocates the basis in the mortgage loans between the portion of
the mortgage loans sold through mortgage-backed securities (i.e., the senior
certificates) and the portion retained (i.e., the residual interests) based on
the relative fair values of those assets on the date of the sale. The Company
may recognize gains or losses attributable to the change in the fair value of
the residual interests, which are recorded at estimated fair value and
accounted for as "held-for-trading" securities. The Company is not aware of an
active market for the purchase or sale of residual interests; accordingly, the
Company estimates the fair value of the residual interests by calculating the
present value of the estimated expected future cash flows using a discount
rate commensurate with the risks involved. For its February and May 1997
securitizations, the Company utilized discount rates of approximately 16.0%.
Each NIR is determined by using the amount of the excess of the weighted
average coupon on the loans sold over the sum of: (i) the coupon on the senior
certificates, (ii) a servicing fee paid to the servicer of the loans, (iii)
estimated losses to be incurred on the portfolio of loans securitized over the
estimated lives of the loans and (iv) other expenses and revenues, which
includes anticipated prepayment penalties. The significant assumptions used by
the Company to estimate NIR cash flows are anticipated prepayments and
estimated credit losses. The Company estimates prepayments by evaluating
historical prepayment performance of comparable loans and the impact of trends
in the industry. The Company's prepayment estimates have resulted in estimated
average lives of its mortgage loans of between four and five years. The
Company estimates credit losses using available historical loss data for
comparable portfolios of loans and the specific characteristics of the loans
included in the Company's securitizations. For purposes of calculating the NIR
for its February and May 1997
30
<PAGE>
securitizations, the Company assumed that aggregate credit losses as a
percentage of the original principal balances of the respective securitized
loan portfolios will total approximately 3%.
There are no assurances that actual performance of any of the Company's
securitized loan portfolios will be consistent with the Company's estimates
and assumptions. To the extent that actual prepayment speeds, losses or market
discount rates materially differ from the Company's estimates, the estimated
value of its residual interests may increase or decrease, which would have a
material impact on the Company's results of operations, financial condition
and liquidity. See "Risk Factors--Residual Interests in Securitizations."
RESULTS OF OPERATIONS
Quarter Ended March 31, 1997 Compared to Quarter Ended March 31, 1996
The Company began lending operations in February 1996. Accordingly, results
for the first quarter of 1996 primarily reflect costs incurred in the startup
of operations. In the first quarter of 1996, total loan origination volume was
$4.3 million, total revenues were $39,000 and total expenses were $899,000.
The Company did not sell any loans during the first quarter of 1996.
For the first quarter of 1997, total loan origination volume was $250.6
million and total loan sales were $194.8 million, including the Company's
initial securitization of $99.1 million. Total revenues for the first quarter
of 1997 were $12.6 million, and consisted primarily of gain on sale of loans
of $10.0 million and interest income on invested cash and loans held for sale
of $2.3 million. Total expenses for the first quarter of 1997 were $8.5
million, and consisted of personnel expense of $3.5 million, general and
administrative expenses of $2.0 million, interest expense of $1.8 million,
advertising and promotion expense of $842,000, servicing expense of $234,000
and professional services expense of $156,000.
Net earnings for the first quarter of 1997 were $2.3 million compared to a
net loss for the first quarter of 1996 of $498,000.
Year Ended December 31, 1996 Compared to Period from November 17, 1995
(inception) to December 31, 1995
From the date of incorporation, November 17, 1995, through December 31,
1995, the primary focus of the Company was on the development of policies and
procedures and on the hiring of key employees. The Company did not generate
significant revenue during this period except $14,000 in interest income on
invested cash, and incurred operating expenses of $95,000. In addition, the
Company deferred certain organizational expenses totaling $59,000 during this
period.
Total revenues for 1996 were $14.5 million and consisted primarily of gain
on sale of loans of $11.6 million and interest income on invested cash and
loans held for sale of $2.8 million. Gain on sale of loans was recorded on the
sale of $298.7 million of mortgage loans, which represented 83.7% of total
loan originations for the year. Interest income was recorded primarily on
loans held for sale, which totaled $58.0 million as of December 31, 1996, and
which averaged $32.4 million for the year based on quarterly average balances.
Total expenses, excluding $4.3 million of origination costs deducted
directly from the gain on sale of loans, were $12.2 million, and consisted of
personnel expenses of $6.1 million, general and administrative expenses of
$2.5 million, interest expense of $1.9 million, advertising and promotion
expense of $1.2 million, servicing expense of $269,000 and professional
services expense of $282,000. Expenses for 1996 increased as compared to 1995
due primarily to (i) the increase in staffing from eight employees as of
December 31, 1995 to 333 employees as of December 31, 1996, (ii) the opening
of three regional operating centers, (iii) the opening of 32 sales offices and
(iv) costs incurred in connection with the growing volume of loan
originations.
Net earnings for 1996 were $1.3 million as compared to a net loss for 1995
of $82,000.
31
<PAGE>
Comparison of Quarters Ended March 31, 1996, June 30, 1996, September 30,
1996, December 31, 1996, and March 31, 1997
Revenues. Total revenues consisted of gain on sale of loans, interest income
on invested cash and loans held for sale and servicing revenues. Total
revenues were $39,000, $1.1 million, $3.2 million, $10.2 million and $12.6
million for the first, second, third and fourth quarters of 1996 and the first
quarter of 1997, respectively. The quarterly increase in total revenues
reflected the Company's significant increase in loan originations and
purchases since the commencement of lending operations in February 1996, and
was due primarily to (i) quarterly increases in gain on sale of loans
resulting from increases in total loans sold, (ii) quarterly increases in
interest income resulting from the increasing balance of loans held for sale
during each successive quarter, and (iii) increases in servicing revenue
resulting from the retention of servicing rights on a portion of loans sold
through whole loan transactions during the third quarter of 1996, and the
retention of servicing rights on the Company's initial securitization of $99.1
million of loans in February 1997, including income derived from the Company's
residual interest in securitization.
The Company has implemented a loan sales strategy that includes both
securitizations and whole loan sales to advance the Company's goal of
enhancing profitability while managing cash flows. The timing of specific loan
sales may not always correlate to the timing of loan originations due to
market conditions or other factors which may impact the value of loans, such
as the size of the loan pools to be sold. The amount of loans sold in the
fourth quarter of 1996 exceeded 100% of loan originations during such quarter
due to the accumulation of loans originated in prior quarters for final sale.
The following table sets forth the amount of loans sold through whole loan
sales transactions and securitizations, and the components of the gain on sale
of loans for the periods indicated.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
--------------------------------------------------------------------------------
MARCH 31, 1996 JUNE 30, 1996 SEPTEMBER 30, 1996 DECEMBER 31, 1996 MARCH 31, 1997
-------------- ------------- ------------------ ----------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total loans sold through
whole loan transactions
and securitizations.... $-- $28,822 $79,419 $190,472 $194,848
Total loans sold as a
percentage of loan
originations........... -- 54.9% 64.4% 107.8% 77.8%
Gain on sale of loans:
Gain from whole loan
sale transactions and
securitizations, net.. $-- $ 1,034 $ 3,749 $ 10,269 $ 11,903
Unrealized gain on
held-for-trading
securities............ 1,267
Provision for
repurchase losses..... -- (20) (80) (606) (495)
Non-refundable loan
fees.................. -- 559 1,106 1,883 3,311
Premiums paid.......... -- (76) (739) (1,158) (1,803)
Origination costs...... -- (667) (1,378) (2,246) (4,171)
---- ------- ------- -------- --------
Gain on sale of loans.. $-- $ 830 $ 2,658 $ 8,142 $ 10,012
==== ======= ======= ======== ========
</TABLE>
Gains or losses from whole loan sales of mortgage loans are recognized at
the date of settlement and are based on the difference between the selling
price and the carrying value of the related loans sold including the value of
servicing rights. Gains or losses from securitizations are recognized at the
date of settlement and are equal to the excess of cash received and assets
retained by the Company, over the carrying value of the loans sold, less
transaction costs. Gain from whole loan sales transactions and securitizations
increased quarterly as a result of increases in the amount of loans sold, and
increased as a percentage of total loans sold through whole
32
<PAGE>
loan sales transactions and securitizations as a result of increasing premiums
received by the Company resulting from, among other things, increases in the
size of loan pools sold, and the impact of the Company's initial
securitization in February 1997.
The Company maintains an allowance for estimated losses related to possible
off-balance sheet recourse associated with the potential repurchase of loans
which were previously sold through whole loan sales transactions. The
Company's determination of the level of allowance for repurchase losses is
based upon various judgments, assumptions and industry statistics for
projected losses related to representations and warranties made to whole loan
purchasers. This provision is charged against gain on sale of loans and
credited to the allowance for repurchase losses in other liabilities. The
Company's primary repurchase risk arises when the borrower fails to make the
early payments on their loans. The establishment of a provision for losses of
$20,000, $80,000, $606,000 and $495,000 in the second, third and fourth
quarters of 1996 and the first quarter of 1997, respectively, reflects the
significant increase in whole loan sales activities during those quarters. The
Company charged off, net of recoveries, $0, $0, $50,000, $556,000 and $375,000
for the first, second, third and fourth quarters of 1996 and the first quarter
of 1997, respectively.
Non-refundable loan fees are generated primarily from origination fees paid
by retail borrowers, and, to a lesser extent, from fees paid by loan brokers
within the Wholesale Division and are deferred and recognized as an adjustment
to gain on sale of loans when the loans are sold. The quarterly increase in
non-refundable loan fees was due to quarterly increases in loan origination
volume primarily within the Retail Division.
Purchase premiums represent payments made by the Company to independent loan
brokers and loan correspondents in connection with the origination and
purchase of loans and are deferred and recognized as an adjustment to gain on
sale of loans when the loans are sold. The quarterly increase in purchase
premiums is primarily due to quarterly increases in loan origination volume
within the Wholesale Division.
Direct costs associated with the origination of mortgage loans, which
include commissions and certain other compensation costs, are deferred and
recognized as an adjustment to gain on sale of loans when the loans are sold.
The quarterly increase in direct origination costs is the result of increases
in commission and staffing costs related to the quarterly increases in loan
origination volume.
Interest income reflects interest earned on invested cash and loans held for
sale, and was $39,000, $248,000, $560,000, $2.0 million and $2.3 million for
the first, second, third and fourth quarters of 1996 and the first quarter of
1997, respectively. The quarterly increase in interest income is the result of
increases in the average amount of loans held for sale, which increased as a
result of the Company's increasing loan origination volume. The average amount
of loans held for sale, calculated based on beginning of quarter and end of
quarter balances, was $2.1 million, $16.1 million, $49.9 million, $64.9
million and $85.6 million for the first, second, third and fourth quarters of
1996 and the first quarter of 1997, respectively.
Servicing income reflects servicing fees received on loans sold or
securitized by the Company on which the Company has retained ownership of the
servicing rights. While the Company sold primarily all of its loans through
whole loan sales transactions on a servicing-released basis during 1996, the
Company retained ownership of the servicing rights on approximately $17.3
million in loans sold in September 1996 and $99.1 million in loans securitized
in February 1997.
Expenses. Total expenses, excluding origination costs deducted directly from
the gain on sale of loans, were $899,000, $1.6 million, $2.7 million, $7.0
million and $8.5 million for the first, second, third and fourth quarters of
1996 and the first quarter of 1997, respectively. The quarterly increase in
total expenses is the result of the significant expansion of the Company's
operations since the commencement of lending operations in February 1996.
Beginning in the fourth quarter of 1996, the Company accelerated its
geographic expansion, adding 19 new retail and wholesale sales offices in the
fourth quarter of 1996 and 16 new sales offices in the first quarter of
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1997. The Company expenses the start-up costs associated with opening new
sales offices, and, therefore during periods of significant expansion, the
Company's operating expenses may increase more rapidly than the Company's
revenues, the recognition of which are dependent on the timing and volume of
loan sales and securitizations. To help achieve the Company's objective of
break-even levels of operations within two to four months after opening a
wholesale sales office and five to eight months after opening a retail sales
office, the Company plans to (i) focus initial hiring efforts on experienced
sales professionals, (ii) utilize existing regional and/or corporate
operations personnel to support the sales office locations, (iii) provide
direct mail and/or telemarketing support to accelerate sales activity and (iv)
minimize initial operating costs through the use of short term leases of
executive suites and equipment. The following table sets forth the components
of the Company's expenses for the periods indicated.
<TABLE>
<CAPTION>
AS OF AND FOR THE QUARTER ENDED
--------------------------------------------------------------------------------
MARCH 31, 1996 JUNE 30, 1996 SEPTEMBER 30, 1996 DECEMBER 31, 1996 MARCH 31, 1997
-------------- ------------- ------------------ ----------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Personnel............... $584 $ 845 $1,350 $3,304 $ 3,545
General and
administrative expense. 144 322 592 1,398 1,954
Interest expense........ 14 169 346 1,412 1,808
Advertising and
promotion.............. 106 199 297 567 842
Servicing............... -- 24 57 188 234
Professional expenses... 51 61 79 91 156
---- ------ ------ ------ -------
Total expenses........ $899 $1,620 $2,721 $6,960 $ 8,539
==== ====== ====== ====== =======
Total end of quarter
staffing............... 53 105 178 333 462
Total offices........... 5 9 16 35 51
</TABLE>
Personnel expense includes employee base salaries and benefits costs plus
incentive bonus awards paid and accrued, but excludes a portion of commissions
and certain personnel costs directly related to originations, which are
deferred and recognized as an adjustment to gain on sale of loans when the
loans are sold. Personnel expense increased quarterly due to the significant
increase in staffing required to process the quarterly growth in loan
origination and purchase volume, which increased from $4.3 million for the
first quarter of 1996 to $250.6 million for the first quarter of 1997, and to
support the opening of new offices.
General and administrative expense includes costs associated with facilities
leases, furniture and equipment, depreciation, equipment leases, postage and
couriers, stationery and supplies, telephone expense, travel expense and other
general business expenses. General and administrative expense increased
quarterly due to an increase in (i) lease expense related to the growth in the
number of branch offices, (ii) postage and courier expense and stationery and
supplies expense directly related to the growth in loan origination volume,
and (iii) depreciation of furniture and equipment and equipment lease expense
required to support the increased number of offices and personnel.
Interest expense includes interest costs related to the Company's warehouse,
aggregation and residual financing facilities and other short-term borrowings,
and interest costs related to long-term borrowings secured by the Company's
furniture and equipment. Interest expense has increased quarterly due to
(i) increases in the average outstanding balance of the warehouse and
aggregation facilities, (ii) increases in long-term borrowings, and (iii)
residual financing obtained in connection with the Company's February 1997
securitization.
Advertising and promotion expense primarily reflects the cost of the
Company's direct-mail marketing and, to a lesser extent, other promotional
costs associated with loan origination activities. Advertising and promotion
expense increased quarterly primarily due to an increase in the number of
mailings supporting the Company's growth in retail sales offices. Total
mailings were approximately 250,000, 720,000, 1.6 million, 1.9 million and 2.8
million for the first, second, third and fourth quarters of 1996 and the first
quarter of 1997, respectively.
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<PAGE>
Servicing expense reflects initial setup fees, monthly sub-servicing costs
and other fees paid to Advanta. Servicing expense increased quarterly due
primarily to the growth in loan origination volume.
Professional expenses include legal expenses, accounting fees and other
consulting costs. Professional expenses increased quarterly due to (i)
increased legal fees required to support the increased lending activity,
(ii) increased accounting fees resulting from the growth of the Company and
relating to the Company's initial securitization, and (iii) consulting costs
incurred to assist the Company's multi-state licensing efforts and the ongoing
development of the Company's quality control and compliance programs.
The Company incurred net losses of $498,000 and $317,000 for the first and
second quarters of 1996, respectively, primarily as a result of the
significant costs associated with the startup of operations. The Company
recorded net earnings of $294,000, $1.9 million and $2.3 million for the third
and fourth quarters of 1996 and the first quarter of 1997, respectively, as
the growth in loan origination volume and related loan sales activities
resulted in increasing levels of revenue from gain on sale of loans and
interest income.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires access to short-term warehouse and aggregation credit
facilities in order to fund loan originations and purchases pending the
pooling and sale of such loans. The Company currently has an $85 million
warehouse line of credit led by First Bank which expires in May 1998 and has
received a commitment letter from First Bank proposing an increase in the
Company's warehouse line limit to $150 million subject to the completion of
the Offering. The Company intends to agree to such proposal upon the closing
of the Offering. The Company utilizes the First Bank warehouse line to finance
the actual funding of its loan originations and purchases. The Company also
has a $175 million aggregation facility with Salomon, which is subject to
renewal by Salomon on a monthly basis. After loans are funded by the Company
utilizing the First Bank warehouse line and all loan documentation is
complete, the loans are transferred to the Salomon aggregation facility,
generally within 15 days after funding, where they are held until a loan sale
is completed. The First Bank warehouse line is generally paid down upon the
transfer of loans to the Salomon aggregation facility. The Salomon aggregation
facility, and in some cases the First Bank warehouse line, are paid down with
the proceeds of loan sales and securitizations. The Company expects to add new
credit facilities, as well as renew and expand its existing credit facilities,
in order to finance its growing levels of loan production.
The Company also has a residual financing agreement with Salomon pursuant to
which Salomon will provide the Company with financing upon the Company's
retention of residual interests in securitizations on which Salomon is the
lead underwriter. The amount of residual financing provided by Salomon upon
each securitization is determined pursuant to a formula set forth in the
agreement and, in the event of a change in the variables utilized by Salomon
in determining such financing amount, the Company may be required to repay
some or all of any residual financing balance outstanding. The Company will
need to add new credit facilities, as well as renew and expand this credit
facility in order to finance future securitization transactions.
The Company's business requires substantial cash to support its operating
activities and growth plans. The Company's growing negative operating cash
flow position is primarily a function of its securitization strategy and rapid
growth. The Company records a residual interest in securitization and
recognizes a gain on sale when it effects a securitization, but only receives
the cash representing such gain over the life of the loans securitized. In
order to support its loan origination, purchase and securitization programs,
the Company is required to make significant cash investments that include the
funding of: (i) fees paid to brokers and correspondents in connection with
generating loans through wholesale and correspondent lending activities; (ii)
fees and expenses incurred in connection with the securitization and sale of
loans including over-collateralization requirements for securitization; (iii)
commissions paid to sales employees to originate loans; (iv) the difference
between the amount funded per loan and the amount advanced under its current
warehouse facility; and (v) income tax payments arising from the recognition
of gain on sale of loans. The Company also requires cash to fund ongoing
operating and administrative expenses, including sub-servicing expenses
incurred in the servicing of the Company's loans, capital expenditures and
debt service. The Company's sources of operating cash flow include:
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<PAGE>
(i) the premium advance component of the Salomon aggregation facility; (ii)
premiums obtained in whole loan sales; (iii) mortgage origination income and
fees; (iv) interest income on loans held for sale; (v) excess cash flow from
securitization trusts; and (vi) cash servicing income. As a result of its
strategy to significantly grow its loan origination, purchase and
securitization programs, the Company expects that its operating uses of cash
will substantially exceed its operating sources of cash. This gap will
continue to increase to the extent that the Company's securitization volumes
increase, whether due to increased volumes of loan production or as a result
of a continued shift towards securitization in its loan sales mix. However,
the Company believes that its cash flow profile will improve over time as its
rate of loan production growth moderates and the balance of its residual
interests and the size of its servicing portfolio increases.
The Company intends to rely on credit facilities and undertake capital
markets financings in order to generate funds to finance the negative cash
flow generated by its operations, securitization and growth plans. The
Company's current credit facilities include: (i) the First Bank warehouse
line; (ii) the Salomon aggregation facility; (iii) the Salomon residual
financing facility; and (iv) $5.0 million of long-term secured and unsecured
credit facilities with First Bank.
First Bank has expanded participation in the $85 million warehouse line
facility to include Guaranty Federal Bank, F.S.B. As of March 31, 1997, the
Company's outstanding balance under the warehouse line was $65.8 million. The
facility provides for an advance rate equal to the lesser of 97% of the
principal balance of loans originated or purchased, or 97% of the acquisition
price and a rate of interest equal to the one-month LIBOR plus 1.50%. The
availability of funds under this facility is subject to the Company's
continued compliance with certain operating and financial covenants, including
(i) leverage covenants based on the ratio of outstanding borrowings to net
worth, (ii) cash covenants requiring minimum liquidity at each month end equal
to $1.5 million, (iii) restrictions on changes in the Company's business, (iv)
restrictions on selling any asset other than in the ordinary course of
business and (v) restrictions on additional financing or guaranteeing the debt
obligation of any other entity without prior approval.
The Salomon aggregation facility provides for the financing of up to $175
million in loans originated or purchased by the Company at an advance rate
equal to the lesser of market value as determined by Salomon, or 105% of the
principal balance of the loans and a rate of interest generally equal to the
one-month LIBOR plus 1.25%. As of March 31, 1997, amounts payable by the
Company under this aggregation facility were $44.7 million. The Salomon
residual financing facility provides for the financing of an amount calculated
pursuant to a formula set forth in the agreement based on the amount of
residual interests retained by the Company in a covered securitization and a
rate of interest equal to the one-month LIBOR plus 1.25%. No significant
financial or operating covenants have been imposed by Salomon in connection
with the aggregation or residual financing facilities. In November 1996, the
Company commited to provide Salomon with a first right to purchase whole loans
from the Company and/or to have Salomon lead underwrite loans sold through
securitization by the Company in an aggregate amount of $500 million. In May
1997 the Company fulfilled all such volume commitments to Salomon.
The Company has a discretionary, non-revolving $2.5 million line of credit
with an affiliate of First Bank secured by the Company's furniture and
equipment. Advances under this facility are made periodically at the
discretion of the lender, and bear interest at a fixed rate established at the
time of each advance for a term of three years. As of March 31, 1997, amounts
payable under this facility were $1.9 million, and the weighted average
interest rate was 9.0%.
In March 1997, the Company established a $2.5 million unsecured line of
credit with First Bank for working capital purposes and has received a
commitment letter from First Bank proposing an increase in the Company's
working capital line to $5.0 million upon the completion of the Offering. The
Company intends to agree to such proposal upon the closing of the Offering. As
of March 31, 1997, amounts payable under this facility were $1.25 million and
the interest rate was 10.25%. Outstanding balances under this line of credit
bear interest at a variable rate 1.75% above First Bank's "reference rate"
plus 1.75%, which, at March 31, 1997, was 8.5%, and funds may be borrowed on a
revolving basis. The working capital facility is subject to the same covenants
as the
36
<PAGE>
warehouse line and has the same expiration date. As a sublimit under the
working capital line of credit, First Bank has provided the Company with a
$1.2 million letter of credit required by the landlord under the lease on the
Company's new executive and administrative offices. See "Business--
Properties."
The Company anticipates that the net proceeds from the Offering, together
with the funds available under its credit facilities, will be sufficient to
fund its operations for the next 12 months, if the Company's future operations
are consistent with management's expectations. If more favorable advance rates
are arranged on warehouse facilities, aggregation facilities, or residual
financing, or more funds are made available under the furniture and equipment
financing facility or working capital line, or if the Company increases the
percentage of sales through whole loan transactions, the timing of additional
liquidity needs would be extended. In the event the Offering is not
consummated, however, the Company would have to arrange alternative financing,
and possibly increase the amount of loans sold through whole loan transactions
to maintain adequate liquidity.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
ACCOUNTING CONSIDERATIONS
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 125 (FASB 125), "Accounting
for Transfer and Servicing of Financial Assets and Extinguishment of
Liabilities." FASB 125 addresses the accounting for all types of
securitization transactions, securities lending and repurchase agreements,
collateralized borrowing arrangements and other transactions involving the
transfer of financial assets. FASB 125 distinguishes transfers of financial
assets that are sales from transfers that are secured borrowings. FASB 125 is
generally effective for transactions that occur after December 31, 1996, and
it is to be applied prospectively. FASB 125 will require the Company to
allocate its basis in the mortgage loans between the portion of the mortgage
loans sold through mortgage backed securities and the portion retained (the
residual interests) based on the relative fair values of those portions on the
date of sale. The pronouncement requires the Company to account for residual
interests as "held-for-trading" securities which are to be recorded at fair
value in accordance with SFAS No. 115. The Company adopted FASB 125 on January
1, 1997 and there was no material impact on the Company's financial position
or results of operations.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 (FASB No. 128), "Earnings
Per Share." FASB No. 128 supersedes APB Opinion No. 15 (APB No. 15), "Earnings
Per Share" and specifies the computation, presentation, and disclosure
requirements for earnings per share (EPS) for entities with publicy held
common stock or potential common stock. FASB No. 128 was issued to simplify
the computation of EPS and to make the U.S. standard more compatible with the
EPS standards of other countries and that of the International Accounting
Standards Committee (IASC). It replaces the presentation of primary EPS with a
presentation of basic EPS and fully diluted EPS with diluted EPS.
Basic EPS, unlike primary EPS, excludes 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 securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Diluted EPS is computed similarly to fully diluted EPS under APB No. 15.
37
<PAGE>
FASB No. 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted. After adoption, all prior-period EPS data presented shall be
restated to conform with FASB No. 128. The Company has determined that this
statement will increase the earnings per share computation under basic EPS as
compared to primary EPS.
FASB No. 129, "Disclosure of Information about Capital Structure," is
effective for financial statements for periods ending after December 15, 1997.
It is not expected that the issuance of FASB No. 129 will require significant
revision of prior disclosures since the Statement lists required disclosures
that had been included in a number of previously existing separate statements
and opinions.
38
<PAGE>
BUSINESS
This Prospectus may contain forward-looking statements which involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those discussed in "Risk Factors."
GENERAL
New Century is a specialty finance company engaged in the business of
originating, purchasing, selling and servicing subprime mortgage loans secured
primarily by first mortgages on single family residences. The Company
originates loans through its Wholesale and Retail Divisions. From the
commencement of lending operations in February 1996 through March 31, 1997,
the Company originated and purchased $607.5 million in mortgage loans. The
Company's loan originations and purchases have grown from $4.3 million for the
first quarter of 1996 to $250.6 million for the first quarter of 1997. The
Company's principal strategy is to continue to increase loan originations
through geographic expansion, high levels of service to brokers through its
Wholesale Division and increased consumer marketing through its Retail
Division. New Century has also implemented a loan sales strategy that includes
both securitizations and whole loan sales in order to advance the Company's
goal of enhancing profitability while managing cash flows.
The Company's borrowers generally have substantial equity in the property
securing the loan, but have impaired or limited credit profiles or higher
debt-to-income ratios than traditional mortgage lenders allow. The Company's
borrowers also include individuals who, due to self-employment or other
circumstances, have difficulty verifying their income, and individuals who
prefer the prompt and personalized service provided by the Company. These
types of borrowers are generally willing to pay higher loan origination fees
and interest rates than those charged by conventional lending sources. Because
these borrowers typically use the proceeds of the Company's loans to
consolidate and refinance debt and to finance home improvements, education and
other consumer needs, the Company believes that its loan volume will be less
dependent on general levels of interest rates or home sales and therefore less
cyclical than conventional mortgage lending. Although the Company's
underwriting guidelines include five levels of credit risk classification,
approximately 54.1% of the principal balance of the loans originated and
purchased by the Company in 1996 were to borrowers within the Company's two
highest credit grades. One important consideration in underwriting subprime
loans is the nature and value of the collateral securing the loans. The
Company believes that the amount of equity present in the real estate securing
its loans, together with the fact that approximately 88.2% of its loans
originated or purchased in the first quarter of 1997 were secured by
borrowers' primary residences, mitigates the risks inherent in subprime
lending. The average loan-to-value ratio on loans originated and purchased by
the Company in 1996 was approximately 71.5%. Approximately 97.3% and 98.4% of
the loans originated and purchased by the Company during 1996 and the first
quarter of 1997, respectively, were secured by first mortgages, and the
remainder of the loans the Company originated and purchased for such periods
were secured by second mortgages.
The Wholesale Division originates loans through independent loan brokers and
accounted for $159.1 million, or 63.5%, of the Company's loan production
during the first quarter of 1997. As of May 31, 1997, the Wholesale Division
originated loans through its three regional operating centers located in
Southern California, Northern California and Chicago and through 23 additional
sales offices located in 15 states. The Company believes that it has been
successful in penetrating the broker market by providing prompt, consistent
service, which includes (i) utilizing experienced subprime underwriting
personnel to evaluate the specific characteristics of each loan application,
(ii) issuing a conditional loan approval or denial promptly, generally within
24 hours after receipt of an application from a broker, (iii) utilizing teams
of account executives in the field and account managers in the office to
actively assist brokers in completing approved transactions, (iv) providing
brokers with access to the Company's decision-making personnel, (v) locating
Company personnel in geographic proximity to their broker customers,
(vi) avoiding the imposition of unnecessary conditions on loan approvals, and
(vii) consistently funding loans in accordance with the approved terms,
generally within 15 to 20 days following conditional approval.
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<PAGE>
The Retail Division originates loans through the direct solicitation of
borrowers and accounted for $74.4 million, or 29.7%, of the Company's loan
production during the first quarter of 1997. As of May 31, 1997, the Retail
Division originated loans through a network of 15 sales offices located in
California and 25 sales offices located in 15 other states. The Company's
retail marketing includes high-volume targeted direct mail and more
traditional marketing activities conducted by retail loan officers, who seek
to identify potential borrowers through referral sources as well as individual
sales efforts. By creating a direct relationship with the borrower, retail
lending creates a more sustainable loan origination franchise and provides the
Company with greater control over the lending process. The Company also
receives the origination fees paid by the borrower on loans originated through
the Retail Division, which offsets the higher costs of retail lending and may
contribute to increased profitability and cash flow.
The Company began purchasing closed loans from other mortgage bankers and
financial institutions ("correspondents") in late 1996. In early 1997, the
Company expanded this program to include the purchase of small, bulk packages
of loans from correspondents. Correspondent purchases totaled $17.1 million,
or 6.8%, of the Company's total loan production during the first quarter of
1997. Purchasing closed loans through the Correspondent Program allows the
Company to supplement its own loan production with limited overhead expenses.
Loans purchased by the Company under the Correspondent Program must be
originated in accordance with the Company's underwriting guidelines and
currently all such loans are re-underwritten by the Company prior to purchase.
By focusing on the purchase of individual loans on a flow basis and small bulk
purchases, the Company believes that its Correspondent Program complements its
existing marketing efforts to brokers and enables the Company to increase loan
production on a cost-effective basis. The Company plans to expand its
Correspondent Program through marketing efforts by its broker account
executives and through targeted marketing to selected financial institutions
and mortgage bankers.
The Company's seven senior executives have substantial mortgage banking
experience and have previously directed the national expansion of several
conventional and subprime mortgage companies. The senior management team has
broad and complementary skills, including expertise in subprime originations,
subprime underwriting, loan administration, servicing and collections,
secondary marketing, capital markets, finance, legal/regulatory affairs and
public company management. Furthermore, the Company's current underwriters
have an average of 10 years of subprime mortgage lending experience and all
loans presently require two underwriting approvals. The experience of its
underwriting personnel allows the Company to exercise flexibility within its
underwriting process based on the specific characteristics of each loan
application. In addition, all appraisals are reviewed by qualified Company
personnel or a qualified appraiser retained by the Company. Along with its
thorough underwriting process, the Company maintains strong corporate controls
throughout the lending process, including subjecting all loans to a series of
pre- and post-funding audits to verify the accuracy of the loan application
data and to assure compliance with the Company's underwriting policies,
procedures and guidelines. The Company believes that its underwriting and
review processes provide the necessary support to continue the Company's rapid
loan origination growth while maintaining loan quality.
New Century sells its mortgage loans through securitizations as well as
through bulk sales of whole loans to institutional purchasers. During 1996,
the Company sold $298.7 million of loans through whole loan sales transactions
at a weighted average sales price equal to 105.0% of the original principal
balance of the loans sold. As of May 31, 1997, the Company has securitized
$228.4 million of its mortgage loans through two securitization transactions.
Each of these securitizations has been credit enhanced by an insurance policy
provided through a monoline insurance company allowing the senior certificates
in the related trusts to receive ratings of "AAA" from Standard & Poor's
Ratings Services and "Aaa" from Moody's Investors Service, Inc. The Company
intends to securitize a majority of its loans while continuing to sell a
substantial portion of its loans through whole loan sale transactions.
Until February 1997, the Company sold all of its loan production on a
servicing-released basis. Starting with its first securitization in February
1997, the Company has retained the servicing rights on the loans sold through
its securitizations. While retaining servicing rights as the master servicer
on the securitized loans, the Company currently outsources its servicing to
Advanta. This strategy has allowed the Company to focus its
40
<PAGE>
own management efforts and capital investments on expanding loan production
and developing related loan processing, secondary marketing and administrative
operations. Advanta currently conducts all of the Company's servicing
operations, including interim servicing on loans held for sale, interim
servicing of loans sold to whole loan purchasers pending a servicing transfer
and servicing on loans for which the servicing rights are retained by the
Company through securitization. As of March 31, 1997, the Company's servicing
portfolio consisted of 3,110 loans with an aggregate principal balance of
approximately $346.4 million, of which 999 loans with an aggregate principal
balance of $112.2 million were held for sale and serviced on an interim basis,
1,256 loans with an aggregate principal balance of $136.4 million were
serviced on an interim basis for the whole loan purchasers thereof and 855
loans with an aggregate principal balance of $97.8 million had been
securitized. The Company intends to develop its own servicing capability in
the future in order to manage the servicing relationship with its borrowers
and oversee the performance of its loans more directly. See "Recent
Developments--Comerica Investment and Strategic Relationship."
GROWTH AND OPERATING STRATEGIES
Increasing Growth of Retail Production. The Company will emphasize the
growth of retail loan production during 1997 through geographic expansion and
increased consumer marketing efforts. The Company has opened 20 retail sales
offices during the first five months of 1997 and intends to open 10 or more
additional retail sales offices during the remainder of 1997. The Company
targets markets for expansion based on demographics and its ability to recruit
sales office managers and other qualified personnel in particular markets. The
expansion costs for new sales offices are generally mitigated by leasing
short-term executive suite space until revenues are generated by the office,
at which time the Company leases permanent space. Controlling the costs of
expansion permits the Company to enter and, if necessary, exit new geographic
markets quickly with limited financial impact. The Company intends to
coordinate the opening of each new retail sales office with direct mail
advertising with the goals of generating revenues for each such office within
60 to 90 days after opening and achieving break-even operations within five to
eight months. The Company's geographic expansion plans require additional
capital and human resources and there can be no assurance the Company will
successfully implement its expansion plans. See "Risk Factors--Ability to
Sustain Growth and Rapid Geographic Expansion." The Company also intends to
increase its consumer marketing, which includes the use of direct mail, a
loans-by-mail program and more traditional marketing methods, such as
referrals and individual loan officer sales efforts. The Company has increased
the number of targeted direct mail pieces to retail borrowers from
approximately 750,000 mailers in January 1997 to approximately 1.4 million
mailers in May 1997 and intends to increase the number of targeted direct mail
pieces to over 2 million per month by the end of 1997. See "Business--
Marketing."
Continuing Growth of Wholesale Production. The Company will continue the
growth of its Wholesale Division, primarily through geographic expansion and
greater penetration in existing markets by providing continued high levels of
service to brokers. The Company intends to continue its geographic expansion
through the development of lending operations in the Southeast and Northeast
regions of the country. In connection with its expansion, the Company plans to
open 5 or more additional wholesale sales offices in markets surrounding the
Company's existing and planned regional operations centers and to increase the
total number of account executives from 42 as of May 31, 1997 to approximately
80 by the end of 1997. The Company has developed its National Call Center, a
centralized telemarketing group that contacts mortgage brokers in areas where
New Century does not currently have a wholesale sales office, to expand into
new markets. The Company intends to target markets where the National Call
Center program is particularly successful for the opening of new wholesale
sales offices. The Company's geographic expansion plans require additional
capital and human resources and there can be no assurance the Company will
successfully implement its expansion plans. See "Risk Factors--Ability to
Sustain Growth and Rapid Geographic Expansion."
The Company believes that providing prompt, consistent service is the reason
for its success with wholesale brokers. As a result, management has created a
customer service oriented culture at the Company. By providing a high level of
service, the Company seeks to maximize the number of potential loans closed in
the short term and establishes the basis for repeat business, referrals and
other future lending opportunities. The Company
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<PAGE>
expects to improve service to brokers by (i) regionalizing certain wholesale
operational support activities, (ii) continuing improvements in the Company's
computer and other support systems, which are expected to improve the
Company's speed, efficiency and consistency in processing loan applications,
and (iii) expanding product offerings to provide brokers with a broader
selection of borrowing alternatives for their customers.
Enhancing Profitability while Managing Cash Flow. New Century has
implemented a loan sales strategy that includes both securitizations and whole
loan sales in order to advance the Company's goal of enhancing profits while
managing cash flows. Loan sales through securitizations permit the Company to
enhance operating profits and to benefit from future cash flows generated by
the residual interests retained by the Company. Whole loan sale transactions
enable the Company to generate current cash flow, protect against the
potential volatility of the securitization market and reduce the risks
inherent in retaining residual interests. The Company's strategy is to enhance
earnings by securitizing loans with characteristics which the securitization
market considers most favorable. At the same time, the Company seeks to
enhance earnings and cash flows from whole loan sales by tailoring the
composition of its whole loan pools to meet the investment preferences of
specific buyers. The Company may in the future increase or decrease the
percentage of loans sold through securitizations based on economic conditions,
secondary market conditions and available financial resources.
The Company manages its cash flows in several ways, including selling a
significant portion of its loans through whole loan sales which result in the
receipt of cash gains at the time of sale. The Company also manages its cash
flow through the use of a variety of funding sources, including the receipt of
advance rates in excess of par on its loan aggregation facility and borrowing
against the value of the residual interests received in its securitization.
The residual interests retained by the Company constitute an investment which
the Company believes will provide attractive investment returns and future
cash flow. Further, the Company believes that its cash flow profile will
improve over time as its rate of loan production growth moderates and the
balance of its residual interests and the size of its servicing portfolio
increases. The Company continually evaluates different securitization and
financing strategies which may improve its profitability and/or cash flow
position.
Regionalizing Operations and Incentivizing Performance. New Century is
implementing a strategy of regionalizing operations support, which will place
Company decision makers closer to local brokers, enable the Company to refine
its procedures to reflect local market practices and conditions and enable the
Company to provide a higher level of service to brokers. The Company's
compensation structure, which includes stock options and cash incentives based
on both loan volume and loan quality for a large number of key employees,
incentivizes its personnel to achieve the Company's performance goals. The
Company believes its compensation structure also enables it to attract and
retain key employees. In addition, the Company believes that its operations
support compensation structure and the experience of its senior management,
underwriting personnel and many members of its support staff, together with
their ability to recruit and retain additional qualified personnel, provide
fundamental support for the Company's growth and operating strategies.
Expanding Product Offerings. The Company frequently reviews its products and
pricing for competitiveness and introduces new products to meet the needs of
its borrowers, brokers and correspondents. The Company recently commenced loan
originations through its Alternative Mortgage Products Division which offers
loans to borrowers meeting conventional mortgage lending standards and offers
a broad selection of second mortgage products, including loans with loan-to-
value ratios of up to 125% for borrowers with good credit histories. The
Company believes that offering these high loan-to-value products is beneficial
to the Company because a number of its competitors are offering such products
and they generate fee-based cash income for the Company. The Company also
believes that these mortgage products will enable the Company to increase loan
production from brokers and correspondents who have customers seeking such
products and from borrowers identified through the Company's retail marketing
whose needs are not satisfied by the mortgage products offered by the Retail
Division. The Alternative Mortgage Products Division maintains separate
underwriting and loan processing staffs and the Company expects that the
mortgage loans originated through its Alternative Mortgage Products Division
will be sold by the Company on a broker or correspondent basis, rather than
through securitizations or servicing-retained sales. Finally, the Company is
evaluating the introduction of other categories of consumer loans to its
product offerings, thereby expanding its consumer base and diversifying its
product mix.
42
<PAGE>
MARKETING
Retail Division. The Company emphasizes high-volume targeted direct mail but
also uses a variety of other marketing activities to attract borrowers for the
Retail Division. Using its database screening, the Company selects the
potential customers to whom it sends direct mail. The Company's database
screening involves a detailed marketing analysis intended to identify current
homeowners who are likely to be qualified candidates for the Company's loan
products. Factors considered by the Company in identifying homeowners for its
mailing list include the length of time the homeowner has owned the home and
the individual's credit profile. Longer periods of homeownership increase the
likelihood that the homeowner has substantial equity in the home and will
satisfy the Company's loan-to-value requirements. Aspects of an individual's
credit profile, such as credit problems, limited credit history and prior
borrowings from consumer finance companies, also indicate that the individual
is a likely candidate for the Company's loan programs.
The Company tracks the success of its marketing efforts and regularly
assesses the accuracy of its database screening in identifying likely
candidates for its products. By limiting the mailing of direct mail pieces to
likely borrowers, the Company believes it more efficiently utilizes its
marketing expenditures. The Company has increased the number of targeted
direct mail pieces to retail borrowers from approximately 750,000 mailers in
January 1997 to approximately 1.4 million mailers in May 1997 and intends to
increase the number of targeted direct mail pieces to over 2 million per month
by the end of 1997.
Under the Company's recently initiated loans-by-mail program, the Company
utilizes its direct marketing methodology in markets where the Company does
not currently maintain a sales office. The Company will target markets where
the loans-by-mail program is particularly successful for the opening of new
retail sales offices. The Company also will continue to emphasize retail loan
generation through more traditional marketing methods, such as referrals and
individual loan officer sales efforts, and intends to provide each sales
office with an increased promotional budget to support these activities. In
addition, the Company has initiated an "outbound" telemarketing strategy to
augment the lead generation capabilities of direct marketing and is evaluating
television and radio advertising.
Wholesale Division. The Company's wholesale marketing strategy is focused on
the sales efforts of its account executives, supported by the Company's
commitment to providing prompt, consistent service to brokers and their
customers. The Company expects that its growth in wholesale originations will
stem primarily from increasing the number of account executives, increasing
the number of markets served by such account executives and continuing efforts
to improve the service provided to brokers and their customers. The Company
will utilize the resources of its National Call Center to contact and
establish relationships with brokers with whom the Company is not currently
doing business in areas New Century has targeted for expansion. To date, the
Company has not engaged in mass distribution of loan program information to
the broker community, advertised in broker-focused publications or undertaken
other similar marketing techniques to reach new brokers, but the Company will
utilize some or all of these and other marketing techniques in the future.
LOAN ORIGINATIONS AND PURCHASES
The Company originates loans primarily through its Wholesale and Retail
Divisions and purchases loan through its Correspondent Program. The Wholesale
Division originates loans through a network of independent mortgage brokers,
the Retail Division solicits loans directly from prospective borrowers and the
Correspondent Program purchases loans from mortgage banking and financial
institution correspondents that originate, underwrite and fund the loans prior
to their sale to the Company. All of the Company's loans are secured by first
or second mortgages on one-to-four single family residences.
Wholesale Division. The Wholesale Division funded $159.1 million in loans,
or 63.5% of the Company's total loan production, during the first quarter of
1997. As of May 31, 1997, the Wholesale Division was operating through three
regional operating centers located in Southern California, Northern California
and Chicago and through 23 additional sales offices located in Arizona,
California (3), Colorado, Florida, Georgia, Hawaii, Indiana, Minnesota,
Missouri (3), Nevada, New Mexico, Ohio (3), Pennsylvania (2), Texas (2) and
Washington,
43
<PAGE>
employing a total of 42 account executives. As of March 31, 1997, the Company
had approximately 950 approved mortgage brokers and in the first quarter of
1997 originated loans through approximately 500 brokers. During the first
quarter of 1997, New Century's 10 largest producing brokers originated
approximately 17% of the Company's loans, with the largest broker accounting
for approximately 4%.
In wholesale originations, the broker's role is to identify the applicant,
assist in completing the loan application form, gather necessary information
and documents and serve as the Company's liaison with the borrower through the
lending process. The Company reviews and underwrites the applications
submitted by the broker, approves or denies the application, sets the interest
rate and other terms of the loan and, upon acceptance by the borrower and
satisfaction of all conditions imposed by the Company, funds the loan. Because
brokers conduct their own marketing and employ their own personnel to complete
loan applications and maintain contact with borrowers, originating loans
through the Wholesale Division allows the Company to increase its loan volume
without incurring the higher marketing, labor and other overhead costs
associated with increased retail originations.
Loan applications generally are submitted by mortgage brokers to an account
executive in one of the Company's sales offices. The application is then
forwarded to the closest regional operating center where the loan is logged-in
for RESPA and other regulatory compliance purposes, underwritten and, in most
cases, conditionally approved or denied within 24 hours of receipt. Because
mortgage brokers generally submit individual loan files to several prospective
lenders simultaneously, the Company attempts to respond to each application as
quickly as possible. If approved, a "conditional approval" will be issued to
the broker with a list of specific conditions to be met (for example, credit
verifications and independent third-party appraisals) and additional documents
to be supplied prior to the funding of the loan. An account manager and the
originating New Century account executive will work directly with the
submitting mortgage broker to collect the requested information and to meet
the underwriting conditions and other requirements. In most cases, the Company
funds loans within 15-20 days after approval of the loan application.
The following table sets forth selected information relating to wholesale
loan originations excluding loans purchased through the Company's
Correspondent Program during the periods shown:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
--------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1996 1996 1996 1996 1997
--------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Principal balance (in
thousands)............. $2,292 $45,412 $104,392 $135,896 $159,075
Average principal
balance per loan (in
thousands)............. $ 115 $ 123 $ 109 $ 108 $ 107
Combined weighted
average initial loan-
to-value ratio......... 71.0% 71.8% 72.0% 70.8% 70.5%
Percent of first
mortgage loans......... 93.5% 98.0% 97.7% 98.5% 99.4%
Property securing loans:
Owner occupied......... 95.0% 88.3% 86.9% 88.7% 87.7%
Non-owner occupied..... 5.0% 11.7% 13.1% 11.3% 12.3%
Weighted average
interest rate:
Fixed-rate............. 9.8% 10.2% 10.8% 10.5% 10.0%
ARMs................... 8.3% 9.4% 9.2% 9.4% 9.4%
Margin--ARMs........... 5.7% 6.9% 7.0% 7.1% 7.1%
</TABLE>
Retail Division. During the first quarter of 1997, the Company originated
$74.4 million in loans, or 29.7% of its total loan production, through its
Retail Division. As of May 31, 1997, the Retail Division employed 134 retail
loan officers, located in 40 sales offices in Arizona (3), California (15),
Colorado, Hawaii (2), Illinois (2), Kansas, Minnesota (2), Missouri (3),
Nevada, New Mexico, Ohio (3), Oregon, Pennsylvania (2), Utah, Washington and
Wisconsin. By creating a direct relationship with the borrower, retail lending
provides a more sustainable loan origination franchise and greater control
over the lending process while generating loan origination fees to offset the
higher costs of retail lending, which contributes to profitability and cash
flow.
In connection with the Company's direct mail activities, the Company's
database screening activities are directed by a centralized staff who create a
targeted mailing list for each geographic market and oversee the completion of
mailings by a third party mailing vendor. All calls or written inquiries from
potential borrowers
44
<PAGE>
which result from the mailings are received at a centralized location, where
the Company's telemarketing staff interviews the borrower, makes a preliminary
evaluation of the borrower's credit and the value of the collateral property
and refers qualified leads to loan officers in the retail sales office closest
to the borrower. Under the loans-by-mail program, the qualified leads are
referred to a centralized staff of loan officers who utilize document and
signing services to exchange documentation with the borrower.
The following table sets forth selected information relating to retail loan
originations during the periods shown:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
-------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1996 1996 1996 1996 1997
--------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Principal balance (in
thousands)............. $2,001 $7,120 $18,956 $38,410 $74,384
Average principal
balance per loan (in
thousands)............. $ 105 $ 82 $ 81 $ 95 $ 108
Combined weighted
average initial loan-
to-value ratio......... 74.2% 70.0% 71.8% 72.3% 72.4%
Percent of first
mortgage loans......... 100.0% 93.6% 91.9% 94.6% 95.7%
Property securing loans:
Owner occupied......... 100.0% 92.0% 92.7% 93.9% 90.0%
Non-owner occupied..... -- 8.0% 7.3% 6.1% 10.0%
Weighted average
interest rates:
Fixed-rate............. 9.7% 10.4% 10.3% 10.0% 9.7%
ARMs................... 9.7% 9.2% 9.3% 8.9% 8.4%
Margin--ARMs........... 5.6% 6.6% 6.8% 7.0% 7.0%
</TABLE>
Correspondent Program. The Company began purchasing closed loans from other
mortgage bankers and financial institutions through its Correspondent Program
in late 1996. In early 1997, the Company expanded this program to include the
purchase of small, bulk packages of loans from correspondents. Correspondent
purchases totaled $17.1 million, or 6.8%, of the Company's total loan
production during the first quarter of 1997. Purchasing closed loans through
the Correspondent Program allows the Company to supplement its own loan
production with limited overhead expenses. Loans purchased by the Company
under the Correspondent Program must be originated in accordance with the
Company's underwriting guidelines and all such loans are currently re-
underwritten by the Company prior to purchase. By focusing on the purchase of
individual loans on a flow basis and small bulk purchases, the Company
believes that its Correspondent Program complements its existing marketing
efforts to brokers and enables the Company to increase loan production on a
cost-effective basis. The Company plans to expand its Correspondent Program
through marketing efforts by its broker account executives and through
targeted marketing to selected financial institutions and mortgage bankers.
The Company reviews an application for approval from each lender seeking to
participate in the Correspondent Program. The Company analyzes the mortgage
banker's underwriting guidelines and financial condition, including its
licenses and financial statements. New Century requires each mortgage banker
to enter into a purchase and sale agreement with customary representations and
warranties regarding the loans such mortgage banker will sell to the Company,
thereby providing the Company with representations and warranties that are
comparable to those given by the Company to its loan purchasers.
PRODUCT TYPES
General. The Company offers both fixed-rate and adjustable-rate loans, as
well as loans with an interest rate that is initially fixed for a period of
time and subsequently converts to an adjustable-rate. Most of the ARMs
originated by the Company are offered at a low initial interest rate,
sometimes referred to as a "teaser" rate. At each interest rate adjustment
date, the Company adjusts the rate, subject to certain limitations on the
amount of any single adjustment, until the rate charged equals the fully
indexed rate. There can be no assurance, however, that the interest rate on
these loans will reach the fully indexed rate if the loans are pre-paid or in
cases of foreclosure. The Company's borrowers fall into five subprime risk
classifications and products are available at different interest rates and
with different origination and application points and fees depending on the
particular
45
<PAGE>
borrower's risk classification (see "Business--Underwriting Standards").
Borrowers may choose to increase or decrease their interest rate through the
payment of different levels of origination fees and many of the Company's
fixed-rate borrowers, in particular, choose to "buy down" their interest rate
through the payment of additional origination fees. The Company's maximum loan
amounts are generally $500,000 with a loan-to-value ratio of up to 85%. The
Company does, however, offer larger loans with lower loan-to-value ratios on a
case-by-case basis, and also offers products that permit a loan-to-value ratio
of up to 90% for selected borrowers with a Company risk classification of
"A+." Loans originated or purchased by the Company in 1996 had an average loan
amount of approximately $105,666 and an average loan-to-value ratio of
approximately 71.5%. Unless prohibited by state law or otherwise waived by the
Company upon the payment by the related borrower of higher origination fees
and a higher interest rate, the Company generally imposes a prepayment penalty
on the borrower. Approximately 66.2% of the loans the Company originated or
purchased during the first quarter of 1997 provided for the payment by the
borrower of a prepayment charge in limited circumstances on certain full or
partial prepayments.
Alternative Mortgage Products Division. The Company frequently reviews its
products and pricing for competitiveness and introduces new products to meet
the needs of its borrowers, brokers and correspondents. The Company recently
commenced loan originations through its Alternative Mortgage Products Division
which offers loans to borrowers meeting conventional mortgage lending
standards and also offers a broad selection of second mortgage products,
including loans with loan-to-value ratios of up to 125% for borrowers with
good credit histories. The Alternative Mortgage Products Division maintains
separate underwriting and loan processing staffs and the Company expects that
the mortgage loans originated through its Alternative Mortgage Products
Division will be sold by the Company on a broker or correspondent basis,
rather than through securitizations or servicing-retained sales. The Company
is evaluating the introduction of certain other categories of consumer loans
to its product offerings, thereby expanding its consumer base and diversifying
its product mix.
UNDERWRITING STANDARDS
New Century originates or purchases its mortgage loans in accordance with
the underwriting criteria (the "Underwriting Guidelines") described below. The
loans the Company originates or purchases generally do not satisfy
conventional underwriting standards, such as those utilized by the Federal
National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC"); therefore, the Company's loans are likely to result in
rates of delinquencies and foreclosures that are higher, and may be
substantially higher, than those rates experienced by portfolios of mortgage
loans underwritten in a more traditional manner. The Underwriting Guidelines
are intended to evaluate the credit history of the potential borrower, the
capacity of the borrower to repay the proposed loan, the value of the security
property and the adequacy of such property as collateral for the proposed
loan. Based upon the underwriter's review of the loan application and related
data and application of the Underwriting Guidelines, the loan terms, including
interest rate and maximum loan-to-value, are determined.
The Company utilizes only experienced underwriters and the Company's chief
credit officer (the "Chief Credit Officer") must approve the hiring of all
underwriters, including those located in the regional operations centers. The
Company's underwriters are required to have had either substantial subprime
underwriting experience with a consumer finance company or other subprime
lender or substantial experience with the Company in other aspects of the
subprime mortgage finance industry before becoming part of the Company's
underwriting department. As of March 31, 1997, the Company employed 17
underwriters with an average of 10 years of subprime mortgage lending
experience. All underwriters participate in ongoing training, including
regular supervisory critiques of each underwriter's work. The Company believes
that its experienced underwriting personnel have the ability to analyze the
specific characteristics of each loan application and make appropriate credit
judgments. In addition, the Company believes that by effectively employing its
training program, its underwriters efficiently review and evaluate loan
packages while understanding and adhering to the Company's Underwriting
Guidelines.
46
<PAGE>
Underwriters are not given approval authority until their work has been
reviewed by the Chief Credit Officer for a period of time and deemed
satisfactory. Thereafter, the Chief Credit Officer re-evaluates the authority
levels of all underwriting personnel on an ongoing basis. All approved loans
currently require a second underwriting approval. The Company believes that
these controls and procedures constitute an important part of the Company's
infrastructure and commitment to loan quality.
On a case-by-case basis, exceptions to the Underwriting Guidelines are made
where compensating factors exist. For example, it may be determined that an
applicant warrants a risk category upgrade, a debt service-to-income ratio
exception, a pricing exception, a loan-to-value exception or an exception from
certain requirements of a particular risk category (collectively called an
"upgrade" or an "exception"). An upgrade or exception may generally be allowed
if the application reflects certain compensating factors, among others: low
loan-to-value; a maximum of one 30-day late payment on all mortgage loans
during the last 12 months; stable employment or ownership of the current
residence for five or more years; and above average physical condition of the
property securing the loan. An upgrade or exception may also be allowed if the
applicant places a down payment through escrow of at least 20% of the purchase
price of the mortgaged property, or if the new loan reduces the applicant's
monthly aggregate mortgage payment by 25% or more. Accordingly, certain
mortgagors may qualify in a more favorable risk category than would apply in
the absence of such compensating factors. In limited circumstances, the
underwriters may exercise judgment to make exceptions to the Underwriting
Guidelines where no compensating factors exist.
Each loan applicant completes an application that includes information with
respect to the applicant's liabilities, income, credit history, employment
history and personal information. The Underwriting Guidelines require a credit
report on each applicant from a credit reporting company. The report typically
contains information relating to such matters as credit history with local and
national merchants and lenders, installment debt payments and any record of
defaults, bankruptcies, repossessions or judgments. All mortgaged properties
are appraised by qualified independent appraisers prior to funding of the
loan. Such appraisers inspect and appraise the subject property and verify
that it is in acceptable condition. The Company requires that all mortgaged
properties be in at least "average" condition. Following each appraisal, the
appraiser prepares a report that includes a market value analysis based on
recent sales of comparable homes in the area and, when deemed appropriate,
replacement cost analysis based on the current cost of constructing a similar
home. All appraisals are required to conform to the Uniform Standards of
Professional Appraisal Practice adopted by the Appraisal Standards Board of
the Appraisal Foundation and are generally on forms acceptable to FNMA and
FHLMC. The Underwriting Guidelines require a review of the appraisal by a
qualified employee of the Company or by a qualified appraiser retained by the
Company.
The Underwriting Guidelines include three levels of applicant documentation
requirements, referred to as the "Full Documentation," "Limited Documentation"
and "Stated Income Documentation" programs. Under each of the programs, the
Company reviews the applicant's source of income, calculates the amount of
income from sources indicated on the loan application or similar
documentation, reviews the credit history of the applicant, calculates the
debt service-to-income ratio to determine the applicant's ability to repay the
loan, reviews the type and use of the property being financed, and reviews the
property. In determining the ability of the applicant to repay the loan, the
Company's underwriters use (i) a qualifying rate that is equal to the stated
interest rate on fixed-rate loans, (ii) the initial interest rate on loans
which provide for two or three years of fixed payments before the initial
interest rate adjustment or (iii) one percent above the initial interest rate
on other adjustable-rate loans. The Underwriting Guidelines require that
mortgage loans be underwritten in a standardized procedure which complies with
applicable federal and state laws and regulations and requires the Company's
underwriters to be satisfied that the value of the property being financed, as
indicated by an appraisal and a review of the appraisal, currently supports
the outstanding loan balance. In general, the maximum loan amount for mortgage
loans originated under the programs is $500,000; however, larger loans may be
approved on a case-by-case basis. The Underwriting Guidelines permit one-to-
four-family residential property loans to have loan-to-value ratios at
origination of generally up to 80%, or up to 90% for borrowers in the
Company's highest credit grade categories, depending on, among other things,
the purpose of the mortgage loan, a borrower's credit
47
<PAGE>
history, repayment ability and debt service-to-income ratio, as well as the
type and use of the property. With respect to mortgage loans secured by
mortgaged properties acquired by a borrower under a "lease option purchase,"
the loan-to-value of the related mortgage loan is based on the lower of the
appraised value at the time of origination of such mortgage loan or the sale
price of the related mortgaged property if the "lease option purchase price"
was set less than six months prior to origination. If the "lease option
purchase price" was set six months or more prior to origination, the loan-to-
value is based on the appraised value at the time of origination.
Under the Full Documentation program, applicants generally are required to
submit two written forms of verification of stable income for at least twelve
months. Under the Limited Documentation program, one such form of verification
is required for twelve months. Under the Stated Income Documentation program,
an applicant may be qualified based upon monthly income as stated on the
mortgage loan application if the applicant meets certain criteria. All the
foregoing programs require that with respect to salaried employees there be a
telephone verification of the applicant's employment. Verification of the
source of funds required to be deposited by the applicant into escrow in the
case of a purchase money loan is generally required under the Full
Documentation program guidelines and on all purchase loans where the loan-to-
value ratio is greater than 70%. No such verification is required under any of
the programs where the loan-to-value ratio is less than 70%.
The Company's categories and criteria for grading the credit history of
potential borrowers is set forth in the table below. Generally, borrowers in
lower credit grades are less likely to satisfy the repayment obligations of a
mortgage loan and, therefore, are subjected to more stringent underwriting
criteria and more limited loan-to-value ratios and are charged higher interest
rates and loan origination fees. Loans made to lower credit grade borrowers,
including credit-impaired borrowers, entail a higher risk of delinquency and
may result in higher losses than loans made to borrowers who use conventional
mortgage sources. The Company believes that the amount of equity present in
the collateral securing its loans generally mitigates these risks.
48
<PAGE>
UNDERWRITING GUIDELINES(1)
<TABLE>
<CAPTION>
A+ RISK A- RISK B RISK C RISK C- RISK
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Existing mortgage
history................ Maximum one Maximum Maximum four Unlimited Unlimited
30-day late three 30-day 30-day late number of 30- and 60-
payment and late payments and 30- and 60- day late
no 60-day payments and one 60-day day late payments and
late no 60-day late payment payments and a maximum of
payments late within last maximum of two 90-day
within last payments 12 months if two 90-day late
12 months; within last LTV is 75% late payments and
must be 12 months if or less; no payments one 120-day
current at LTV is 75% 60-day late within last late payment
application or less; two payments if 12 months if if LTV is
time 30-day late LTV is over LTV is 70% more than
payments in 75%; not or less; 65%; if LTV
last 12 required to maximum two is 65% or
months if be current 60-day late less, there
LTV is over at payments or may be a
75%; not application one 90-day current
required to time late payment notice of
be current if LTV is default; not
at over 70%; required to
application not required be current
time to be at
current at application
application time
time
Other credit............ No open Minor Prior Significant Significant
collection derogatory defaults prior defaults
accounts or items acceptable; defaults acceptable;
charge-offs allowed; not not more acceptable; open charge-
open after more than than $1,000 generally, offs or
funding $500 in open in open not more collection
collection collection than $2,500 amounts may
accounts or accounts or in open remain open
charge-offs charge-offs collection after
open after open after accounts or funding
funding funding charge-offs
open after
funding
Bankruptcy filings...... Generally, Generally, Generally, Generally, Bankruptcy,
no no no no notice of
bankruptcy bankruptcy bankruptcy bankruptcy sale filing,
or notice of or notice of or notice of or notice of notice of
default default default default default
filings in filings in filings in filings in filing or
last 3 years last 3 years last 2 years last 18 foreclosure
months permitted on
a case by
case basis
Debt service to income
ratio.................. 42-45% 55% or less 60% or less 60% or less 65% or less
Maximum loan-to-value
ratio:(2)
Owner occupied:
single family.......... 85-90% 75-85% 70-80% 70-75% 70%
Owner occupied:
condo/two-to-four unit. 80% 70-75% 65-70% 65-70% 65%
Non-owner occupied..... 75% 70-75% 65-75% 65-70% 60-65%
</TABLE>
- --------
(1) The letter grades applied to each risk classification reflect the
Company's internal standards and do not necessarily correspond to the
classifications used by other mortgage lenders. "LTV" means loan-to-value
ratio.
(2) The maximum LTV set forth in the table is for borrowers providing full
documentation. The LTV is reduced 5% for limited documentation and 10% for
stated income applications, if applicable.
New Century evaluates its Underwriting Guidelines on an ongoing basis and
periodically modifies the Underwriting Guidelines to reflect the Company's
current assessment of various issues related to an underwriting analysis. The
Company recently introduced a "mortgage only" underwriting program for
borrowers in the two highest credit grade categories. Underwriting under the
mortgage only program focuses primarily on the borrower's mortgage payment
history and places less emphasis on consumer credit and other aspects of the
borrower's credit history. In addition, the Company adopts underwriting
guidelines appropriate to new loan products, such as those offered by the
Alternative Mortgage Products Division. The conventional mortgage loans and
second mortgage loans, including 125% loan-to-value loans, offered by the
Alternative Mortgage Products
49
<PAGE>
Division are underwritten to the standards of the intended buyers thereof and
utilize information not considered by the Company in its standard Underwriting
Guidelines, including credit scores. In addition, the Alternative Mortgage
Products Division maintains separate underwriting and loan processing staffs.
New Century commenced receiving applications for mortgage loans under its
regular lending program in February 1996 and during 1996 sold all of its loans
on a whole loan, servicing-released basis. Accordingly, the Company (whether
as an originator or purchaser of mortgage loans) does not currently have
representative historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of estimating the future
delinquency and loss experience of its mortgage loans. However, the Company
recently established reporting systems to track such data for the loans
included in its February and May 1997 securitizations and expects to have this
data in the future with respect to the loans the Company securitizes.
LOAN PRODUCTION BY BORROWER RISK CLASSIFICATION
The following table sets forth information concerning the Company's
principal balance of fixed rate and adjustable rate loan production by
borrower risk classification for the periods shown:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE FOR THE
--------------------------------------------- YEAR ENDED QUARTER ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1996 1996 1996 1996 1997
--------- -------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
A+ Risk Grade:
Percent of total
purchases and
origination........... 25.1% 20.2% 23.4% 19.3% 21.0% 20.2%
Combined weighted
average initial loan-
to-value ratio........ 75.7 74.6 73.5 72.7 73.3 73.0
Weighted average
interest rate:
Fixed-rate............. 9.9 9.8 9.8 9.9 9.8 9.5
ARMs................... 8.5 8.7 8.2 8.6 8.4 8.7
Margin-- ARMs.......... 5.8 6.4 6.4 6.7 6.5 6.8
A- Risk Grade:
Percent of total
purchases and
origination........... 39.8% 35.9% 32.4% 32.8% 33.2% 36.1%
Combined weighted
average initial loan-
to-value ratio........ 74.3 72.9 73.6 73.2 73.3 72.4
Weighted average
interest rate:
Fixed-rate............. 9.5 10.1 10.4 9.9 10.1 9.6
ARMs................... 9.4 9.0 9.0 8.8 8.9 8.7
Margin--ARMs........... 5.9 6.7 6.8 6.9 6.8 6.8
B Risk Grade:
Percent of total
purchases and
origination........... 26.7% 21.0% 22.0% 24.1% 22.9% 23.2%
Combined weighted
average initial loan-
to-value ratio........ 65.3 69.7 73.4 71.9 72.0 71.2
Weighted average
interest rate:
Fixed-rate............. 10.1 10.4 10.7 10.5 10.5 10.3
ARMs................... 9.2 9.5 9.3 9.4 9.4 9.4
Margin--ARMs........... 5.3 7.0 7.0 7.2 7.1 7.2
C Risk Grade:
Percent of total
purchases and
origination........... 4.1% 14.8% 13.9% 14.3% 14.1% 12.1%
Combined weighted
average initial loan-
to-value ratio........ 80.0 70.1 69.0 68.1 68.8 68.6
Weighted average
interest rate:
Fixed-rate............. -- 11.5 12.4 11.0 11.6 10.8
ARMs................... 8.3 9.7 10.2 10.3 10.2 10.0
Margin--ARMs........... 6.0 7.1 7.5 7.5 7.4 7.4
C- Risk Grade:
Percent of total
purchases and
origination........... 4.3% 8.1% 8.3% 9.5% 8.8% 8.4%
Combined weighted
average initial loan-
to-value ratio........ 75.0 65.4 62.2 63.3 63.3 62.3
Weighted average
interest rate:
Fixed-rate............. -- 10.8 12.2 12.3 11.9 11.4
ARMs................... 9.4 11.5 11.1 11.1 11.1 10.6
Margin--ARMs........... 5.0 7.5 7.6 7.7 7.6 7.5
</TABLE>
50
<PAGE>
GEOGRAPHIC DISTRIBUTION
The following table sets forth aggregate dollar amounts (in thousands) and
the percentage of all loans originated or purchased by the Company by state
for the periods shown:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE FOR THE
----------------------------------------------------------- YEAR ENDED QUARTER ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1996 1996 1996 1996 1997
------------ ------------- -------------- -------------- -------------- --------------
$ % $ % $ % $ % $ % $ %
------ ----- ------- ----- -------- ----- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California.............. $4,122 96.0% $44,205 84.1% $ 75,565 61.3% $ 98,952 56.0% $222,844 62.4% $124,698 49.8%
Illinois................ -- -- -- -- 23,250 18.8% 32,671 18.5% 55,921 15.7% 44,674 17.8%
Ohio.................... -- -- -- -- 2,990 2.4% 10,814 6.1% 13,804 3.9% 13,190 5.3%
Arizona................. -- -- 1,717 3.3% 5,315 4.3% 11,120 6.3% 18,152 5.1% 15,451 6.2%
Colorado................ 101 2.4% 3,970 7.6% 5,558 4.5% 6,790 3.8% 16,419 4.6% 12,980 5.2%
Utah.................... 70 1.6% 1,726 3.3% 3,394 2.8% 6,176 3.5% 11,366 3.2% 9,316 3.7%
Other................... -- -- 914 1.7% 7,276 5.9% 10,243 5.8% 18,433 5.1% 30,261 12.0%
------ ----- ------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total.................. $4,293 100.0% $52,532 100.0% $123,348 100.0% $176,766 100.0% $356,939 100.0% $250,570 100.0%
</TABLE>
LOAN SALES AND SECURITIZATIONS
The Company currently intends to securitize a majority of the loans
originated or purchased by the Company and to sell a substantial portion of
its loans in bulk sales to institutional purchasers of whole loans.
Whole Loan Sales. Until February 1997, the Company followed a strategy of
selling for cash all of its loan originations and purchases in the secondary
market through loan sales in which the Company disposes of its entire economic
interest in the loans (including servicing rights) for a cash price that
represents a premium over the principal balance of the loans sold. During
1996, the Company sold $298.7 million of loans through whole loan sales
transactions at a weighted average sales price equal to 105.0% of the original
principal balance of the loans sold. The Company did not sell any loans
through securitization during this period; however, substantially all of the
loans sold during this period were ultimately securitized by the purchasers
thereof.
The Company seeks to maximize its premium on whole 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 1996,
the Company sold loans to seven institutional purchasers, two of which
purchased approximately 83.6% of the loans sold by the Company.
Whole loan sales are made on a non-recourse basis pursuant to a purchase
agreement containing customary representations and warranties by the Company
regarding the underwriting criteria applied by the Company and the origination
process. The Company, therefore, may be required to repurchase or substitute
loans in the event of a breach of its representations and warranties. In
addition, the Company sometimes commits to repurchase or substitute a loan if
a payment default occurs within the first month following the date the loan is
funded, unless other arrangements are made between the Company and the
purchaser. The Company is also required in some cases to repurchase or
substitute a loan if the loan documentation is alleged to contain fraudulent
misrepresentations made by the borrower. See "Risk Factors--Dependence on
Whole Loan Sales for Future Earnings."
Securitizations. The Company completed the sale of loans through
securitization in February and May 1997 and anticipates that significant
revenue from gain on the sale of loans will be generated from the sale of
mortgage backed securities created through securitization transactions in
future periods. In a securitization, the Company sells loans that it has
originated or purchased to a trust for a cash purchase price and an interest
in the loans securitized called residual interests. The cash purchase price is
raised through an offering of senior certificates by the trust. Following the
securitization, purchasers of senior certificates receive the principal
collected, including prepayments, and the investor pass-through interest rate
on the principal balance, while the Company receives the cash flows from the
residual interests, after payment of servicing fees, guarantor fees and
51
<PAGE>
other trust expenses and provided the specified over-collateralization
requirements are met. The Company recognizes gain on sale of the loans, which
represents the excess of the estimated fair value of the residual interests,
less closing and underwriting costs, over the carrying value of the loans
sold, in the fiscal quarter in which such loans are sold. Concurrent with
recognizing such gain on sale, the Company records the residual interests as
assets on its balance sheet. The recorded values of these residual interests
are amortized as distributions are received from the trust holding the
respective loan pool.
With respect to the aforementioned securitizations, the Company arranged for
the related trusts to purchase credit enhancements for the senior certificates
in the related trusts in the form of insurance policies provided by one
AAA/Aaa rated monoline insurance company and, as a result, the senior
certificates in each trust received a rating of "AAA" from Standard & Poor's
Ratings Services and "Aaa" from Moody's Investors Service, Inc.
There are no assurances that actual performance of any of the Company's
securitized loan portfolios will be consistent with the Company's estimates
and assumptions. To the extent that actual prepayment speeds, losses or market
discount rates materially differ from the Company's estimates, the estimated
value of its residuals may increase or decrease, which may have a material
impact on the Company's results of operations, financial condition and
liquidity. See "Risk Factors--Dependence on Securitizations for Future
Earnings,--Residual Interests in Securitizations,--Liquidity; Negative Cash
Flow."
LOAN SERVICING AND DELINQUENCIES
Servicing. The Company subcontracts with Advanta, a third party subservicer,
to conduct its servicing operations, which has allowed the Company to increase
the volume of its loan originations and purchases without incurring related
overhead investments in servicing operations. During the period from the date
the Company originates or purchases loans and the date the Company sells these
loans, which generally ranges from thirty to ninety days (the "Interim
Period"), the Company is responsible for servicing the loans it originates and
purchases. In some cases, whole loan purchasers may request that the Company,
through Advanta, continue to service the loans purchased for an interim period
following the sale. In April 1996, the Company entered into the Advanta
Interim Agreement to service loans during the Interim Period, including any
interim period following the sale of the loans. In addition, Advanta currently
services or subservices loans sold through each public securitization of the
Company's loans pursuant to the Advanta Securitization Agreement.
According to Advanta's Annual Report on Form 10-K for the year ended
December 31, 1996, Advanta's servicing portfolio at December 31, 1996 was
approximately $6.4 billion in loans. Servicing includes collecting and
remitting loan payments, making required advances, accounting for principal
and interest, holding escrow or impound funds for payment of taxes and
insurance, and, if applicable, contacting delinquent borrowers and supervising
foreclosures and property dispositions in the event of unremedied defaults in
accordance with the Company's guidelines.
Advanta Interim Agreement. Under the Advanta Interim Agreement, New Century
is obligated to pay Advanta an annual servicing fee on the declining principal
balance of each loan serviced and a set-up fee for each loan delivered to
Advanta for servicing, and to reimburse Advanta for certain customary costs
and expenses. Such expenses include costs for the preservation, restoration
and protection of the mortgaged properties secured by the Company's loans, any
enforcement or judicial proceedings, including foreclosures, related to such
mortgaged properties, the management and liquidation of the mortgaged
properties if they are acquired in satisfaction of a defaulted mortgage loan,
the maintenance of hazard insurance and the payment of property taxes and
mortgage insurance premiums. If claims are not made or paid under applicable
insurance policies or if coverage thereunder has ceased, the Company will
suffer a loss to the extent that proceeds from liquidation of the mortgaged
property, after reimbursement of Advanta's expenses in the sale, are less than
the principal balance of the related mortgage loan.
The Company may terminate the Advanta Interim Agreement upon the occurrence
of one or more of the events specified in the Advanta Interim Agreement
generally relating to Advanta's proper and timely
52
<PAGE>
performance of its duties and obligations under such agreement. Either the
Company or Advanta may terminate the Advanta Interim Agreement without cause
upon 90 days' prior written notice to the other party; provided, that if the
Company terminates such agreement without cause, the Company must pay Advanta
all reasonable costs associated with the transfer of the Company's loans to
another servicer. In addition, if the Company transfers servicing of any
amount of mortgage loans being serviced by Advanta to another servicer, the
Company must pay Advanta up to $50 per mortgage loan transferred.
As is customary in the mortgage loan servicing industry, Advanta is entitled
to retain any late payment charges, penalties and assumption fees collected in
connection with the mortgage loans. Advanta also receives any benefit derived
from interest earned on collected principal and interest payments between the
date of collection and the date of remittance to the Company and from interest
earned on escrow funds. However, the Company retains the benefit of any
prepayment penalties collected on the loans. Under the Advanta Interim
Agreement, Advanta is required to remit to the Company no later than the 20th
day of each month all principal and interest collected from borrowers during
the prior monthly reporting period.
Advanta Securitization Agreement. Under the Advanta Securitization
Agreement, the Company is obligated to pay Advanta a monthly servicing fee on
the declining principal balance of each loan serviced and a set-up fee for
each loan delivered to Advanta for servicing. Advanta is required to pay all
expenses related to the performance of its duties under the Advanta
Securitization Agreement. Further, Advanta is required to make advances of
taxes and required insurance premiums that are not collected from borrowers
with respect to any mortgage loan, only if it determines that such advances
are recoverable from the mortgagor, insurance proceeds or other sources with
respect to such mortgage loan. If such advances are made, Advanta generally
will be reimbursed prior to the Company receiving the remaining proceeds.
Advanta also will be entitled to reimbursement by the Company for expenses
incurred by it in connection with the liquidation of defaulted mortgage loans
and in connection with the restoration of mortgaged property. If claims are
not made or paid under applicable insurance policies or if coverage thereunder
has ceased, the Company will suffer a loss to the extent that the proceeds
from liquidation of the mortgaged property, after reimbursement of Advanta's
expenses in the sale, are less than the principal balance of the related
mortgage loan.
Under the Advanta Securitization Agreement, if the Company terminates such
agreement without cause or transfers the servicing of any amount of the
mortgage loans serviced by Advanta to another servicer, the Company must pay
Advanta certain penalties, fees and costs. Depending on the size of the
Company's loan portfolio serviced by Advanta at any point in time, the
termination or transfer penalties that the Company would be obligated to pay
Advanta may be substantial. With respect to mortgage loans securitized by the
Company, the Company will not be able to terminate the servicer without the
approval of the trustee for such securitization.
As is customary in the mortgage loan servicing industry, Advanta is entitled
to retain any late payment charges, penalties and assumption fees collected in
connection with the mortgage loans, net of pre-payment penalties, which accrue
to the Company. Advanta receives any benefit derived from interest earned on
collected principal and interest payments between the date of collection and
the date of remittance to the Company and from interest earned on tax and
insurance impound funds. Under the Advanta Securitization Agreement, Advanta
is generally required to remit all principal and interest scheduled to be
collected from borrowers during the prior monthly reporting period generally
no later than the 18th day of each month.
The Company currently outsources its servicing operations to Advanta because
this arrangement has allowed the Company to increase the volume of its loan
originations and purchases without incurring related overhead investments in
servicing operations. The Company intends to develop its own servicing
capability in order to manage the relationship with its borrowers and oversee
the performance of its loans more directly. See "Recent Developments--Comerica
Investment and Strategic Relationship."
Delinquencies and Foreclosures. Loans originated or purchased by the Company
are secured by mortgages, deeds of trust, security deeds or deeds to secure
debt, depending upon the prevailing practice in the state in which the
property securing the loan is located. Depending on local law, foreclosure is
effected by
53
<PAGE>
judicial action or nonjudicial sale, and is subject to various notice and
filing requirements. In general, the borrower, or any person having a junior
encumbrance on the real estate, may cure a monetary default by paying the
entire amount in arrears plus other designated costs and expenses incurred in
enforcing the obligation during a statutorily prescribed reinstatement period.
Generally, state law controls the amount of foreclosure expenses and costs,
including attorneys fees, which may be recovered by a lender. After the
reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan
and may be required to pay the loan in full to prevent the scheduled
foreclosure sale. Where a loan has not yet been sold or securitized, the
Company will generally allow a borrower to reinstate the loan up to the date
of foreclosure sale.
Although foreclosure sales are typically public sales, third-party
purchasers rarely bid in excess of the lender's lien because of the difficulty
of determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus, the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the sum of the principal amount
outstanding under the loan, accrued and unpaid interest and the expenses of
foreclosure. Depending on market conditions, the ultimate proceeds of the sale
may not equal the lender's investment in the property.
New Century commenced receiving applications for mortgage loans under its
regular lending program in February 1996 and during 1996 sold all of its loans
on a whole loan, servicing-released basis. Accordingly, the Company (whether
as an originator or purchaser of mortgage loans) does not have representative
historical delinquency, bankruptcy, foreclosure or default experience that may
be referred to for purposes of estimating the future delinquency and loss
experience of its mortgage loans. Likewise, the Company does not have
meaningful delinquency, loss and prepayment data with respect to the loans
included in the Company's first securitization, as these loans have been
outstanding for only a short period of time.
INTEREST RATE RISK MANAGEMENT
The Company's profits depend, in part, on the difference, or "spread,"
between the effective rate of interest received by the Company on the loans it
originates or purchases and the interest rates payable by the Company under
its warehouse financing facilities or for securities issued in its
securitizations. The spread can be adversely affected because of interest rate
increases during the period from the date the loans are originated or
purchased until the closing of the sale or securitization of such loans.
The Company from time to time may use various hedging strategies to provide
a level of protection against interest rate risks on its fixed-rate mortgage
loans. These strategies may include selling short and selling forward United
States Treasury securities and prefunding loan originations in its
securitizations, as well as forward sales of mortgage loans or mortgage-backed
securities, interest rate caps and floors and buying and selling of futures
and options on futures. The Company's management determines the nature and
quantity of hedging transactions based on various factors, including market
conditions and the expected volume of mortgage loan originations and
purchases. While the Company believes its hedging strategies are cost-
effective and provide some protection against interest rate risks, no hedging
strategy can completely protect the Company from such risks. Further, the
Company does not believe that hedging against the interest rate risks
associated with adjustable-rate mortgages is cost effective, and the Company
does not utilize the hedging strategies described above with respect to its
adjustable-rate loans, which constitute the majority of the Company's loan
production.
COMPETITION
The Company faces intense competition in the business of originating,
purchasing and selling mortgage loans. The Company's competitors in the
industry include other consumer finance companies, mortgage banking companies,
commercial banks, credit unions, thrift institutions, credit card issuers and
insurance finance companies. Many of these competitors are substantially
larger and have considerably greater financial, technical and marketing
resources than the Company. In addition, many financial services organizations
that are much
54
<PAGE>
larger than the Company have formed national loan origination networks
offering loan products that are substantially similar to the Company's loan
programs. Competition among industry participants can take many forms,
including convenience in obtaining a loan, customer service, marketing and
distribution channels, amount and term of the loan, loan origination fees and
interest rates. In addition, the current level of gains realized by the
Company and its competitors on the sale of subprime loans could attract
additional competitors into this market. Additional competition may lower the
rates the Company can charge borrowers, thereby potentially lowering gain on
future loan sales and securitizations. To the extent any of these competitors
significantly expand their activities in the Company's market, the Company
could be materially adversely affected. Fluctuations in interest rates and
general economic conditions may also affect the Company's competition. During
periods of rising 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.
The Company believes its competitive strengths include: (i) the experience
of its senior executive team and underwriting personnel; (ii) providing a high
level of service to brokers and their customers; (iii) offering competitive
loan programs for borrowers whose needs are not met by conventional mortgage
lenders; (iv) the Company's high-volume targeted direct mail marketing program
and database screening methodology; and (v) its performance-based compensation
structure which allows the Company to attract, retain and motivate qualified
personnel.
REGULATION
The consumer financing industry is a highly regulated industry. The
Company's business is subject to extensive and complex rules and regulations
of, and examinations by, various federal, state and local government
authorities. These rules and regulations impose obligations and restrictions
on the Company's loan origination, credit activities and secured transactions.
In addition, these rules limit the interest rates, finance charges and other
fees the Company may assess, mandate extensive disclosure to the Company's
customers, prohibit discrimination and impose multiple qualification and
licensing obligations on the Company. Failure to comply with these
requirements may result in, among other things, loss of approved status,
demands for indemnification or mortgage loan repurchases, certain rights of
rescission for mortgage loans, class action lawsuits, administrative
enforcement actions and civil and criminal liability. Management of the
Company believes that the Company is in compliance with these rules and
regulations in all material respects.
The Company's loan origination activities are subject to the laws and
regulations in each of the states in which those activities are conducted. For
example, state usury laws limit the interest rates the Company can charge on
its loans. As of May 31, 1997, the Company was licensed or exempt from
licensing requirements by the relevant state banking or consumer credit
agencies to originate first mortgages in 41 states and second mortgages in 36
states. The Company's lending activities are also subject to various federal
laws, including the Truth in Lending Act, Homeownership and Equity Protection
Act of 1994, the Equal Credit Opportunity Act, the Fair Credit Reporting Act,
the Real Estate Settlement Procedures Act and the Home Mortgage Disclosure
Act.
The Company is subject to certain disclosure requirements under the Truth in
Lending Act ("TILA") and Regulation Z promulgated under TILA. TILA is designed
to provide consumers with uniform, understandable information with respect to
the terms and conditions of loan and credit transactions. TILA also guarantees
consumers a three day right to cancel certain credit transactions, including
loans of the type originated by the Company. In addition, TILA gives
consumers, among other things, a right to rescind loan transactions in certain
circumstances if the lender fails to provide the requisite disclosure to the
consumer.
The Company is also subject to the Homeownership and Equity Protection Act
of 1994 (the "High Cost Mortgage Act"), which makes certain amendments to
TILA. The High Cost Mortgage Act generally applies to consumer credit
transactions secured by the consumer's principal residence, other than
residential mortgage transactions, reverse mortgage transactions or
transactions under an open end credit plan, in which the loan has either (i)
total points and fees upon origination in excess of the greater of eight
percent of the loan amount or
55
<PAGE>
$400, or (ii) an annual percentage rate of more than ten percentage points
higher than United States Treasury securities of comparable maturity ("Covered
Loans"). The High Cost Mortgage Act imposes additional disclosure requirements
on lenders originating Covered Loans. In addition, it prohibits lenders from,
among other things, originating Covered Loans that are underwritten solely on
the basis of the borrower's home equity without regard to the borrower's
ability to repay the loan and including prepayment fee clauses in Covered
Loans to borrowers with a debt-to-income ratio in excess of 50% or Covered
Loans used to refinance existing loans originated by the same lender. The High
Cost Mortgage Act also restricts, among other things, certain balloon payments
and negative amortization features. The Company did not originate or purchase
Covered Loans in 1996, but the Company commenced originating and purchasing
Covered Loans during the first quarter of 1997.
The Company is also required to comply with the Equal Credit Opportunity Act
of 1974, as amended ("ECOA") and Regulation B promulgated thereunder, the Fair
Credit Reporting Act, as amended, the Real Estate Settlement Procedures Act of
1975, as amended, and the Home Mortgage Disclosure Act of 1975, as amended.
ECOA prohibits creditors from discriminating against applicants on the basis
of race, color, sex, age, religion, national origin or marital status.
Regulation B restricts creditors from requesting certain types of information
from loan applicants. The Fair Credit Reporting Act, as amended, requires
lenders, among other things, to supply an applicant with certain information
if the lender denied the applicant credit. The Real Estate Settlement
Procedures Act mandates certain disclosure concerning settlement fees and
charges and mortgage servicing transfer practices. It also prohibits the
payment or receipt of kickbacks or referral fees in connection with the
performance of settlement services. In addition, beginning with loans
originated in 1997, the Company must file an annual report with the Department
of Housing and Urban Development pursuant to the Home Mortgage Disclosure Act,
which requires the collection and reporting of statistical data concerning
loan transactions.
In the course of its business, the Company may acquire properties securing
loans that are in default. There is a risk that hazardous or toxic waste could
be found on such properties. In such event, the Company could be held
responsible for the cost of cleaning up or removing such waste, and such cost
could exceed the value of the underlying properties.
Because the Company's business is highly regulated, the laws, rules and
regulations applicable to the Company are subject to regular modification and
change. There are currently proposed various laws, rules and regulations
which, if adopted, could impact the Company. There can be no assurance that
these proposed laws, rules and regulations, or other such laws, rules or
regulations, will not be adopted in the future which could make compliance
much more difficult or expensive, restrict the Company's ability to originate,
broker, purchase or sell loans, further limit or restrict the amount of
commissions, interest and other charges earned on loans originated, brokered,
purchased or sold by the Company, or otherwise adversely affect the business
or prospects of the Company.
EMPLOYEES
At April 30, 1997, the Company employed 491 full-time employees and 3 part-
time employees. None of the Company's employees is subject to a collective
bargaining agreement. The Company believes that its relations with its
employees are satisfactory.
PROPERTIES
The Company's current executive and administrative offices are located in
Newport Beach, California, and consist of approximately 9,300 square feet. The
leases on the premises expire December 10, 1998, subject to termination in
December 1997. The current annual rent for these offices is approximately
$140,000.
The Company intends to relocate its executive and administrative offices in
June 1997 to Irvine, California. The estimated expiration date for the lease
on the new premises is May 31, 2002 and the monthly rent is approximately
$75,000 through November 1997 for 41,092 square feet and from $110,000 to
$122,000 thereafter
56
<PAGE>
for 60,189 square feet. The Company's anticipated relocation of its executive
and administrative offices may cause a temporary short-term disruption in its
operations; however, the Company believes that any such disruption will not
have a material adverse effect on its results of operations or financial
condition.
The Company also leases space for its sales offices. As of March 31, 1997,
these facilities had an annual aggregate base rental of approximately $990,000
and the sales offices ranged in size from 100 to 4,968 square feet with lease
terms typically ranging from one to five years. As of March 31, 1997, annual
base rents for the sales offices ranged from approximately $3,600 to $82,000.
In general, the terms of these leases vary as to duration and rent escalation
provisions and the leases expire between June 1997 and May 2002 and provide
for rent escalations dependent upon either increases in the lessors' operating
expenses or fluctuations in the consumer price index in the relevant
geographical area.
LEGAL PROCEEDINGS
The Company occasionally becomes involved in litigation arising in the
normal course of business. Management believes that any liability with respect
to such legal actions, individually or in the aggregate, will not have a
material adverse effect on the Company's financial position or results of
operations.
57
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The Board of Directors is divided into three classes: Class I, Class II and
Class III. After each director's initial term, each director serves for a term
ending the third annual meeting after which such director is elected and until
such director's successor is elected. The terms of office of directors in
Class I, Class II and Class III end after the annual meetings of stockholders
of the Company in 1998, 1999 and 2000, respectively. Messrs. Gotschall, Ryan
and Smith are Class I directors, Messrs. Chu, Morrice and Sachs are Class II
directors and Messrs. Bentley, Cole and Holder are Class III directors. The
following table sets forth the name, age and position with the Company of each
person who is an executive officer, director or key employee of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Directors and Executive
- -----------------------
Officers:
--------
Robert K. Cole........... 50 Chairman of the Board, Chief Executive Officer,
Director
Brad A. Morrice.......... 40 Vice Chairman, President, General Counsel,
Secretary, Director
Edward F. Gotschall...... 42 Vice Chairman, Chief Operating Officer--
Finance/Administration, Director
Steven G. Holder......... 39 Vice Chairman, Chief Operating Officer--Loan
Production/Operations, Director
John C. Bentley(1)(2).... 37 Director
Sherman I. Chu(2)........ 32 Director
Harlan W. Smith(3)....... 63 Director
Martin F. Ryan........... 59 Director
Michael M. Sachs(1)(2)... 56 Director
Future Director:
- ---------------
Fredric J. Forster(4).... 53 Future Director
Key Employees:
- -------------
Patrick J. Flanagan...... 32 Director, Executive Vice President and Chief
Operating Officer, New Century Mortgage (5)
Shahid S. Asghar......... 34 Director, Senior Vice President--Wholesale
Lending, New Century Mortgage (5)
Paul L. Rigdon........... 36 Director, Senior Vice President--Retail Lending,
New Century Mortgage (5)
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
(3) Upon the completion of the Offering, Mr. Smith shall resign from the
Board.
(4) Mr. Forster shall become a director of the Company and a member of the
Compensation Committee upon the closing of the Offering and has agreed to
be named as such in the Prospectus.
(5) New Century Mortgage Corporation ("New Century Mortgage") is a wholly-
owned subsidiary of the Company.
ROBERT K. COLE has been the Chairman of the Board and Chief Executive
Officer of the Company since December 1995 and a director of the Company since
November 1995. Mr. Cole also serves on the Board of Directors of New Century
Mortgage. From February 1994 to March 1995, he was the President and Chief
Operating Officer--Finance of Plaza Home Mortgage Corporation ("Plaza Home
Mortgage"), a publicly-traded savings and loan holding company specializing in
the origination and servicing of residential mortgage loans. In addition, Mr.
Cole served as a director of Option One Mortgage Corporation ("Option One"), a
subsidiary of
58
<PAGE>
Plaza Home Mortgage specializing in the origination, sale and servicing of
subprime mortgage loans. From June 1990 to January 1994, Mr. Cole was the
President of Triple Five, Inc., an international real estate development
company. Previously, Mr. Cole was the President of operating subsidiaries of
NBD Bancorp and Public Storage, Inc. Mr. Cole received a Masters of Business
Administration degree from Wayne State University.
BRAD A. MORRICE has been Vice Chairman of the Company since December 1996,
General Counsel of the Company since December 1995 and President, Secretary
and a director of the Company since November 1995. Mr. Morrice also serves as
Co-Chairman of the Board and Chief Executive Officer of New Century Mortgage.
From February 1994 to March 1995, he was the President and Chief Operating
Officer--Administration of Plaza Home Mortgage, after serving as its Executive
Vice President, Chief Administrative Officer since February 1993. In addition,
Mr. Morrice served as General Counsel and a director of Option One. From
August 1990 to January 1993, Mr. Morrice was a partner in the law firm of
King, Purtich & Morrice, where he specialized in the legal representation of
mortgage banking companies. Mr. Morrice previously practiced law at the firms
of Fried, King, Holmes & August and Manatt, Phelps & Phillips. He received his
law degree from the University of California, Berkeley (Boalt Hall) and a
Masters of Business Administration degree from Stanford University.
EDWARD F. GOTSCHALL has been Vice Chairman of the Company since December
1996, Chief Operating Officer--Finance/Administration of the Company since
December 1995 and a director of the Company since November 1995. Mr. Gotschall
also serves as Chief Financial Officer and a director of New Century Mortgage.
From April 1994 to July 1995, he was the Executive Vice President/Chief
Financial Officer of Plaza Home Mortgage and a director of Option One. In
December 1992, Mr. Gotschall was one of the co-founders of Option One and
served as its Executive Vice President/Chief Financial Officer until April
1994. From January 1991 to July 1992, he was the Executive Vice
President/Chief Financial Officer of The Mortgage Network, Inc., a retail
mortgage banking company.
STEVEN G. HOLDER has been Vice Chairman of the Company since December 1996,
Chief Operating Officer--Loan Production/Operations of the Company since
December 1995 and a director of the Company since November 1995. Mr. Holder
also serves as Co-Chairman of the Board and Chief Executive Officer of New
Century Mortgage. From February 1993 to August 1995, he was the Executive Vice
President of Long Beach Mortgage Company ("Long Beach Mortgage"). From July
1991 to February 1993, Mr. Holder was the Vice President for Business
Development of Transamerica Financial Services. From 1985 to 1990, he was a
Regional Vice President for Nova Financial Services, a startup consumer
finance subsidiary of First Interstate Bank. Mr. Holder has over 20 years
experience in the consumer finance and mortgage business.
PATRICK J. FLANAGAN has been Executive Vice President and Chief Operating
Officer of New Century Mortgage since January 1997 and a director of New
Century Mortgage Corporation since May 1997. Mr. Flanagan initially joined New
Century Mortgage in May 1996 as Regional Vice President of Midwest Wholesale
and Retail operations. From August 1994 to April 1996, Mr. Flanagan was a
Regional Manager with Long Beach Mortgage. From July 1992 to July 1994, he was
an Assistant Vice President for First Chicago Bank, from February 1989 to
February 1991, he was Assistant Vice President for Banc One in Chicago and
from February 1991 to July 1992, he was a Business Development Manager for
Transamerica Financial Services.
SHAHID S. ASGHAR has been Senior Vice President--Wholesale Lending of New
Century Mortgage since January 1997 and a director of New Century Mortgage
Corporation since May 1997. Mr. Asghar initially joined New Century Mortgage
as Vice President, Mortgage Banking Operations in December 1995. From June
1995 to November 1995, Mr. Asghar was the Southern California District Manager
for Ford Consumer Finance. From September 1992 to March 1995, he was an Area
Sales Manager for Long Beach Mortgage and from June 1988 to September 1992, he
was a Business Development Manager for Transamerica Financial Services.
PAUL L. RIGDON has been Senior Vice President--Retail Lending of New Century
Mortgage since February 1997 and a director of New Century Mortgage
Corporation since May 1997. Mr. Rigdon joined New Century Mortgage in
September 1996 as the Regional Manager in charge of expansion in the Northwest
Retail Region. From May 1995 to September 1996, he was a District Manager for
Advanta Finance. From March 1990 to May 1995, he was an Area Manager for Long
Beach Mortgage.
59
<PAGE>
JOHN C. BENTLEY has been a director of the Company since November 1995.
Since February 1995, Mr. Bentley has been a principal of Cornerstone Equity
Partners, L.L.C., a private equity investment company of which he is a co-
founder. From February 1989 to February 1995, he was employed by Banc One
Capital Corporation, most recently as a Senior Vice President, where he worked
in the merchant banking group. Mr. Bentley also served four years as Chief
Financial Officer of R.J. Moran, Inc., a diversified holding company.
SHERMAN I. CHU has been a director of the Company since November 1995. Since
April 1995, Mr. Chu has been a principal of Cornerstone Equity Partners,
L.L.C., of which he is a co-founder. From November 1991 to March 1995, he was
employed by Banc One Capital Corporation, most recently as an Assistant Vice
President, where he worked in the merchant banking group. Mr. Chu was also
employed for two years by Banc One Corporation, where he worked in the credit
and international lending departments.
HARLAN W. SMITH has been a director of the Company since November 1995 and
following the completion of the Offering, Mr. Smith will resign from the
Board. Since December 1994, Mr. Smith has been the owner and manager of Copper
State Capital, LLC, a private equity investment company, and the owner and
manager of Kiva Corporation, a consulting firm. From July 1986 to November
1993, he was the Chairman of the Board of Dyneer Corporation, a privately-held
provider of mobile power transmission equipment.
MICHAEL M. SACHS has been a director of the Company since November 1995.
Since 1990, Mr. Sachs has been the principal shareholder, Chairman of the
Board and Chief Executive Officer of Westrec Financial, Inc., which operates
marinas and related businesses. He also serves on the Board of Directors of
Innoserv Technologies, a publicly-traded company.
MARTIN F. RYAN has been a director of the Company since December 1996. Mr.
Ryan has practiced as an attorney since 1963 and has been the President and a
director of Martin F. Ryan, Ltd. since 1983. Mr. Ryan has served as a director
of The Foundation Companies, Inc. since its inception in 1992, including two
years as Chairman of the Board. In addition, Mr. Ryan served as a director of
the Baptist Foundation of Arizona for seven years. The Baptist Foundation is
the sole owner of The Foundation Companies, Inc. and the Foundation Companies,
Inc. is the managing member of Cornerstone Fund I, L.L.C. ("Cornerstone").
FREDRIC J. FORSTER will become a director of the Company upon the closing of
this Offering. Since January 1996, Mr. Forster has been a principal of
Financial Institutional Partners, LLC, a newly formed investment banking and
brokerage firm headquartered in Irvine, California. From March 1993 to April
1996, Mr. Forster was the President and Chief Operating Officer of H.F.
Ahmanson and Company and its subsidiary Home Savings of America, and from 1979
to 1993, he was the President of ITT Federal Bank, formerly Newport Balboa
Savings and Loan Association. In addition, from 1986 to 1995, Mr. Forster
served on the board of directors, and in 1995 was the Vice Chairman, of the
Federal Home Loan Bank of San Francisco.
Pursuant to the shareholders agreement in effect prior to the Offering among
the Company, Cornerstone and the other stockholders of the Company,
Cornerstone previously designated five directors (Messrs. Bentley, Chu, Sachs,
Smith and Ryan), and Messrs. Cole, Morrice, Gotschall and Holder collectively
designated themselves to the Board. All rights to designate directors will
terminate along with the termination of the shareholders agreement upon the
closing of the Offering. The Company anticipates that upon the closing of the
Offering Mr. Smith will resign and be replaced by Mr. Forster. The directors,
officers and key employees listed above each owns shares of Common Stock of
the Company in the amounts set forth in the section entitled "Beneficial
Ownership of Securities and Selling Stockholders."
BOARD COMMITTEES
The Company's Board of Directors has an Audit Committee and a Compensation
Committee. The Audit Committee is comprised of Messrs. Sachs, Chu and Bentley
and is responsible for making recommendations concerning the engagement of
independent certified public accountants, approving professional services
provided by the independent certified public accountants and reviewing the
adequacy of the Company's internal
60
<PAGE>
accounting controls. The Compensation Committee is comprised of Messrs.
Bentley and Sachs and Mr. Forster will become a member of such committee upon
the closing of the Offering. The Compensation Committee has the exclusive
responsibility for establishing the compensation and other benefits payable to
executive officers and has the responsibility for administering the Company's
incentive compensation and benefit plans, including the Stock Option Plan and
the Founding Managers' Plan.
DIRECTOR COMPENSATION
The Company pays its non-employee directors an annual retainer of $10,000,
and a fee of $2,500 for each board or committee meeting attended. The Company
will also reimburse its non-employee directors for reasonable expenses
incurred in attending meetings. In addition, the Company's Stock Option Plan
provides that, upon their initial election or appointment to the Board, each
non-employee director will be granted a non-qualified option to purchase
15,000 shares of Common Stock, subject to vesting in equal installments over
three years from the date of grant (a "Non-Employee Director Option"). If any
non-employee director's services as a member of the Board terminate, each of
such director's option which is not then exercisable will terminate. The
current non-employee directors other than Mr. Smith were each granted a Non-
Employee Director Option in May 1997 at an exercise price of $7.50 per share.
Upon Mr. Smith's resignation from the Board effective as of the closing of the
Offering, Mr. Smith will receive an option to purchase 7,500 shares of Common
Stock at an exercise price equal to the initial public offering price.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee is or has been an employee of the
Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted a provision in its Certificate of Incorporation that
limits the liability of its directors for monetary damages arising from a
breach of their fiduciary duties as directors. The Company's Bylaws provide
that the Company must indemnify its directors and officers to the fullest
extent permitted by the Delaware General Corporation Law. The Company also has
entered into indemnification agreements with its executive officers and
directors and has officer and director liability insurance with respect to
certain liabilities. See "Description of Capital Stock--Limitation of
Liability of Directors and Indemnification of Directors and Officers."
61
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information with respect to
compensation earned by the Company's Chief Executive Officer and the named
executive officers other than the Chief Executive Officer during fiscal 1996.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
---------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION(1)
--------------------------- -------- ------- ------------ ---------------
<S> <C> <C> <C> <C>
Robert K. Cole................ $150,000 $96,969(2) -- $ 825
Chairman of the Board and
Chief Executive Officer
Brad A. Morrice............... 150,000 96,969(2) -- 1,200
Vice Chairman, President and
General Counsel
Edward F. Gotschall........... 143,750 96,969(2) 40,000 6,933(3)
Vice Chairman and Chief
Operating Officer--
Finance/Administration
Steven G. Holder.............. 150,000 81,969(2) 80,000 563
Vice Chairman and Chief
Operating Officer-- Loan
Production/Operations
</TABLE>
- --------
(1) The contribution made by the Company on behalf of the executive officer to
a 401(k) profit sharing plan.
(2) Includes signing bonuses and amounts earned pursuant to the Founding
Managers' Incentive Compensation Plan in 1996 but paid in 1997.
(3) Includes $5,789 paid by the Company to lease an automobile for Mr.
Gotschall.
Option Grants in Fiscal 1996
The following table sets forth certain information with respect to
individual grants of stock options made during fiscal 1996 to the named
executive officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------- POTENTIAL REALIZABLE
NUMBER OF PERCENT OF VALUE AT ASSUMED
SECURITIES TOTAL ANNUAL RATES OF STOCK
UNDERLYING OPTIONS PRICE APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM(2)
GRANTED EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME (1) FISCAL 1996 ($/SH) DATE 5% 10%
---- ---------- ------------ -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert K. Cole.......... -- -- -- -- -- --
Brad A. Morrice......... -- -- -- -- -- --
Edward F. Gotschall..... 40,000(3) 8.9% $3.50(4) 12/4/06 $ 88,000 $ 223,200
Steven G. Holder........ 80,000(3) 17.7% 3.50(4) 12/4/06 176,000 446,400
</TABLE>
- --------
(1) All options were granted "at market" on the date of grant.
(2) This column shows the hypothetical gains or "option spreads" of the
options granted based on the per-share market price of the Common Stock at
the time of grant and assumed annual compound stock appreciation rates of
5% and 10% over the full 10-year term of the options. The 5% and 10%
assumed rates of appreciation are mandated by the rules of the Securities
and Exchange Commission and do not represent the Company's estimate or
projection of future Common Stock prices. The gains shown are net of the
option exercise price, but do not include deductions for taxes or other
expenses associated with the exercise of the option or the sale of the
underlying shares. The actual gains, if any, on the exercises of stock
options will depend on the future performance of the Common Stock, the
option holder's continued employment through the option period for options
granted pursuant to the Stock Option Plan, and the date on which the
options are exercised.
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<PAGE>
(3) The options are exercisable as to one third of the shares of Common Stock
on the first anniversary of the grant date, with an additional one third
of the underlying shares becoming exercisable on each successive
anniversary date, and full vesting on the third anniversary date. The
options were granted for a term of 10 years, subject to earlier
termination in certain events related to termination of employment. In
certain circumstances, including a recapitalization, stock split,
reorganization, merger, combination, consolidation and a sale of
substantially all of the assets of the Company, the Board of Directors
will adjust, in such manner and to such extent as it deems appropriate,
the number, amount and type of shares subject to the option and the
exercise price of the option.
(4) The exercise price and tax withholding obligations related to exercise may
be paid by delivery of already owned shares of Common Stock, subject to
certain conditions.
Fiscal Year-end Option Values
The following table sets forth certain information with respect to the value
of the options at the end of fiscal 1996 held by the named executive officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, 1996 (#) DECEMBER 31, 1996 ($)(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert K. Cole.............. -- -- -- --
Brad A. Morrice............. -- -- -- --
Edward F. Gotschall......... -- 40,000 -- $20,000
Steven G. Holder............ -- 80,000 -- $40,000
</TABLE>
- --------
(1) The amounts set forth represent the difference between the estimated fair
market value of $4.00 per share as of December 31, 1996 and the exercise
price of the options, multiplied by the applicable number of shares
underlying the options.
Employment Agreements
The Company has entered into employment agreements with Messrs. Cole,
Morrice, Gotschall and Holder (the "Founding Managers"). Each agreement
continues in effect until December 31, 1999 but is extended automatically for
successive one-year periods unless terminated by either the Company or the
respective Founding Manager. Under the terms of the agreements, the Founding
Managers each received a signing bonus of $15,000 and an annual base salary at
the rate of $150,000 per year during 1996 and thereafter at a rate determined
by the Company's Board of Directors. The Founding Managers initially received
a salary of $180,000 for fiscal 1997. On May 30, 1997, the Board of Directors
revised the Founding Managers' salary to $256,000 for fiscal 1997, plus a $500
per month automobile allowance. In the event of termination of employment of a
Founding Manager without cause (as defined in the agreement) by the Company,
the Company: (i) will pay such Founding Manager his base salary through the
end of the month during which such termination occurs plus credit for any
vacation earned but not taken, his base salary in effect at termination for a
minimum of six months or, if longer, through the expiration of the term of
employment then in effect, and an amount equal to the most recent annual
profit-sharing and/or incentive bonus received by him or, if more, the amount
which would be due under the profit sharing and/or incentive bonus plans
applicable to him for the then current year calculated as of the effective
date of termination; (ii) will maintain such Founding Manager's medical
insurance and other programs in which he was entitled to participate until the
expiration of the term of employment then in effect or his commencement of
full time employment with a new employer; and (iii) will pay all costs up to
$20,000 related to such Founding Manager's participation in a senior executive
outplacement program. Each Founding Manager may be terminated for cause only
by a vote of a majority of the Board of Directors of the Company.
63
<PAGE>
Founding Managers' Incentive Compensation Plan
General. In December 1996, the Company adopted the Founding Managers'
Incentive Compensation Plan and the Company has amended the terms thereof
effective for 1997 and subsequent plan years (as amended, the "Incentive
Compensation Plan"). The Incentive Compensation Plan is intended to promote
the success of the Company by providing a means to retain and motivate the
Founding Managers by rewarding them with additional incentive compensation for
high levels of individual annual performance and for significant efforts to
enhance the financial performance of the Company. The Compensation Committee
(the "Committee") of the Board of Directors administers the Incentive
Compensation Plan. The Committee has full discretion to construe and interpret
the terms and provisions of the Incentive Compensation Plan and related
agreements. In addition, the Committee has the authority to make all
determinations under the Incentive Compensation Plan, and to prescribe, amend
and rescind rules relating to the administration of the Incentive Compensation
Plan. Capitalized terms not otherwise expressly defined herein shall have the
meaning specified in the Incentive Compensation Plan.
Shares Reserved for Awards. The total number of shares of the Company's
Common Stock set aside for awards under the Incentive Compensation Plan is
250,000 shares, subject to certain adjustments described below. The number and
kind of shares available under the Incentive Compensation Plan are subject to
adjustment in the event of certain extraordinary events, such as a
reorganization, merger, consolidation, recapitalization, reclassification,
stock-split or similar event. The number of shares covered by awards
outstanding are also subject to adjustment in these events.
Incentive Compensation Amounts. Each of the four Founding Managers is
entitled to one quarter of amounts payable under the Incentive Compensation
Plan. Subject to the limitations described below, the amount available for
incentive awards (the "Incentive Pool") for each fiscal year, commencing in
1997, is an amount equal to a percentage of the Company's earnings
("Earnings") before income taxes and without deducting amounts payable under
the Incentive Compensation Plan. The specific percentage of Earnings which is
used to determine the Incentive Pool is based on the ratio (the "Ratio") of
Earnings to Total Stockholders' Equity. If the Ratio is at least 25% but less
than 50%, the Incentive Pool is an amount equal to 5% of Earnings in excess of
25% of Total Stockholders' Equity. If the Ratio is at least 50%, the Incentive
Pool is an amount equal to the sum of (i) 5% of Earnings in excess of 25% of
Total Stockholders' Equity, plus (ii) 2% of Earnings in excess of 50% of Total
Stockholders' Equity. Total Stockholders' Equity for purposes of this
calculation is equal to the amount of stockholders' equity as of January 1 of
each fiscal year adjusted on a pro-rata basis for any equity offerings
completed during the fiscal year.
Limits on Incentive Compensation. The Incentive Compensation Plan limits the
aggregate amount of cash payable thereunder for each fiscal year. The maximum
cash award payable for fiscal 1997 is 100% of the Founding Manager's base
salary in such year and thereafter is 200% of such base salary. In the event
the Incentive Pool for any fiscal year exceeds such maximum amounts, the
balance of the awards will be paid in shares of restricted stock valued at the
fair market value of the Company's Common Stock at the time of the award. The
restricted stock will vest in equal annual installments over a three year
period. In the event that a Founding Manager's employment terminates with the
Company for any reason other than death or total disability, shares of
restricted stock which have not yet become vested shall be forfeited.
Notwithstanding the preceding, upon the occurrence of certain Change of
Control Events, unvested shares subject to a restricted stock award will
become fully vested. A Founding Manager who receives shares of restricted
stock will be entitled to cash dividends and voting rights for each share of
restricted stock issued under the Incentive Compensation Plan.
Restrictions. If the payment of a Founding Manager's benefits under the
Incentive Compensation Plan would cause the Company to violate any covenant
contained in any agreement entered into by the Company with a third party, the
payment of benefits under the Incentive Compensation Plan are deferred until
such time as the Company would remain in compliance with these covenants after
such benefits are paid. In addition, if the Company is in violation of any
third party financial covenant, the payment of benefits will be deferred until
the Company is in compliance with its financial covenants after such benefits
are paid.
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<PAGE>
Semi-Annual and Annual Payments. On July 31 and January 31 of each year, the
Founding Managers are entitled to a cash advance equal to 80% of the amount
payable as of June 30 and December 31 based on the Company's unaudited
financial statements as of such dates. To the extent the Incentive Pool for
any fiscal year exceeds the aggregate of the semi-annual cash awards, an
additional award in cash and/or restricted stock will be payable to the
Founding Managers in a lump sum within 10 days of the receipt of the Company's
audited financial statements for such fiscal year. To the extent the Incentive
Pool for any fiscal year is less than the aggregate of the semi-annual cash
advances, the Founding Managers shall refund in a lump sum the excess cash
advances within 10 days of the completion of the Company's audited financial
statements for such fiscal year.
Stock Option Plan
The Company adopted the New Century Financial Corporation 1995 Stock Option
Plan (the "Stock Option Plan") in December 1995. The Stock Option Plan is
intended to provide a means to attract, motivate and retain key employees,
consultants, advisors and knowledgeable directors of the Company and to
promote the success of the Company.
Under the Stock Option Plan, awards ("Awards") may consist of any
combination of stock options (incentive or nonqualified), restricted stock,
stock appreciation rights ("SARs") and performance share awards. The number of
shares of Common Stock reserved for issuance that may be issued under the
Stock Option Plan currently is 2,000,000. The maximum number of shares that
may be covered by options and SARs granted to any participant during a
calendar year is 500,000 shares. Each of the foregoing limits is subject to
adjustment under certain circumstances as described more fully in Section 6.2
of the Stock Option Plan. Awards under the Stock Option Plan may be made to
officers and key employees of the Company, to consultants of the Company and
to directors who are not employees or officers of the Company ("Non-Employee
Directors"). See "Management--Director Compensation." As of May 31, 1997, the
Company had granted options to purchase a total of 1,267,520 shares of Common
Stock under the Stock Option Plan (of which 1,267,520 options remained
outstanding and 36,450 shares were vested) which include options to purchase
an aggregate of 60,000 shares of Common Stock which have been granted to the
non-employee directors. The Company will grant options to purchase 441,500
shares of Common Stock upon the closing of the Offering, including an option
to purchase 62,500 shares subject to three year vesting in equal annual
installments, to each of Messrs. Cole, Morrice, Gotschall and Holder.
In addition to the above options, a restricted stock award covering 92,500
shares of Common Stock has been granted to each of Messrs. Cole, Morrice,
Gotschall and Holder, of which 92,500, 61,667 and 30,833 shares will be
subject to forfeiture until the first, second and third anniversaries of the
date of grant, respectively.
The Stock Option Plan provides that all Awards are non-transferable and will
not become subject in any manner to sale, transfer, anticipation, alienation,
assignment, pledge, encumbrance or charge. The Compensation Committee may,
however, permit Awards to be exercised by certain persons or entities related
to a participant for estate and/or tax planning purposes. Only the
participant, subject to the above exceptions, may exercise an Award during the
participant's lifetime.
Participants in the Stock Option Plan are recommended by management and
approved by the Compensation Committee. The Compensation Committee is
appointed by the Board of Directors and has the authority to construe and
interpret the Stock Option Plan and any agreements thereunder, prescribe,
amend and rescind rules and regulations relating to the administration of the
Stock Option Plan, accelerate or extend the vesting or exercisability or
extend the term of any or all outstanding Awards (within the maximum 10 year
limit on the term of Awards), and make all other determinations necessary or
desirable for the administration of the Stock Option Plan.
Nonqualified stock options and incentive stock options (those intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code")) may be granted under the Stock Option Plan. Incentive stock
options may only be granted to employees of the Company. The Compensation
Committee determines the exercise price, vesting provisions, and terms of
Options. However, the exercise price of incentive stock options cannot be less
than the fair market value of the Common Stock on the date of grant (110% if
granted to an employee who owns 10% or more of the Common Stock).
65
<PAGE>
The Stock Option Plan contains a Non-Employee Director program which
provides for the grant of options to Non-Employee Directors. Under this
program, each Non-Employee Director who was elected or appointed to the Board
of Directors at the Company's 1997 annual meeting of stockholders was granted
a nonqualified stock option to purchase 15,000 shares of Common Stock. In
addition, upon any other individual's initial election to the Board of
Directors as a Non-Employee Director (or initial appointment to the Board of
Directors as a Non-Employee Director), such Non-Employee Director will be
granted a nonqualified stock option to purchase 15,000 shares of Common Stock.
The number of shares provided for each grant is subject to adjustment upon
certain events as provided in Section 6.2 of the Stock Option Plan. The
purchase price per share for options granted under this program will equal the
fair market value of the Common Stock on the date of grant. Each option
granted under this program becomes exercisable in installments according to
the following schedule: (i) one-third of the total number of shares subject to
the option become exercisable on the first anniversary of the grant date, (ii)
an additional one-third of the total number of shares subject to the option
become exercisable on the second anniversary of the grant date, and (iii) the
remaining number of shares subject to the option become exercisable on the
third anniversary of the grant date. These options are granted for 10 year
terms, but will terminate earlier if the director ceases to be a member of the
Board of Directors.
Restricted stock awards may be granted on the basis of such factors as the
Compensation Committee deems appropriate. Each restricted stock award
agreement must specify the number of shares of Common Stock to be issued, the
date of such issuance, the price, if any, to be paid for such shares by the
participant, whether and to what extent the cash consideration paid for such
shares shall be returned upon forfeiture and the restrictions imposed on such
shares, which will not terminate earlier than six months after the date the
restricted stock is awarded. Shares subject to restricted stock awards are
nontransferable and held by the Company until such shares have vested and are
subject to a risk of forfeiture unless certain conditions are satisfied.
SARs may be granted in connection with stock options or separately. SARs
granted in connection with stock options will provide for payments to the
holder based upon increases in the price of the Common Stock over the exercise
price of the related option on the exercise date. The Compensation Committee
may elect to pay SARs in cash, Common Stock or in a combination of cash and
Common Stock.
Performance share awards may be granted on the basis of such factors as the
Compensation Committee deems appropriate. Generally, these awards will be
based upon specific agreements and will specify the number of shares of Common
Stock subject to the award, the price, if any, to be paid for such shares by
the participant and the conditions upon which the issuance to the participant
will be based.
Without limiting the generality of the foregoing, the Stock Option Plan will
permit the Compensation Committee to grant certain other types of Awards
("Performance Based Awards") which are intended to qualify as "performance-
based compensation" under Section 162(m) of the Code. Options and SARs that
are granted at fair market value are intended to qualify as Performance-Based
Awards. In addition, other share-based awards may be granted under the Stock
Option Plan and are intended to qualify as Performance-Based Awards. The Stock
Option Plan also provides for the grant of Performance-Based Awards that are
not denominated nor payable in and do not have a value derived from the value
of or a price related to shares of Common Stock and are payable only in cash
("Cash--Based Awards").
The eligible class of persons for Performance-Based Awards is all executive
officers of the Company. The maximum number of shares of Common Stock which
may be delivered pursuant to all Awards that are granted as Performance-Based
Awards to any participant in any calendar year may not exceed 500,000 shares
(subject to adjustment) and the annual aggregate amount of compensation that
may be paid to any participant in respect of Cash-Based Awards may not exceed
$1,000,000.
The performance goals of Performance-Based Awards are any one or a
combination of Cash Flow, Earnings Per Share, Gain on Sale of Loans, Loan
Production Volume, Loan Quality, Return on Equity, and Total Stockholder
Return (each as defined in Article VII of the Stock Option Plan). These goals
will be applied over performance cycles as determined by the Compensation
Committee. Specific cycles and target levels of performance, as well as the
award levels, will be determined by the Compensation Committee not later than
the
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<PAGE>
applicable deadline under Section 162(m) of the Code and in any event at a
time when achievement of such targets is substantially uncertain. Appropriate
adjustments to goals and targets may be made by the Compensation Committee
based upon objective criteria in the case of certain events that were not
anticipated at the time goals were established. The Company believes that
specific performance targets (when established) are likely to constitute
confidential business information, the disclosure of which may adversely
affect the Company or mislead the public.
The Compensation Committee must certify the achievement of the applicable
performance goals and the actual amount payable to each participant under
Performance-Based Awards prior to payment. The Compensation Committee may
retain discretion to reduce, but not increase, the amount payable under a
Performance-Based Award, notwithstanding the achievement of targeted
performance goals. Performance-Based Awards may be fully accelerated or the
Compensation Committee may provide for partial credit in the event of certain
events circumstances that the Compensation Committee may determine.
Options which have not yet become exercisable will lapse upon the date a
participant is no longer employed by the Company for any reason. Options which
have become exercisable must generally be exercised within 30 days after such
date if the termination of employment was for any reason other than
retirement, total disability, death or discharge for cause. In the event the
participant is discharged for cause, all options will lapse immediately upon
such termination of employment. If the termination of employment was due to
retirement, total disability or death, the options, which are exercisable on
the date of such termination, must be exercised within three months of the
date of such termination or such shorter period provided in the award
agreement. SARs granted concurrently with an option have the same termination
provisions as the option to which they relate. The termination provisions of
SARs granted independently of an option are governed by the applicable award
agreement. In the event of a termination of services to or employment with the
Company for any reason, shares of Common Stock subject to a participant's
restricted stock award will be forfeited in accordance with the related award
agreement to the extent such shares have not vested on the date of
termination. Likewise, in the event of a termination of services to or
employment with the Company for any reason, shares of Common Stock subject to
a participant's performance share award will be forfeited in accordance with
the related award agreement to the extent such shares have not been issued or
become issuable on the date of termination.
In the event the stockholders of the Company approve the dissolution or
liquidation of the Company, certain mergers or consolidations or the sale of
substantially all of the business assets of the Company, unless prior to such
event the Board of Directors determines that there will be either no
acceleration or limited acceleration of awards, each option and related SAR
will become immediately exercisable, restricted stock will immediately vest
and the number of shares or an amount of cash covered by each performance
share award will be issued or paid to the participant.
The authority to grant new Awards under the Stock Option Plan will terminate
on the tenth anniversary of its adoption by the Board of Directors, unless the
Stock Option Plan is terminated prior to that time by the Board of Directors.
Such termination typically will not affect rights of participants which
accrued prior to such termination. The Board of Directors and the Compensation
Committee may make certain amendments to the Stock Option Plan and outstanding
Awards. To the extent required by applicable law or deemed necessary by the
Board of Directors, the Stock Option Plan may not be amended, without
shareholder consent, to increase the maximum number of shares which may be
delivered pursuant to Awards granted thereunder, materially increase the
benefits accruing to participants thereunder or materially change the
requirements as to the eligibility to participate therein.
With respect to nonqualified stock options, the Company is generally
entitled to deduct an amount equal to the difference between the option
exercise price and the fair market value of the shares at the time of
exercise. With respect to incentive stock options, the Company is generally
not entitled to a similar deduction either upon grant of the option or at the
time the option is exercised. The current federal income tax consequences of
other awards authorized under the Stock Option Plan generally follow certain
basic patterns: SARs are taxed and deductible in substantially the same manner
as nonqualified stock options; nontransferable restricted stock subject
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<PAGE>
to a substantial risk of forfeiture results in income recognition equal to the
excess of the fair market value of the stock over the purchase price only at
the time the restrictions lapse (unless the recipient elects to accelerate
recognition as of the date of grant); performance share awards generally are
subject to tax at the time of payment; unconditional stock bonuses are
generally subject to tax measured by the value of the payment received; and
Cash-Based Awards generally are subject to tax at the time of payment; in each
of the foregoing cases, the Company will generally have a corresponding
deduction at the time the participant recognizes income. If an Award is
accelerated under the Stock Option Plan, the Company may not be permitted to
deduct the portion of the compensation attributable to the acceleration.
Furthermore, if the compensation attributable to Awards is not "performance-
based" within the meaning of Section 162(m) of the Code, the Company may not
be permitted to deduct such compensation in certain circumstances.
401(k) Profit Sharing Plan
The Company has a 401(k) profit sharing plan that covers substantially all
employees who have been employed by the Company for over three months and have
attained the age of 21. The 401(k) plan allows eligible employees to defer
amounts of their compensation up to the statutory limit each year. The Company
matches 25% of employee contributions up to a maximum contribution by the
Company of 1.5% of each employee's compensation. The Company also has a
discretionary matching program under the plan, through which the Company may
make contributions to employees out of the Company's current or accumulated
net profit. In 1996, the Company contributed $47,000 to its 401(k) profit
sharing plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December 1996, the Company issued warrants to purchase the following
number of shares of Common Stock, exercisable at $3.50 per share, to the
following directors, executive officers and 5% security holders (collectively,
the "Warrantholders") in satisfaction of their preemptive rights as
stockholders: Cornerstone (220,656 shares), Westrec Rollover PS Plan (11,032
shares), Michael M. Sachs (16,550 shares), Harlan W. Smith (11,032 shares),
Harcol Limited Partnership (11,032 shares), Cornerstone Equity Partners,
L.L.C. (11,032 shares), Martin F. Ryan, Ltd. Defined Benefit Pension Plan
(8,274 shares), Robert K. Cole (55,556 shares), Brad A. Morrice (54,453
shares), Samantha H. Morrice Trust (1,103 shares), Edward F. Gotschall (50,040
shares), and Steven G. Holder (47,834 shares). The Warrantholders voluntarily
exercised these warrants on May 30, 1997. John Bentley and Sherman Chu,
directors of the Company, are principals of Cornerstone Equity Partners,
L.L.C., which manages certain aspects of and has a 20% "back-end" ownership
interest in Cornerstone Fund I, L.L.C. Michael Sachs, a director of the
Company, is the trustee of Westrec Rollover PS Plan. Harlan W. Smith, a
director of the Company, is a general partner in Harcol Limited Partnership.
Martin F. Ryan, a director of the Company, is the trustee of Martin F. Ryan,
Ltd. Defined Benefit Pension Plan. The sole beneficiary of the Samantha H.
Morrice Trust is the daughter of Brad A. Morrice, a director and executive
officer of the Company.
In connection with a letter of intent regarding the possible purchase of a
subsidiary of Westrec Financial, Inc. ("Westrec"), the Company paid an
aggregate of approximately $68,000 through March 31, 1997 to Westrec for the
payment of certain operating expenses of such subsidiary. In exchange for the
payment of such expenses, the Company received an option to purchase all of
the outstanding shares of the subsidiary. The letter of intent was terminated
in April 1997. Michael Sachs, a director of the Company, is the Chief
Executive Officer, Chairman and primary shareholder of Westrec.
In connection with the sale of 545,000 shares of Common Stock to Comerica,
the Company and Comerica have agreed to enter into certain arrangements
concerning servicing and other strategic relationships. Under the
arrangements, the Company will pay certain fees to Comerica and has issued
warrants to purchase 100,000 shares of Common Stock. The Company has also
reserved an additional 233,333 shares of Common Stock for issuance under
warrants to be granted to Comerica if certain performance goals are met, such
as (i) the commencement of servicing operations under the sub-servicing
arrangements between the Company and Comerica, (ii) the completion of one year
of servicing operations under such sub-servicing agreements, and (iii) the
funding of $20 million in loans by the Company as a result of leads developed
through Comerica's branch system and consumer loan portfolio. See "Prospectus
Summary--Recent Developments--Comerica Investment and Strategic Relationship."
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<PAGE>
BENEFICIAL OWNERSHIP OF SECURITIES AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 31, 1997, as adjusted to
reflect the sale of 2,900,000 shares by the Company in the Offering, by (i)
each director of the Company, (ii) each of the named executive officers, (iii)
each person known to the Company to be the beneficial owner of more than 5% of
the Common Stock, (iv) all directors and executive officers of the Company as
a group and (v) each Selling Stockholder.
<TABLE>
<CAPTION>
COMMON STOCK
COMMON STOCK TO BE BENEFICIALLY
BENEFICIALLY OWNED OWNED
PRIOR TO OFFERING AFTER THE OFFERING(2)
--------------------- ------------------------
NUMBER NUMBER OF NUMBER
OF SHARES BEING OF
BENEFICIAL OWNERS(1) SHARES PERCENT OFFERED (2) SHARES PERCENT
-------------------- ----------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Cornerstone Fund I,
L.L.C.(3).............. 4,220,656 38.40% 600,000 3,620,656 26.06%
Comerica Incorporat-
ed(4).................. 545,000 4.96 -- 545,000 3.92
Brad A. Morrice(5)(6)... 1,223,217 11.13 -- 1,223,217 8.80
Robert K. Cole(5)....... 1,222,735 11.12 -- 1,222,735 8.80
Edward F. Gotschall(5).. 1,119,632 10.19 -- 1,119,632 8.06
Steven G. Holder(5)..... 1,078,391 9.81 -- 1,078,391 7.76
John C. Bentley(7)...... 211,032 1.92 -- 211,032 1.52
Sherman I. Chu(7)....... 211,032 1.92 -- 211,032 1.52
Harlan W. Smith(8)...... 422,064 3.84 -- 422,064 3.04
Martin F. Ryan(9)....... 158,274 1.44 -- 158,274 1.14
Michael M. Sachs(10).... 527,582 4.80 -- 527,582 3.80
Fredric J. Forster...... -- * -- -- *
All directors and execu-
tive officers as a
group (9 persons)...... 5,962,927 54.25% 5,329,831 38.37%
</TABLE>
- --------
* Less than one percent.
(1) Unless otherwise indicated, each of the stockholders named in this table
has sole voting and dispositive power with respect to the shares shown as
beneficially owned.
(2) Assumes no exercise of the Underwriters' over-allotment option. If the
Underwriters' over-allotment option is exercised in full, (i) Cornerstone
Fund I, L.L.C. will sell an additional 250,000 shares of Common Stock and
the number of shares and the percent of Common Stock to be beneficially
owned after the Offering by Cornerstone Fund I, L.L.C. will be 3,370,656
shares and 23.9%, respectively, (ii) Cornerstone Equity Partners, L.L.C.
("CEP") will sell 42,500 shares of Common Stock and the number of shares
and the percent of Common Stock to be beneficially owned after the
Offering by CEP will be 168,532 shares and 1.19%, respectively and (iii)
the number of shares and the percent of Common Stock to be beneficially
owned after the Offering by all directors and executive officers as a
group will be 5,037,331 and 35.7%, respectively.
(3) Such person may be reached at 5050 N. 40th Street, Suite 310, Phoenix,
Arizona 85018. The Foundation Companies, Inc. is the managing member of
Cornerstone Fund I, L.L.C. and CEP is a member of Cornerstone Fund I,
L.L.C. The Foundation Companies, Inc. has sole voting power and shares
dispositive power with CEP with respect to the shares owned by
Cornerstone Fund I, L.L.C. The Foundation Companies, Inc. is a wholly-
owned subsidiary of the Baptist Foundation of Arizona, which may also be
deemed to be the beneficial owner of the shares owned by Cornerstone Fund
I, L.L.C.
(4) Such person may be reached at 3551 Hamlin Road, Auburn Hills, Michigan
48326.
(5) Each of such persons may be reached through the Company at 4910 Birch
Street, Suite 100, Newport Beach, California 92660.
(6) Includes 1,103 shares of Common Stock owned by the Samantha H. Morrice
Trust, the sole beneficiary of which is Mr. Morrice's minor daughter.
(7) Includes 211,032 shares of Common Stock owned by CEP. As principals of
CEP, Messrs. Bentley and Chu share voting and dispositive power of the
shares owned by CEP and may be deemed to be the beneficial owners of the
shares owned by Cornerstone Fund I, L.L.C. See note (3) above.
(8) Includes 211,032 shares of Common Stock owned by Harcol Limited
Partnership, of which Mr. Smith is a general partner.
(9) All 158,274 shares of Common Stock are owned by the Martin F. Ryan, Ltd.
Defined Benefit Pension Plan, of which Mr. Ryan is the trustee. Martin F.
Ryan, a director of the Company, is a director of The Foundation
Companies, Inc. See note (3) above.
(10) Includes 211,032 shares of Common Stock owned by Westrec Rollover PS
Plan, of which Mr. Sachs is the trustee.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon closing of this Offering, the authorized capital stock of the Company
will consist of 45,000,000 shares of Common Stock and 7,500,000 shares of
Preferred Stock. Upon the closing of the Offering, the Company will have
13,892,373 shares of Common Stock outstanding and no shares of Preferred Stock
outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters to
be voted upon by the stockholders, including the election of directors. The
Company's Certificate of Incorporation does not provide for cumulative voting
in the election of directors.
Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The Company does not anticipate paying any cash dividends
in the foreseeable future. See "Risk Factors--Absence of Dividends" and
"Dividend Policy." In the event of liquidation, dissolution or winding up of
the Company, holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities and after satisfaction of the
liquidation preference of any outstanding Preferred Stock.
Upon completion of the Offering, no holders of Common Stock will have
preemptive rights. In addition, holders of Common Stock have no conversion or
redemption rights and are not subject to further assessments by the Company.
Upon consummation of the Offering, all of the then outstanding shares of
Common Stock will be validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Company's Board of Directors is authorized to issue from time to time,
without stockholder authorization, in one or more designated series, any or
all of the authorized but unissued shares of Preferred Stock with such
dividend, redemption, conversion and exchange provisions as may be provided
for the particular series. Any series of Preferred Stock may possess voting,
dividend, liquidation and redemption rights superior to those of the Common
Stock. The rights of holders of Common Stock will be subject to and may be
adversely affected by the rights of the holders of any Preferred Stock that
may be issued in the future. Issuance of a new series of Preferred Stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could make it more difficult for a third party
to acquire, or discourage a third party from acquiring, the outstanding voting
stock of the Company, and make removal of the present Board of Directors more
difficult. The Company has no present plans to issue any shares of Preferred
Stock. See "Risk Factors--Anti-Takeover Provisions."
REGISTRATION RIGHTS
After November 22, 1998, holders of approximately 10,392,373 shares of
Common Stock, constituting all of the holders of Common Stock prior to the
Offering, will be entitled to request that the Company effect a registration
under the Securities Act, covering the sale of some or all of the shares owned
by such holders, subject to certain conditions. Such holders may request that
the Company effect three such registrations. In addition, the Company must use
reasonable efforts to make registration statements under Forms S-2 and S-3
available to such holders, but is not obligated to do so. Finally, in the
event the Company proposes to register any of its shares of Common Stock under
the Securities Act, such holders of Common Stock are entitled to require that
the Company include all or a portion of their shares in such registration,
subject to certain conditions and limitations, including reductions in the
number of shares to be registered. The Company is required to bear all
registration expenses incurred in connection with the three demand
registrations on Form S-1, and in all Form S-2, S-3 and Company registrations.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law (the "DGCL"). In general, Section 203
prevents an "interested stockholder" (defined generally as a person
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<PAGE>
owning 15% or more of a corporation's outstanding voting stock) from engaging
in a "business combination" (as defined therein) with a Delaware corporation
for three years following the date such person became an interested
stockholder unless (i) before such person became an interested stockholder,
the board of directors of the corporation approved the transaction in which
the interested stockholder became an interested stockholder or approved the
business combination, (ii) upon consummation of the transaction that resulted
in the interested stockholder becoming an interested stockholder, the
interested stockholder owns at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced (excluding
shares owned by persons who are both officers and directors of the corporation
and shares held by certain employee stock ownership plans) or (iii) following
the transaction in which such person became an interested stockholder, the
business combination is approved by the board of directors of the corporation
and authorized at a meeting of stockholders by the affirmative vote of the
holders of at least two-thirds of the outstanding voting stock of the
corporation not owned by the interested stockholder.
APPLICATION OF THE CALIFORNIA GENERAL CORPORATION LAW TO THE COMPANY
If the Company's equity securities are held by less than 800 stockholders
and a majority of its outstanding shares are held by persons with California
addresses and the Company has operational characteristics that indicate that
it has significant contacts to California, the Company may be subject to
Section 2115 of the California Corporations Code. In such event, the Company
would be subject to certain key provisions of the California General
Corporation Law, including, without limitation, those provisions relating to
the number of directors to be elected each year (all directors would be
required to be elected each year under California law applicable to companies
with less than 800 beneficial holders of their equity securities), the
stockholders' right to cumulate votes at elections of directors (cumulative
voting would be mandatory under California law applicable to companies with
less than 800 beneficial holders of their equity securities), the
stockholders' right to remove directors without cause (which under California
law is subject to the stockholders' right to cumulative voting), the Company's
ability to indemnify its officers, directors and employees (which generally is
more limited in certain situations in California than in Delaware), the
Company's ability to make distributions, dividends or repurchases (which
generally is more restrictive in California than in Delaware), inspection of
corporate records (which is generally more available in California than in
Delaware), approval of certain corporate transactions, and dissenters' rights.
After consultation with the Underwriters of this Offering, the Company
anticipates that it will have more than 800 stockholders following the
completion of this Offering.
LIMITATION OF LIABILITY AND INDEMNIFICATION AGREEMENTS
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by applicable law a director of the Company shall not be
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director. Under the DGCL, liability of a director may not
be limited (i) for any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) in respect
of certain unlawful dividend payments or stock redemptions or repurchases and
(iv) for any transaction from which the director derives an improper personal
benefit. The effect of the provisions of the Company's Certificate of
Incorporation is to eliminate the rights of the Company and its stockholders
(through stockholders' derivative suits on behalf of the Company) to recover
monetary damages against a director for breach of the fiduciary duty of care
as a director (including breaches resulting from negligent or grossly
negligent behavior), except as provided in the situations described in clauses
(i) through (iv) above. This provision does not limit or eliminate the rights
of the Company or any stockholder to seek nonmonetary relief such as an
injunction or rescission in the event of a breach of a director's duty of
care.
The Bylaws of the Company provide that the Company will indemnify its
directors and officers to the fullest extent permitted by the DGCL. In
addition, the Company has entered into agreements with each of the directors
and officers of the Company pursuant to which the Company has agreed to
indemnify, subject to certain limitations, such director or officer from
claims, liabilities, damages, expenses, losses, costs, penalties or amounts
paid in settlement incurred by such director or officer in or arising out of
his capacity as a director, officer,
71
<PAGE>
employee and/or agent of the Company or any other corporation of which such
person is a director or officer at the request of the Company to the maximum
extent provided by applicable law. In addition, such director or officer is
entitled to an advance of expenses to the maximum extent authorized or
permitted by law.
PROVISIONS OF CERTIFICATE OF INCORPORATION AND BYLAWS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
summarized in the following paragraphs may have an anti-takeover effect and
may delay, defer or prevent a tender offer or takeover attempt that a
stockholder might consider in its best interest, including those attempts that
might result in a premium over the market price for the shares held by
stockholders.
Classified Board of Directors
Under the Company's Certificate of Incorporation, the Board of Directors of
the Company is divided into three classes, with staggered terms of three years
each. Each year the term of one class expires. The Company's Certificate of
Incorporation provides that any vacancies on the Board of Directors may be
filled by the affirmative vote of a majority of the directors then in office,
even if less than a quorum.
Stockholders Meeting Requirement
Under the Company's Certificate of Incorporation, any election or other
action by stockholders of the Company must be effected at an annual or special
meeting of stockholders and may not be effected by written consent without a
meeting.
Advance Notice Requirements
Under the Company's Bylaws, stockholders will be required to comply with
advance notice provisions with respect to any proposal submitted for
stockholder vote. To be timely, a stockholder's notice must be delivered to
the Secretary at the principal executive offices of the Company not less than
60 days nor more than 90 days prior to the meeting; provided, however, that in
the event that less than 70 days' notice of the date of the meeting is given,
notice by the stockholder to be timely must be received no later than the
tenth day following the day on which such notice of the date of the meeting
was first made by the Corporation. If notice has not been given pursuant to
these provisions, the chairman of the meeting may declare to the meeting that
the proposed business was not properly brought before the meeting and such
business may not be transacted at the meeting. These provisions may preclude
some stockholders from bringing matters before the stockholders at an annual
or special meeting.
Supermajority Voting Requirements
Under the Company's Bylaws, a vote of two-thirds of the directors is
required to change the number of directors of the Company.
LISTING
There is no public trading market for the Common Stock. Application has been
made to have the Common Stock approved for quotation on Nasdaq under the
trading symbol "NCEN."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is U.S. Stock Transfer
Corporation.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
13,892,373 shares of Common Stock. Of the outstanding shares, 3,500,000 shares
will be freely tradeable without restriction or further registration under the
Securities Act unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act.
The remaining 10,392,373 shares of Common Stock outstanding are "restricted
securities" as that term is defined in Rule 144 promulgated under the
Securities Act and are eligible for sale subject to holding period, volume and
other limitations imposed by that rule. As described below, Rule 144 permits
resales of restricted securities subject to certain restrictions. In addition,
stock options for an additional 1,267,520 shares of Common Stock have been
granted to certain non-employee directors and employees of the Company under
the Stock Option Plan, and options to acquire 441,500 shares will be granted
upon the closing of the Offering. Options to acquire 127,500 shares of Common
Stock have also been granted or will be granted to two executive officers and
two non-employee directors of the Company outside the Stock Option Plan,
warrants to purchase 100,000 shares of Common Stock have been issued to
Comerica and warrants to purchase an additional 233,333 shares of Common Stock
will be issued to Comerica subject to the completion by Comerica of certain
performance events. All of the Comerica warrants will have an exercise price
equal to the initial public offering price of the Company's Common Stock,
subject to vesting in equal installments on December 31, 1997, 1998 and 1999.
Accelerated vesting will occur upon (i) certain changes in control of the
Company or (ii) the inclusion of the shares underlying the warrants in a
registration statement, subject to certain limitations, upon exercise of
Comerica's registration rights. An additional 290,980 shares of Common Stock
are reserved for future issuance under the Stock Option Plan. The Company and
certain stockholders have agreed, subject to certain conditions, that they
will not offer, sell or otherwise dispose of any of the shares of Common Stock
or securities convertible into Common Stock owned by them for 180 days from
the date of this Prospectus and the commencement of the Offering,
respectively, without the prior written consent of Montgomery Securities on
behalf of the Underwriters.
In general, under Rule 144 as in effect as of April 29, 1997, a person (or
persons whose shares are aggregated) who has beneficially owned restricted
securities for at least one year, will be entitled to sell in any three-month
period a number of shares that does not exceed the greater of: (i) 1% of the
number of shares of Common Stock then outstanding (approximately 138,924
shares immediately after the Offering) or (ii) the average weekly trading
volume of the Company's Common Stock on Nasdaq during the four calendar weeks
immediately preceding the date on which the notice of sale is filed with the
Securities and Exchange Commission. Sales pursuant to Rule 144 are subject to
certain requirements relating to manner of sale, notice and availability of
current public information about the Company. A person (or persons whose
shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the 90 days immediately preceding the sale and who
has beneficially owned restricted securities for at least two years is
entitled to sell such shares pursuant to Rule 144(k) without regard to the
limitations and requirements described above.
The Company intends to file a registration statement under the Securities
Act to register shares of Common Stock reserved for issuance under its Stock
Option Plan, thus permitting the resales of such shares by non-affiliates in
the public market without restriction under the Securities Act. Such
registration statement is expected to be filed shortly after the date of this
Prospectus. As of the closing of the Offering, options to purchase an
aggregate of 1,709,020 shares of Common Stock will be outstanding under the
Stock Option Plan.
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<PAGE>
UNDERWRITING
The Underwriters named below represented by Montgomery Securities and Piper
Jaffray Inc. (the "Representatives"), have severally agreed, subject to the
terms and conditions set forth in the Underwriting Agreement, to purchase from
the Company and the Selling Stockholder the number of shares of Common Stock
indicated below opposite their respective names at the initial public offering
price less the underwriting discount set forth on the cover page of this
Prospectus. The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters are committed to purchase all of such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Montgomery Securities...........................................
Piper Jaffray Inc...............................................
---------
Total......................................................... 3,500,000
=========
</TABLE>
The Representatives have advised the Company and the Selling Stockholder that
the Underwriters propose initially to offer the Common Stock to the public on
the terms set forth on the cover page of this Prospectus. The Underwriters may
allow to selected dealers a concession of not more than $ per share, and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. After this Offering, the offering
price and other selling terms may be changed by the Representatives. The shares
of Common Stock are offered subject to receipt and acceptance by the
Underwriters, and to certain other conditions, including the right to reject
orders in whole or in part.
The Company and the Selling Stockholders have granted options to the
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to a maximum of 525,000 additional shares of Common
Stock to cover over-allotments, if any, at the offering price less the
underwriting discount set forth on the cover page of this Prospectus. To the
extent the Underwriters exercise this option, each of the Underwriters will be
committed, subject to certain conditions, to purchase such additional shares in
approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with Offering.
The Underwriters have reserved up to 175,000 shares of Common Stock offered
hereby for sale at the Offering price to directors, officers and employees of
the Company and to certain other persons.
The Underwriting Agreement provides that the Company and the Selling
Stockholder will indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act, or will contribute to payments
the Underwriters may be required to make in respect thereof. The Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is therefore unenforceable.
All of the Company's officers and directors and certain of the Company's
stockholders have agreed that they will not, without the prior written consent
of Montgomery Securities (which consent may be withheld in its sole discretion)
and subject to certain limited exceptions, directly or indirectly, sell, offer,
contract or grant any option to sell, make any short sale, pledge, transfer,
establish an open "put equivalent position" within the meaning of Rule 16a-1(h)
under the Exchange Act, or otherwise dispose of any shares of Common Stock,
options or warrants to acquire Common Stock, or securities exchangeable or
exercisable for or convertible into Common Stock currently owned either of
record or beneficially by them or announce the intention to do any of the
foregoing, for a period commencing on the date of this Prospectus and
continuing to a date 180 days after such date. Montgomery Securities may, in
its sole discretion and at any time without notice, release all or any portion
of the securities subject to these lock-up agreements. In addition, the Company
has agreed that, for a period of 180 days after the date of this Prospectus, it
will not, without the consent of Montgomery Securities, issue, offer,
74
<PAGE>
sell or grant options to purchase or otherwise dispose of any equity
securities or securities convertible into or
exchangeable for equity securities except for (i) the issuance of shares of
Common Stock offered hereby, (ii) the issuance of shares of Common Stock
pursuant to the exercise of outstanding options and (iii) the grant of options
to purchase shares of Common Stock pursuant to the Stock Option Plan and
shares of Common Stock issued pursuant to the exercise of such options. See
"Management--Stock Option Plan" and "Shares Eligible for Future Sale."
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined by
negotiations among the Company, the Selling Stockholder and the
Representatives. Among the factors to be considered in such negotiations are
the history of, and prospects for, the Company and the industry in which it
competes, an assessment of the Company management, its past and present
operations and financial performance, the prospects for future earnings of the
Company, the present state of the Company's development, the general condition
of the securities markets at the time of the Offering, the market prices of
and demand for publicly traded common stocks of comparable companies in recent
periods and other factors deemed relevant.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in this Offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level
above that which might otherwise prevail in the open market. A "stabilizing
bid" is a bid for or the purchase of the Common Stock on behalf of the
Underwriters for the purpose of fixing or maintaining the price of the Common
Stock. A "syndicate covering transaction" is the bid for or the purchase of
the Common Stock on behalf of the Underwriters to reduce a short position
incurred by the Underwriters in connection with this Offering. A "penalty bid"
is an arrangement permitting the Representatives to reclaim the selling
concession otherwise accruing to an Underwriter or syndicate member in
connection with this Offering if the Common Stock originally sold by such
Underwriter or syndicate member is purchased by the Representative in a
syndicate covering transaction and has therefore not been effectively placed
by such Underwriter or syndicate member. The Representatives have advised the
Company that such transactions may be effected on Nasdaq or otherwise and, if
commenced, may be discontinued at any time.
Montgomery Securities has performed certain investment banking and advisory
services for the Company in the past.
The Representatives have informed the Company that the Underwriters do not
expect to make sales to accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereby.
LEGAL MATTERS
Certain matters relating to this Offering are being passed upon for the
Company by O'Melveny & Myers LLP, Newport Beach, California. A partner of such
firm owns 211,032 shares of Common Stock of the Company. Brobeck, Phleger &
Harrison LLP, Newport Beach, California will act as counsel for the
Underwriters.
EXPERTS
The financial statements of the Company as of December 31, 1996 and December
31, 1995, for the year ended December 31, 1996 and for the period from
November 17, 1995 (inception) to December 31, 1995 have been included herein
in reliance upon the report of KPMG Peat Marwick LLP, independent auditors
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
75
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), in Washington, D.C., a Registration Statement on Form S-1 under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto. Certain items are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits filed as a
part thereof. Statements contained in this Prospectus as to the contents of
any contract or any other document referred to are not necessarily complete
and, in each instance, if such contract or document is filed as an exhibit,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference to such exhibit. Upon completion of the Offering,
the Company will be subject to the informational requirements of the Exchange
Act and, in accordance therewith, will file reports and other information with
the Commission. The Registration Statement, including exhibits thereto, as
well as the reports and other information filed by the Company with the
Commission, may be inspected without charge at the Public Reference Room of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at Seven World Trade Center, 13th Floor, New
York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials can also be obtained
at prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. Electronic filings made through
the Electronic Data Gathering Analysis and Retrieval System are publicly
available through the Commission's Web Site (http://www.sec.gov).
76
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
Independent Auditors' Report.......................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995........ F-3
Consolidated Statements of Operations for the year ended December
31, 1996, and for the period from November 17, 1995 (inception) to
December 31, 1995.................................................. F-4
Consolidated Statements of Changes in Stockholders' Equity for the
year ended December 31, 1996, and for the period from November 17,
1995 (inception) to December 31, 1995.............................. F-5
Consolidated Statements of Cash Flows for the year ended December
31, 1996, and for the period from November 17, 1995 (inception) to
December 31, 1995.................................................. F-6
Notes to Consolidated Financial Statements for the year ended
December 31, 1996, and for the period from November 17, 1995
(inception) to December 31, 1995................................... F-7
Condensed Consolidated Balance Sheets as of March 31, 1997
(unaudited) and December 31, 1996.................................. F-20
Condensed Consolidated Statements of Operations (unaudited) for the
three months ended March 31, 1997 and 1996 ........................ F-21
Condensed Consolidated Statements of Cash Flows (unaudited) for the
three months ended March 31, 1997 and 1996 ........................ F-22
Notes to Condensed Consolidated Financial Statements (unaudited) for
the three months ended March 31, 1997 and 1996..................... F-23
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
New Century Financial Corporation:
We have audited the accompanying consolidated balance sheets of New Century
Financial Corporation and subsidiary as of December 31, 1996 and 1995 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the year ended December 31, 1996 and the period from
November 17, 1995 (inception) to December 31, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated 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, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of New
Century Financial Corporation and subsidiary as of December 31, 1996 and 1995
and the results of their operations and their cash flows for the year ended
December 31, 1996 and the period from November 17, 1995 (inception) to
December 31, 1995 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Orange County, California
March 7, 1997, except
for note 4, which is
as of March 28, 1997.
F-2
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995
------- ------
ASSETS
<S> <C> <C>
Cash and cash equivalents...................................... $ 3,041 $3,029
Loans receivable held for sale, net (notes 2 and 4)............ 57,990 --
Accrued interest receivable.................................... 786 --
Office property and equipment (notes 3 and 5).................. 1,620 34
Prepaid expenses and other assets.............................. 1,201 88
------- ------
$64,638 $3,151
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Warehouse lines of credit (note 4)............................. $55,659 $ --
Notes payable (note 5)......................................... 1,326 --
Income taxes payable (note 7).................................. 839 --
Accounts payable and accrued liabilities....................... 2,283 83
Deferred income taxes (note 7)................................. 128 --
------- ------
60,235 83
------- ------
Stockholders' equity (notes 9 and 10):
Preferred stock, $.01 par value. Authorized 7,320,000 shares:
Series A Convertible Preferred Stock--issued and
outstanding 5,500,000 shares.............................. 54 54
Series B Convertible Preferred Stock--issued and
outstanding 320,000 shares................................ 4 4
Common Stock, $.01 par value. Authorized 12,963,778 shares;
issued and outstanding 528,618 shares....................... 6 6
Additional paid-in capital................................... 3,086 3,086
Retained earnings (deficit), restricted...................... 1,253 (82)
------- ------
Total stockholders' equity............................... 4,403 3,068
Commitments and contingencies (notes 6 and 8)..................
Subsequent events (notes 2, 4, 5 and 6)........................
------- ------
$64,638 $3,151
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PERIOD FROM
----------------- NOVEMBER 17, 1995
YEAR ENDED YEAR ENDED (INCEPTION) TO
DECEMBER 31, 1996 DECEMBER 31, DECEMBER 31,
(NOTE 14) 1996 1995
----------------- ------------ -----------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Gain on sale of loans (note
2).......................... $ 11,630 $11,630 $--
Interest income.............. 2,846 2,846 14
Servicing fees............... 29 29 --
---------- ------- ----
Total revenues............ 14,505 14,505 14
---------- ------- ----
Expenses:
Personnel.................... 6,328 6,083 54
General and administrative
(note 11)................... 2,456 2,456 11
Interest..................... 1,941 1,941 --
Advertising and promotion.... 1,169 1,169 --
Servicing.................... 269 269 --
Professional services........ 282 282 30
---------- ------- ----
Total expenses............ 12,445 12,200 95
---------- ------- ----
Earnings (loss) before
income taxes............. 2,060 2,305 (81)
Income taxes (note 7)......... 867 970 1
---------- ------- ----
Net earnings (loss)....... $ 1,193 $ 1,335 $(82)
========== ======= ====
Pro Forma earnings per share.. $ 0.08
==========
Pro Forma weighted average
number of shares outstanding. 14,530,439
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD FROM
NOVEMBER 17, 1995 (INCEPTION) TO DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A SERIES B RETAINED
PREFERRED PREFERRED COMMON ADDITIONAL EARNINGS
STOCK STOCK STOCK PAID-IN (DEFICIT)
AMOUNT AMOUNT AMOUNT CAPITAL RESTRICTED TOTAL
--------- --------- ------ ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 17,
1995 (inception)....... $-- $-- $-- $ -- $ -- $ --
Proceeds from issuance
of Series A Preferred
Stock (note 9)......... 54 -- -- 2,696 -- 2,750
Proceeds from issuance
of Series B Preferred
Stock (note 9)......... -- 4 -- 156 -- 160
Proceeds from issuance
of Common Stock
(note 9)............... -- -- 6 234 -- 240
Net loss................ -- -- -- -- (82) (82)
---- ---- ---- ------ ------ ------
Balance, December 31,
1995................... 54 4 6 3,086 (82) 3,068
Net earnings............ -- -- -- -- 1,335 1,335
---- ---- ---- ------ ------ ------
Balance, December 31,
1996................... $ 54 $ 4 $ 6 $3,086 $1,253 $4,403
==== ==== ==== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD FROM
NOVEMBER 17, 1995 (INCEPTION) TO DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
--------- ------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)........................................ $ 1,335 $ (82)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in)
operating activities:
Depreciation and amortization............................. 260 --
Deferred income taxes..................................... 128 --
Provision for losses...................................... 706 --
Loans originated or acquired for sale..................... (357,727) --
Loan sales, net........................................... 298,713 --
Principal payments on loans receivable held for sale...... 418 --
Increase in accrued interest receivable................... (786) --
Increase in prepaid expenses and other assets............. (1,125) (88)
Increase in warehouse lines of credit..................... 55,659 --
Increase in income taxes payable.......................... 839 --
Increase in accounts payable and accrued liabilities...... 2,100 83
--------- ------
Net cash provided by (used in) operating activities..... 520 (87)
--------- ------
Cash flows from investing activities--purchase of office
property and equipment..................................... (1,834) (34)
--------- ------
Cash flows from financing activities:
Net proceeds from notes payable............................ 1,326 --
Proceeds from issuance of stock............................ -- 3,150
--------- ------
Net cash provided by financing activities............... 1,326 3,150
--------- ------
Net increase in cash and cash equivalents............... 12 3,029
Cash and cash equivalents at beginning of period............ 3,029 --
--------- ------
Cash and cash equivalents at end of period.................. $ 3,041 $3,029
========= ======
Supplemental cash flow disclosure:
Interest paid.............................................. $ 1,738 $ --
Income taxes............................................... 3 1
========= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization--New Century Financial Corporation (the "Company"), a Delaware
corporation, was incorporated on November 17, 1995. The Company's subsidiary
commenced operations in February 1996 and is a specialty finance company
engaged in the business of originating, purchasing, selling and servicing
mortgage loans secured primarily by first mortgages on single family
residences.
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of the Company's wholly owned subsidiary, New
Century Mortgage Corporation. All material intercompany balances and
transactions are eliminated in consolidation. The consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles.
Cash and Cash Equivalents--For purposes of the statements of cash flows, the
Company considers all highly liquid debt instruments with original maturities
of three months or less to be cash equivalents. Cash equivalents consist of
cash on hand and due from banks.
Loans Receivable Held for Sale--Mortgage loans held for sale are stated at
the lower of amortized cost or market as determined by outstanding commitments
from investors or current investor-yield requirements calculated on an
aggregate basis.
Interest on loans receivable held for sale is credited to income as earned.
Interest is accrued only if deemed collectible.
Gains on Sale of Loans--Gains or losses resulting from sales of mortgage
loans are recognized at the date of settlement and are based on the difference
between the selling price and the carrying value of the related loans sold.
Such gains and losses may be increased or decreased by the amount of any
servicing released premiums received. Nonrefundable fees and direct costs
associated with the origination of mortgage loans are deferred and recognized
when the loans are sold.
Allowance for Repurchase Losses--The allowance for repurchase losses on
loans sold relates to costs incurred due to the repurchase of loans or
indemnification of losses based on alleged violations of representations and
warranties customary to the mortgage banking industry. The allowance
represents the Company's estimate of losses expected to occur and is
considered to be adequate. Provisions for losses are charged to expense and
credited to the allowance and are determined to be adequate by management
based upon the Company's evaluation of the potential exposure related to the
loan sale agreements.
Office Property and Equipment--Office property and equipment are stated at
cost. The straight-line method of depreciation is followed for financial
reporting purposes. Depreciation and amortization are provided in amounts
sufficient to relate the cost of assets to operations over their estimated
service lives or the lives of the respective leases. The estimated service
lives for furniture and office equipment, computer hardware/software and
leasehold improvements are five years, three years and five years,
respectively.
Organization Costs--Organization costs incurred in connection with the
formation of the Company amounted to approximately $63,000 and are being
amortized over a five-year period using the straight-line method. At December
31, 1996 and 1995, accumulated amortization was $12,000 and $0, respectively.
Financial Statement Presentation--The Company prepares its financial
statements using an unclassified balance sheet presentation as is customary in
the mortgage banking industry. A classified balance sheet
F-7
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
presentation would have aggregated current assets, current liabilities and net
working capital as of December 31, 1996 as follows (dollars in thousands):
<TABLE>
<S> <C>
Current assets................................. $63,018
Current liabilities............................ 59,240
-------
Net working capital........................... $ 3,778
=======
</TABLE>
Errors and Omissions Policy--In connection with the Company's lending
activities, the Company has Fidelity Bond and Errors and Omissions insurance
coverage of $500,000 each at December 31, 1996.
Income Taxes--The Company intends to file consolidated Federal and combined
state tax returns. The Company accounts for income taxes using the asset and
liability method. Under the asset and liability method, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Residual Interests in Securitizations--Residual interests in securitizations
of real estate mortgage investment conduits (REMICs) are recorded as a result
of the sale of loans through securitization. At the closing of each
securitization, the Company removes from its balance sheet the mortgage loans
held for sale and adds to its balance sheet (i) the cash received, (ii) the
estimated fair value of the residuals from the securitizations which consists
of (a) an overcollateralization amount (OC) and (b) a net interest receivable
(NIR). The excess of the cash received and assets retained by the Company over
the carrying value of the loans sold, less transaction costs, equals the gain
on sale of loans recorded by the Company.
The Company allocates its basis in the mortgage loans between the portion of
the mortgage loans sold through mortgage backed securities (the senior
certificates) and the portion retained (the residual interests) based on the
relative fair values of those portions on the date of the sale.
The Company may recognize gains or losses attributable to the change in the
fair value of the residual interests, which are recorded at estimated fair
value and accounted for as "held-for-trading" securities. The Company is not
aware of an active market for the purchase or sale of residual interests;
accordingly, the Company estimates fair value of the residual interests by
calculating the present value of the estimated expected future cash flows
using a discount rate commensurate with the risks involved.
NIRs are determined by using the amount of the excess of the weighted-
average coupon on the loans sold over the sum of: (1) the coupon on the senior
certificates, (2) a base servicing fee paid to the servicer of the loans, (3)
expected losses to be incurred on the portfolio of loans sold over the lives
of the loans and (4) other expenses and revenues, which includes anticipated
prepayment penalties. The significant assumptions used by the Company to
estimate NIR cash flows are anticipated prepayments and estimated credit
losses. The Company estimates prepayments by evaluating historical prepayment
performance of comparable loans and the impact of trends in the industry. The
Company estimates credit losses using available historical loss data for
comparable loans and the specific characteristics of the loans included in the
Company's securitizations.
The OC represents the portion of the loans which are held by the trust as
overcollateralization for the senior certificates sold and along with a
certificate guarantor insurance policy serves as credit enhancement to the
senior certificate holders. The OC initially consists of the excess of the
principal balance of the mortgage loans sold to
F-8
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the trust, less the principal balance of the certificates sold to investors.
The OC is required to be maintained at a specified target level of the
principal balance of the certificates, which can be increased significantly in
the event delinquencies and or losses exceed certain specified levels. Cash
flows received by the trust in excess of the obligations of the trust are
deposited into the overcollateralization account until the target OC is
reached. Once the target OC is reached, distributions of excess cash are
remitted to the Company.
Use of Estimates--Management of the Company has made certain estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in accordance with generally accepted accounting principles. Actual
results could differ from these estimates.
Advertising--The Company accounts for its advertising costs as nondirect
response advertising. Accordingly, advertising costs are expensed as incurred.
Reclassification--Certain amounts for 1995 have been reclassified to conform
to the 1996 presentation.
Recent Accounting Developments--In June 1996, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
125 (FASB No. 125), "Accounting for Transfer and Servicing of Financial Assets
and Extinguishment of Liabilities." FASB No. 125 addresses the accounting for
all types of securitization transactions, securities lending and repurchase
agreements, collateralized borrowing arrangements and other transactions
involving the transfer of financial assets. FASB No. 125 distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. FASB No. 125 is effective for transactions that occur after
December 31, 1996 and it is to be applied prospectively. FASB No. 125 will
require the Company to allocate its basis in the mortgage loans between the
portion of the mortgage loans sold through mortgage backed securities and the
portion retained (the residual interests) based on the relative fair values of
those portions on the date of the sale. The pronouncement requires the Company
to account for the residual interests as "held-for-trading" securities which
are to be recorded at fair value in accordance with SFAS No. 115. The Company
adopted FASB No. 125 on January 1, 1997 and there was no material impact on
the Company's financial position or results of operations.
2. LOANS RECEIVABLE HELD FOR SALE
A summary of loans receivable held for sale, at the lower of cost or market
at December 31, 1996 follows (dollars in thousands):
<TABLE>
<S> <C>
Mortgage loans receivable........................................ $57,701
Net deferred origination costs................................... 289
-------
$57,990
=======
</TABLE>
The Company had no loans receivable held for sale at December 31, 1995.
At December 31, 1996, the Company had loans receivable held for sale of
approximately $1.1 million, on which the accrual of interest had been
discontinued. If these loans receivable had been current throughout their
terms, interest would have increased by approximately $26,000.
F-9
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Gain on Sale of Loans--Gain on sale of loans for the year ended December 31,
1996 was comprised of the following components (dollars in thousands):
<TABLE>
<S> <C>
Gain from whole loan sale transactions.......................... $15,052
Provision for losses............................................ (706)
Nonrefundable fees.............................................. 3,548
Premiums, net................................................... (1,973)
Origination costs............................................... (4,291)
-------
$11,630
=======
</TABLE>
Originations and Purchases--During the year ended December 31, 1996,
approximately 62.4% and 15.7% of the Company's total loan originations and
purchases were in the states of California and Illinois, respectively.
Significant Customers--The Company has entered into a number of transactions
with two customers which accounted for more than 10% of the Company's loan
sales. During the year ended December 31, 1996, the Company sold a total of
approximately 51.4% and 32.2% of the loans sold to these two customers and
recognized gross gains on sales of approximately 50.9% and 39.3% of the total
gross gains.
3.OFFICE PROPERTY AND EQUIPMENT
Office property and equipment consist of the following at December 31
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ----
<S> <C> <C>
Leasehold improvements....................................... $ 93 $ 2
Furniture and office equipment............................... 547 4
Computer hardware and software............................... 1,228 28
------ ---
1,868 34
Less accumulated depreciation and amortization............... (248) --
------ ---
$1,620 $34
====== ===
</TABLE>
4. WAREHOUSE LINES OF CREDIT
Warehouse lines of credit consist of the following at December 31 (dollars
in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -----
<S> <C> <C>
A $55 million line of credit expiring in June 1997 secured
by loans receivable held for sale, bearing interest based
on one month LIBOR (5.54% at December 31, 1996)........... $41,702 $ --
A $175 million master repurchase agreement bearing interest
based on one month LIBOR (5.54% at December 31, 1996). The
agreement may be terminated by the lender giving 28 days
written notice............................................ 13,957 --
------- -----
$55,659 $ --
======= =====
</TABLE>
The warehouse line of credit agreements contain certain restrictive
financial and other covenants which require the Company to, among other
requirements, restrict dividends, and maintain certain levels of net worth,
liquidity of at least $1.5 million, debt to net worth ratios and maintenance
of compliance with regulatory and investor requirements. At December 31, 1996,
the Company was in compliance with these financial and other covenants.
F-10
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On March 14, 1997, the Company amended the $55 million line of credit
agreement to include a working capital line of credit with the bank whereby
the Company will be able to borrow up to $2.5 million. The working capital
line of credit expires in June 1997, is unsecured and bears interest based on
the bank's prime rate.
On March 28, 1997, the $55 million line of credit was amended whereby the
Company will be able to borrow up to $85 million. The terms and conditions of
the amended line of credit are the same as the original terms and conditions
mentioned above.
5.NOTES PAYABLE
Notes payable consists of a financing line of credit of $1.5 million,
collateralized by office property and equipment, bears interest at rates
varying from 8.82% to 9.05% and expires in May 1997. The Company had borrowed
approximately $1.3 million under this line as of December 31, 1996. The
borrowings are payable in blended monthly payments of principal and interest
and mature commencing from May 1999 to December 1999.
The maturities of notes payable at December 31, 1996 are as follows (dollars
in thousands):
<TABLE>
<S> <C>
Due in 1 year or less............................................. $ 459
Due after 1 through 5 years....................................... 867
------
$1,326
======
</TABLE>
In February 1997, the financing line of credit was amended whereby the
Company will be able to borrow up to $2.5 million. The terms and conditions of
the amended line of credit are the same as the original terms and conditions
mentioned above.
6. COMMITMENTS AND CONTINGENCIES
Servicing--The Company's portfolio of mortgage loans serviced for others is
comprised of approximately $102 million at December 31, 1996, all of which
were serviced on a temporary basis under interim servicing arrangements which
the Company contracted with a subservicer to perform.
The Company has a subservicing contract with a subservicer to service its
loans receivable held for sale portfolio which together with the interim
servicing portfolio noted above, totaled approximately $160 million at
December 31, 1996.
Related Party--The Company entered into employment agreements on December 1,
1995 with four executive officers (the "Founding Managers") of the Company
expiring through December 1998. The Company is committed to pay minimum
aggregate compensation of $720,000 per annum. In addition, the executive
officers are entitled to certain employment-related benefits.
In December 1996, the Company adopted the Founding Manager's Incentive
Compensation Plan (the "Plan") for the benefit of the Founding Managers. The
Plan provides for payment of incentive compensation equal to 12.5% of the
Company's earnings before income taxes, provided that these earnings represent
greater than 17.5% return on stockholders' equity as defined. In the event the
aggregate incentive compensation amounts payable to Founding Managers for a
fiscal year exceeds the aggregate base salaries of the Founding Managers, 50%
of the excess amount will be distributed at the discretion of the Compensation
Committee in cash installments or granted as a nonqualified stock option, and
the remaining 50% will be distributed at the discretion of each Founding
Manager in cash installments or granted as a nonqualified stock option. As of
December 31, 1996 and 1995, the Company accrued $318,000 and $0, respectively,
of incentive compensation under the Plan.
F-11
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Operating Leases--The Company and its subsidiary lease certain facilities
under noncancelable operating leases, which expire at various dates through
2002. Total rental expenditures under these leases were approximately $389,000
and $0 for the year ended December 31, 1996 and the period from November 17,
1995 (inception) to December 31, 1995, respectively. Minimum rental
commitments for these leases are as follows (dollars in thousands):
<TABLE>
<S> <C>
Year ending December 31:
1997............................................................. $ 852
1998............................................................. 722
1999............................................................. 475
2000............................................................. 251
2001............................................................. 156
Thereafter....................................................... 8
------
$2,464
======
</TABLE>
The Company is in the process of negotiating a new lease for its
administrative offices. The initial monthly rental payment is estimated to be
$75,000 and is anticipated to expire in 2002.
Loan Commitments--Commitments to fund loans are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses. Also, external market forces impact the probability of
commitments being exercised; therefore, total commitments outstanding do not
necessarily represent future cash requirements. The Company quotes interest
rates to borrowers which are subject to change by the Company. Although the
Company generally honors such interest rate quotes, the quotes do not
constitute interest rate locks, minimizing any potential interest rate risk
exposure. The Company had commitments to fund loans of approximately $37.7
million at December 31, 1996.
The Company had no commitments to sell loans at December 31, 1996.
As of December 31, 1996, the Company was committed to provide an investment
banking firm with a right to purchase whole loans and/or to lead underwrite
loans sold through securitization by the Company in an aggregate amount of
$500 million. In February 1997, the Company securitized through this
investment banking firm approximately $99.1 million in loans. In conjunction
with this securitization, the Company borrowed $7.5 million from this same
firm which is renewable monthly, bears interest based on one month LIBOR and
is collateralized by the Company's retained residual interest in the
securitization.
Contingencies--The Company has entered into loan sale agreements with
investors in the normal course of business which include standard
representations and warranties customary to the mortgage banking industry.
Violations of these representations and warranties may require the Company to
repurchase loans previously sold or to reimburse investors for losses
incurred. In the opinion of management, the potential exposure related to the
Company's loan sale agreements will not have a material adverse effect on the
financial position and operating results of the Company.
The Company sold loans in September and December 1996 under an agreement to
repurchase those loans which were delinquent at a specific date in December
1996 and January 1997. In accordance with this loan sale agreement, the
Company repurchased loans with an outstanding principal balance of
approximately $1.7 million for the year ended December 31, 1996. Subsequent to
year-end, the Company repurchased additional loans with an outstanding
principal balance of approximately $2.3 million.
F-12
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996 and 1995, included in other liabilities are $100,000
and $0, respectively, in allowances for repurchase losses related to possible
off-balance sheet recourse and repurchase agreement provisions. The activity
in the allowance related to possible off-balance sheet recourse and repurchase
agreement provisions for the year ended December 31, 1996 is summarized as
follows (dollars in thousands):
<TABLE>
<S> <C>
Balance, beginning of year.......................................... $ --
Provision for losses................................................ 706
Charge-offs, net.................................................... (606)
----
Balance, end of year................................................ $100
====
</TABLE>
Litigation--The Company is a party to legal actions arising in the normal
course of business. In the opinion of management, based in part on discussions
with outside legal counsel, resolution of such matters will not have a
material adverse effect on the financial position and operating results of the
Company.
7. INCOME TAXES
Components of the Company's provision for income taxes for the year ended
December 31, 1996 and for the period from November 17, 1995 (inception) to
December 31, 1995 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current:
Federal........................................................ $650 $ 1
State.......................................................... 192 --
---- ----
842 1
---- ----
Deferred:
Federal........................................................ 66 --
State.......................................................... 62 --
---- ----
128 --
---- ----
$970 $ 1
==== ====
</TABLE>
Actual income taxes differ from the amount determined by applying the
statutory Federal rate of 34% for the year ended December 31, 1996 and for the
period from November 17, 1995 (inception) to December 31, 1995 to earnings
(loss) before taxes as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Computed "expected" income taxes............................. $784 $(27)
State tax, net............................................... 174 --
Valuation reserve............................................ (28) 28
Other........................................................ 40 --
---- ----
$970 $ 1
==== ====
</TABLE>
F-13
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses.................................... $229 $--
Accruals for tax purposes not deductible..................... 40 --
State taxes.................................................. 86 --
Net operating losses......................................... -- 28
---- ----
355 28
Valuation allowance....................................... -- (28)
---- ----
355 --
---- ----
Deferred tax liabilities:
Deferred loan fees........................................... (448) --
Office property and equipment................................ (35) --
---- ----
(483) --
---- ----
Net deferred income tax liability......................... $128 $--
==== ====
</TABLE>
The valuation allowance for deferred tax assets was $0 and $28,000 at
December 31, 1996 and 1995, respectively. The net change in the total
valuation allowance for the year ended December 31, 1996 was $28,000.
Deferred tax assets are initially recognized for differences between the
financial statement carrying amount and the tax bases of assets and
liabilities which will result in future deductible amounts and operating loss
and tax credit carryforwards. A valuation allowance is then established to
reduce that deferred tax asset to the level at which it is more likely than
not that the tax benefits will be realized. Realization of tax benefits of
deductible temporary differences and operating loss or tax credit
carryforwards depends on having sufficient taxable income of an appropriate
character within the carryback and carryforward periods. Sources of taxable
income that may allow for the realization of tax benefits include: (1) taxable
income in the current year or prior years that is available through carryback,
(2) future taxable income that will result from the reversal of existing
taxable temporary differences, (3) future taxable income generated by future
operations and (4) tax planning strategies that, if necessary, would be
implemented to accelerate taxable income into years in which net operating
losses might otherwise expire.
8. EMPLOYEE BENEFIT PLAN
On July 1, 1996, the Company established the New Century Financial
Corporation 401(k) Profit Sharing Plan (the Plan) for the benefit of eligible
employees and their beneficiaries. The Plan is a defined contribution 401(k)
plan which allows eligible employees to save for retirement through pretax
contributions. Under the Plan, employees of the Company may contribute up to
the statutory limit. The Company will match 25% of the first 6% of
compensation contributed by the employee. An additional Company contribution
may be made at the discretion of the Company. Contributions to the Plan by the
Company for the year ended December 31, 1996 were $47,000.
9. STOCKHOLDERS' EQUITY
Convertible Preferred Stock--On November 22, 1995, the Company issued
5,000,000 shares of Series A Preferred Stock. In December 1995, the Company
issued an additional 500,000 shares of Series A Preferred Stock. The Company
received $2.75 million from the issuances. The holders of the Series A
Preferred Stock are
F-14
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
entitled to convert each share of Series A Preferred Stock into one share of
Common Stock. Upon liquidation, the Series A Preferred Stock is entitled to
receive, in preference to any payment on Series B Preferred Stock and Common
Stock, an amount equal to $0.50 per share and a 12% annual return.
On November 22, 1995, the Company issued 320,000 shares of Series B
Preferred Stock. The Company received $160,000 from this issue. The holders of
the Series B Preferred Stock are entitled to convert each share of Series B
Preferred Stock into one share of Common Stock. Upon liquidation, after the
payments to Series A Preferred Stock as described above, the Series B
Preferred Stock is entitled to receive, in preference to any payment on Common
Stock, an amount equal to $0.50 per share and a 6% annual return.
Common Stock--On November 22, 1995, the Company issued 528,618 shares of
Common Stock. The Company received $240,000 from this issue.
Stock Split--On September 19, 1996, the Company authorized a 2-for-1 stock
split of all classes of stock. The Company also authorized an additional
1,500,000 shares each of Common Stock and Preferred Stock, the terms and
preferences of which may be determined by the Board of Directors without
further shareholder approval. All references in the consolidated financial
statements to number of shares, per share amounts and market prices of the
Company's Preferred and Common Stock have been retroactively restated to
reflect the increased number of preferred and common shares outstanding.
Warrants--Each share of Common Stock issued on November 22, 1995 had a
warrant attached which entitles the holder to purchase 2.78 shares of Common
Stock of the Company at $1.00, $2.00 and $3.00 per share. The warrants are
exercisable at any time prior to January 31, 2003.
In December 1996, the Company issued warrants to purchase an aggregate of
512,384 shares of Common Stock, exercisable at $3.50 per share, to the
Company's existing stockholders. Such warrants were granted to stockholders on
a pro rata basis in satisfaction of the stockholders' respective preemptive
rights.
10. STOCK OPTIONS
In 1995, the Company adopted and received stockholders' approval of the
qualified 1995 Stock Option Plan (the "Plan") pursuant to which the Company's
Board of Directors may grant stock options to officers and key employees. The
Plan authorizes grants of options to purchase up to 705,402 shares of
authorized but unissued Common Stock. Stock options granted under the Plan
have terms of ten years and vest over a range from December 1996 to December
2001. In addition to the Plan, in December 1996, the Company authorized
120,000 nonqualified stock options to certain executive officers of the
Company that vest in December 1999 and expire five years from the grant date.
All stock options are granted with an exercise price equal to the stock's fair
market value at the date of grant.
At December 31, 1996, there were 160,802 shares available for grant under
the Plan. Of the options outstanding at December 31, 1996 and 1995, 14,600 and
zero, respectively, were exercisable with a weighted-average exercise price of
$3.17. The per share weighted-average fair value of stock options granted
during the year ended December 31, 1996 and the period from November 17, 1995
(inception) to December 31, 1995 was $1.05 and $.20 at the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Expected life (years)......................................... 9.1 10
Risk-free interest rate....................................... 6.0% 6.0%
Volatility.................................................... 45.0% 45.0%
Expected dividend yield....................................... -- --
==== ====
</TABLE>
F-15
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company applies APB Opinion No. 25 in accounting for its plans and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," the Company's net earnings (loss) would have been reduced
to the pro forma amounts indicated below (dollars in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 17,
1995
(INCEPTION)
YEAR ENDED TO
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Net earnings (loss):
As reported................................... $1,335 $(82)
Pro forma..................................... 1,329 (82)
====== ====
</TABLE>
Stock options activity during the year ended December 31, 1996 and the
period from November 17, 1995 (inception) to December 31, 1995 is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Granted.......................................... 73,000 $ .50
Exercised........................................ -- --
Canceled......................................... -- --
------- -----
Balance at December 31, 1995................... 73,000 .50
Granted.......................................... 595,600 1.92
Exercised........................................ -- --
Canceled......................................... (4,000) 0.50
------- -----
Balance at December 31, 1996................... 664,600 $1.77
======= =====
</TABLE>
At December 31, 1996, the range of exercise prices, the number outstanding,
weighted-average remaining term and weighted-average exercise price of options
outstanding and the number exercisable and weighted-average price of options
currently exercisable are as follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED- WEIGHTED-
RANGE OF NUMBER AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING REMAINING TERM EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- -------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.50 -- 0.50 282,000 9.67 $0.50 14,600 $0.50
1.75 -- 1.75 174,000 9.75 1.75 -- --
3.50 -- 3.50 208,600 10.00 3.50 -- --
======== ======= ===== ===== ====== =====
</TABLE>
F-16
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. GENERAL AND ADMINISTRATIVE EXPENSES
A summary of general and administrative expenses follows (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995
------ ----
<S> <C> <C>
Occupancy.................................................... $ 389 $--
Telephone.................................................... 336 --
Travel and entertainment..................................... 277 6
Depreciation and amortization................................ 260 --
Office supplies.............................................. 238 2
Postage and courier.......................................... 204 --
Equipment rental............................................. 184 --
Other administrative expenses................................ 568 3
------ ----
$2,456 $ 11
====== ====
</TABLE>
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made using estimated fair value amounts that have been
determined 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 that
could be realized in a current market exchange. The use of different market
assumptions or estimation methodologies may have a material impact on the
estimated fair value amounts.
The estimated fair values of the Company's financial instruments as of
December 31, 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
-------- -------
<S> <C> <C>
Financial assets:
Cash and cash equivalents............................. $ 3,041 $ 3,041
Loans receivable held for sale, net................... 57,990 61,210
Financial liabilities:
Warehouse lines of credit............................. 55,659 55,659
Notes payable......................................... 1,326 1,326
======= =======
</TABLE>
The following methods and assumptions were used in estimating the Company's
fair value disclosures for financial instruments.
Cash and cash equivalents: The fair value of cash and cash equivalents
approximates the carrying value reported in the balance sheet.
Loans receivable held for sale: The fair value of loans receivable held for
sale is determined in the aggregate based on outstanding whole loan
commitments from investors or current investor yield requirements.
Warehouse lines of credit: The carrying value reported in the balance sheet
approximates fair value as the warehouse lines of credit are due upon demand
and bear interest at a rate that approximates current market interest rates
for similar type lines of credit.
Notes payable: The fair value of notes payable is determined by discounting
expected cash payments at the current market interest rate over the term of
the notes payable.
F-17
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
13. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
The following is condensed information as to the financial condition, results
of operations and cash flows of New Century Financial Corporation (dollars in
thousands):
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------
1996 1995
ASSETS ------- ------
<S> <C> <C>
Cash and cash equivalents....................................... $ 4 $1,151
Investment in subsidiary........................................ 4,273 1,913
Other assets.................................................... 136 53
------- ------
$ 4,413 3,117
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities............................................... $ 10 $ 49
Stockholders' equity............................................ 4,403 3,068
------- ------
$ 4,413 $3,117
======= ======
</TABLE>
CONDENSED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 17,
1996
(INCEPTION)
YEAR ENDED TO
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Interest income....................................... $ 17 $ 5
Equity in earnings (loss) of subsidiary............... 1,419 (87)
------ ----
1,436 (82)
------ ----
Personnel............................................. 104 --
General and administrative............................ 46 --
Professional services................................. 10 --
------ ----
160 --
------ ----
Earnings (loss) before income tax benefit........... 1,276 (82)
Income tax benefit.................................... (59) --
------ ----
Net earnings (loss)................................. $1,335 $(82)
====== ====
</TABLE>
F-18
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 17,
1996
(INCEPTION)
YEAR ENDED TO
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)................................ $ 1,335 $ (82)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 11 --
Increase in other assets......................... (94) (53)
Increase (decrease) in other liabilities......... (39) 49
Equity in earnings (loss) of subsidiary.......... (1,419) 87
Net cash provided by (used in) operating
activities.................................... (206) 1
------- -------
Cash flows from investing and financing activities:
Investment in subsidiary........................... (941) (2,000)
Proceeds from issuance of stock.................... -- 3,150
------- -------
(941) 1,150
------- -------
Net increase (decrease) in cash................ (1,147) 1,151
Cash and cash equivalents, beginning of period....... 1,151 --
------- -------
Cash and cash equivalents, end of period............. $ 4 $ 1,151
======= =======
</TABLE>
14. UNAUDITED PRO FORMA STATEMENT OF EARNINGS AND EARNINGS PER SHARE
Pro Forma net earnings for the year ended December 31, 1996 represents the
results of operations adjusted to reflect the effect of the revised employment
agreements and the revised calculation of incentive compensation amounts for
the Founding Managers which took effect on May 30, 1997.
Pro Forma earnings per share has been computed by dividing pro forma net
earnings by the pro forma weighted average number of shares outstanding. In
accordance with a regulation of the Securities and Exchange Commission, the
pro forma weighted average number of shares includes all options and warrants
issued below the estimated initial public offering price within one year prior
to the filing of the Registration Statement for the initial public offering
and is calculated using the treasury stock method. Historical earnings per
share is not presented because it is not indicative of the ongoing entity.
F-19
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
MARCH 31,
1997 MARCH 31, DECEMBER 31,
ASSETS (NOTE 5) 1997 1996
------ --------- --------- ------------
<S> <C> <C> <C>
Cash and cash equivalents..................... $ 3,747 $ 3,747 $ 3,041
Loans receivable held for sale, net (notes 2
and 4)....................................... 113,162 113,162 57,990
Accrued interest receivable................... 364 364 786
Residual interests in securitization (note 3). 13,243 13,243 --
Office property and equipment................. 1,990 1,990 1,620
Prepaid expenses and other assets............. 2,240 1,076 1,201
-------- -------- --------
$134,746 $133,582 $ 64,638
======== ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Warehouse lines of credit (note 4)............ $ 81,909 $110,534 $ 55,659
Residual financing (note 4)................... 7,248 7,248 --
Notes payable................................. 1,869 3,119 1,326
Income taxes payable.......................... 67 131 839
Accounts payable and accrued liabilities...... 4,193 4,041 2,283
Deferred income taxes......................... 1,759 1,759 128
-------- -------- --------
$ 97,045 126,832 60,235
-------- -------- --------
Stockholders' equity:
Preferred stock, $.01 par value. Authorized
7,320,000 shares:
Series A Convertible Preferred Stock--
issued and outstanding 5,500,000 shares.. -- 54 54
Series B Convertible Preferred Stock--
issued and outstanding 320,000 shares.... -- 4 4
Common Stock, $.01 par value. Authorized
12,963,778 shares; issued and outstanding
528,618 shares............................. 139 6 6
Additional paid-in capital.................. 36,825 3,086 3,086
Retained earnings, restricted............... 3,512 3,600 1,253
-------- -------- --------
40,476 6,750 4,403
Deferred compensation costs............... (2,775) -- --
-------- -------- --------
37,701 6,750 4,403
-------- -------- --------
Contingencies (note 7)
Subsequent events (notes 6 and 7)
$134,746 $133,582 $ 64,638
======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-20
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1997 -------------
(NOTE 5) 1997 1996
------------ ------- -----
<S> <C> <C> <C>
Revenues
Gain on sale of loans (note 2)................... $ 10,012 $10,012 $ --
Interest income.................................. 2,271 2,271 39
Servicing fees................................... 302 302 --
---------- ------- -----
Total revenues................................. 12,585 12,585 39
---------- ------- -----
Expenses:
Personnel........................................ 3,697 3,545 584
General and administrative....................... 1,954 1,954 144
Interest......................................... 1,808 1,808 14
Advertising and promotion........................ 842 842 106
Servicing........................................ 234 234 --
Professional services............................ 156 156 51
---------- ------- -----
Total expenses................................. 8,691 8,539 899
---------- ------- -----
Earnings (loss) before income taxes (benefit).. 3,894 4,046 (860)
Income taxes (benefit)............................. 1,635 1,699 (362)
---------- ------- -----
Net earnings (loss)............................ $ 2,259 $ 2,347 $(498)
========== ======= =====
Pro forma earnings per share....................... $ 0.16
==========
Pro forma weighted average number of shares
outstanding....................................... 14,543,207
==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-21
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss).................................... $ 2,347 $ (498)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization........................ 286 27
Deferred income taxes................................ 1,631 (362)
Gain on sale of loans................................ (10,398) --
Net interest receivables collected................... (311) --
Over-collateralization amount released............... 311 --
Provision for losses................................. 495 --
Loans originated or acquired for sale................ (251,652) (4,252)
Loan sales, net...................................... 194,848 --
Principal payments of loans receivable held for sale. 1,257
Initial over-collateralization amount................ (2,973) --
(Increase) decrease in accrued interest receivable... 422 (2)
(Increase) decrease in prepaid expenses and other
assets.............................................. 122 (376)
Increase in warehouse lines of credit................ 54,875 4,080
Decrease in income taxes payable..................... (708) --
Increase in accounts payable and accrued liabilities. 1,638 4
---------- --------
Net cash (used in) operating activities............ (7,810) (1,379)
---------- --------
Cash flows from investing activities--purchase of office
property and equipment.................................. (525) (351)
---------- --------
Cash flows from financing activities:
Net proceeds from notes payable........................ 1,793 --
Net proceeds from residual financing................... 7,248 --
---------- --------
Net cash provided by financing activities.......... 9,041 --
---------- --------
Net increase (decrease) in cash and cash
equivalents....................................... 706 (1,730)
Cash and cash equivalents at beginning of period......... 3,041 3,029
---------- --------
Cash and cash equivalents at end of period............... $ 3,747 $111,299
========== ========
Supplemental cash flow disclosure:
Interest paid.......................................... $ 1,730 $ 2
Income taxes........................................... 776 2
========== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-22
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1997 AND 1996
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three month
period ended March 31, 1997 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1997. For further information,
refer to the consolidated financial statements and footnotes thereto for the
year ended December 31, 1996 included elsewhere herein.
Recent Accounting Developments--In June 1996, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
125 (FASB No. 125), "Accounting for Transfer and Servicing of Financial Assets
and Extinguishment of Liabilities." FASB No. 125 addresses the accounting for
all types of securitization transactions, securities lending and repurchase
agreements, collateralized borrowing arrangements and other transactions
involving the transfer of financial assets. FASB No. 125 distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. FASB No. 125 requires the Company to allocate its basis in the
mortgage loans between the portion of the mortgage loans sold through mortgage
backed securities and the portion retained (the residual interests) based on
the relative fair values of those portions on the date of the sale. The
pronouncement requires the Company to account for the residual interests as
"held-for-trading" securities which are to be recorded at fair value in
accordance with SFAS No. 115. The Company adopted FASB No. 125 on January 1,
1997.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, (FASB No. 128), "Earnings
Per Share." FASB No. 128 supersedes APB Opinion No. 15, (APB 15), "Earnings
Per Share" and specifies the computation, presentation, and disclosure
requirements for earnings per share (EPS) for entities with publicly held
common stock or potential common stock. FASB No. 128 was issued to simplify
the computation of EPS and to make the U.S. standard more compatible with the
EPS standards of other countries and that of the International Accounting
Standards Committee (IASC). It replaces the presentation of primary EPS with a
presentation of basic EPS and fully diluted EPS with diluted EPS.
Basic EPS, unlike primary EPS, excludes 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 securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Diluted EPS is computed similarly to fully diluted EPS under APB No. 15.
FASB No. 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted. After adoption, all prior-period EPS data presented shall be
restated to conform with FASB No. 128. The Company has determined that this
statement will increase the earnings per share computation under Basic EPS as
compared to primary EPS.
F-23
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FASB No. 129, Disclosure of Information about Capital Structure, is
effective for financial statements for periods ending after December 15, 1997.
It is not expected that the issuance of FASB No. 129 will require significant
revision of prior disclosures since the Statement lists required disclosures
that had been included in a number of previously existing separate statements
and opinions.
Residual interests in securitizations--of real estate mortgage investment
conduits (REMICs) are recorded as a result of the sale of loans through
securitization. At the closing of each securitization, the Company removes
from its balance sheet the mortgage loans held for sale and adds to its
balance sheet (i) the cash received, (ii) the estimated fair value of the
residuals from the securitizations which consists of (a) an
overcollateralization amount (OC) and (b) a net interest receivable (NIR). The
excess of the cash received and assets retained by the Company over the
carrying value of the loans sold, less transaction costs, equals the gain on
sale of loans recorded by the Company.
The Company allocates its basis in the mortgage loans between the portion of
the mortgage loans sold through mortgage backed securities (the senior
certificates) and the portion retained (the residual interests) based on the
relative fair values of those portions on the date of the sale.
The Company may recognize gains or losses attributable to the change in the
fair value of the residual interests, which are recorded at estimated fair
value and accounted for as "held-for-trading" securities. The Company is not
aware of an active market for the purchase or sale of residual interests;
accordingly, the Company estimates fair value of the residual interests by
calculating the present value of the estimated expected future cash flows
using a discount rate commensurate with the risks involved.
NIRs are determined by using the amount of the excess of the weighted-
average coupon on the loans sold over the sum of: (1) the coupon on the senior
certificates, (2) a base servicing fee paid to the servicer of the loans, (3)
expected losses to be incurred on the portfolio of loans sold over the lives
of the loans and (4) other expenses and revenues, which includes anticipated
prepayment penalties. The significant assumptions used by the Company to
estimate NIR cash flows are anticipated prepayments and estimated credit
losses. The Company estimates prepayments by evaluating historical prepayment
performance of comparable loans and the impact of trends in the industry. The
Company estimates credit losses using available historical loss data for
comparable loans and the specific characteristics of the loans included in the
Company's securitizations.
The OC represents the portion of the loans which are held by the trust as
overcollateralization for the senior certificates sold and along with a
certificate guarantor insurance policy serves as credit enhancement to the
senior certificate holders. The OC initially consists of the excess of the
principal balance of the mortgage loans sold to the trust, less the principal
balance of the certificates sold to investors. The OC is required to be
maintained at a specified target level of the principal balance of the
certificates, which can be increased significantly in the event delinquencies
and or losses exceed certain specified levels. Cash flows received by the
trust in excess of the obligations of the trust are deposited into the
overcollateralization account until the target OC is reached. Once the target
OC is reached, distributions of excess cash are remitted to the Company.
F-24
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. LOANS RECEIVABLE HELD FOR SALE
A summary of loans receivable held for sale, at the lower of cost or market
at March 31, 1997 and December 31, 1996 follows (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
Mortgage loans receivable.......................... $112,723 $57,701
Net deferred origination costs..................... 439 289
-------- -------
$113,162 $57,990
======== =======
</TABLE>
Gain on Sale of Loans--Gain on sale of loans for the three months ended
March 31, 1997 and 1996 was comprised of the following components (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- ----
<S> <C> <C>
Gain from whole loan
sale transactions and
securitization.......... $11,903 $--
Unrealized gain on held-
for-trading securities. 1,267 --
Provision for losses.... (495) --
Nonrefundable fees...... 3,311 --
Premiums, net........... (1,803) --
Origination costs....... (4,171) --
------- ----
$10,012 $--
======= ====
</TABLE>
3. RESIDUAL INTERESTS IN SECURITIZATION
Residual interests in securitization consists of the following components at
March 31, 1997 (dollars in thousands):
<TABLE>
<S> <C>
Over-collateralization amount.................................... $ 2,973
Net interest receivable (NIR).................................... 10,270
-------
$13,243
=======
</TABLE>
The following table summarizes activity in NIR interests at March 31, 1997
(dollars in thousands):
<TABLE>
<S> <C>
Balance, beginning of period..................................... $ --
NIR recognized................................................... 10,398
Amortization..................................................... (128)
-------
Balance, end of period........................................... $10,270
=======
</TABLE>
F-25
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. WAREHOUSE LINES OF CREDIT
Warehouse lines of credit consist of the following at March 31, 1997 and
December 31, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
A $85 million line of credit expiring in May 1998
secured by loans receivable held for sale,
bearing interest based on one month LIBOR (5.71%
at March 31, 1997)............................... $ 65,803 $41,702
A $175 million master repurchase agreement bearing
interest based on one month LIBOR (5.71% at March
31, 1997). The agreement may be terminated by the
lender giving 28 days written notice............. 44,731 13,957
-------- -------
110,534 55,659
A residual financing line renewable monthly,
secured by residual interests in securitization
bearing interest based on one month LIBOR (5.71%
at March 31, 1997)............................... 7,248 --
-------- -------
$117,782 $55,659
======== =======
</TABLE>
The warehouse line of credit agreements contain certain restrictive
financial and other covenants which require the Company to, among other
requirements, restrict dividends, maintain certain levels of net worth,
liquidity of at least $1.5 million, debt to net worth ratios and maintenance
of compliance with regulatory and investor requirements. At March 31, 1997,
the Company was in compliance with these financial and other covenants.
Advances under the residual financing line are made at the sole discretion
of the lender and are based upon a percentage of the amount of loans
securitized.
5. UNAUDITED PRO FORMA FINANCIAL INFORMATION
The pro forma financial information shows what the significant effects on
the historical financial information would have been had the Company revised
the employment agreements and the calculation of incentive compensation
amounts. The following pro forma adjustments have been made for the three
months ended March 31, 1997.
Pro forma net earnings for the three months ended March 31, 1997 represents
the results of operations adjusted to reflect the effect of the revised
employment agreements and the revised calculation of incentive compensation
amounts for the Founding Managers which took effect on May 30, 1997. The
adjustment for the retroactive application of the revised salary for fiscal
1997 will be earned by the Founding Managers as of May 30, 1997.
Pro forma earnings per share for the three months ended March 31, 1997 has
been computed by dividing pro forma net earnings by the pro forma weighted
average number of shares outstanding. In accordance with a regulation of the
Securities and Exchange Commission, the pro forma weighted average number of
shares includes all options and warrants issued below the estimated initial
public offering price within one year prior to the filing of the Registration
Statement for the initial public offering and is calculated using the treasury
stock method. Historical earnings per share not presented because it is not
indicative of the ongoing entity.
F-26
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pro forma balance sheet information as of March 31, 1997 has been presented
to reflect the adjustments for the revision of employment agreements,
calculation of incentive compensation amounts, the grants of restricted stock
awards, stocks issued to Comerica Inc. for cash consideration, net of costs,
of $3,987,500, stock warrants issued to Comerica Inc., the exercise of
outstanding warrants and the conversion of Series A Preferred Stock and Series
B Preferred Stock, which took effect on May 30, 1997. The pro forma balance
sheet also reflects the sale of 2,900,000 shares for a consideration, net of
costs of $24.8 million in the initial public offering.
6. STOCK OPTIONS
In 1995, the Company adopted and received stockholders' approval of the
qualified 1995 Stock Option Plan (the "Plan") pursuant to which the Company's
Board of Directors may grant stock options to officers and key employees. The
Plan authorizes grants of options to purchase up to 705,402 shares of
authorized but unissued Common Stock. Stock options granted under the Plan
have terms of ten years and vest over a range from December 1996 to December
2001. In addition to the Plan, in December 1996, the Company authorized
120,000 nonqualified stock options to certain executive officers of the
Company that vest in December 1999 and expire five years from the grant date.
All stock options are granted with an exercise price equal to the stock's fair
market value at the date of grant.
At March 31, 1997, there were 172,802 shares available for grant under the
Plan. Of the options outstanding at March 31, 1997, 21,450 were exercisable
with a weighted-average price of $0.50.
Stock options activity during the three months ended March 31, 1997 is as
follows:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Balance at December 31, 1996..................... 664,000 $1.77
Granted........................................ -- --
Exercised...................................... -- --
Canceled....................................... (12,000) 0.92
------- -----
Balance at March 31, 1997.................... 652,600 $1.74
======= =====
</TABLE>
In May 1997, the Company's Board of Directors increased the stock options
that may be granted under the Plan to 2 million shares.
As of May 31, 1997, the Company had a balance of 1,267,520 shares granted
that were outstanding at a weighted-average price of $5.17 per share.
On May 31, 1997, the stock warrants issued in November 1995 and December
1996, were exercised by the respective warrantholders. Certain warrantholders
exercised their warrants by paying the exercise price of the warrants with
shares of common stock of the Company. Such shares of common stock were
credited toward the exercise price at the fair market value of the Common
Stock.
7. CONTINGENCIES
The Company has entered into loan sale agreements with investors in the
normal course of business which include standard representations and
warranties customary to the mortgage banking industry. Violations of these
representations and warranties may require the Company to repurchase loans
previously sold or to reimburse investors for losses incurred. In the opinion
of management, the potential exposure related to the Company's loan sale
agreements will not have a material adverse effect on the financial position
and operating results of the Company.
F-27
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company sold loans in September and December 1996 under an agreement to
repurchase those loans which were delinquent at a specific date in December
1996 and January 1997. In accordance with this loan sale agreement, the
Company repurchased loans with an outstanding principal balance of
approximately $3.5 million in the quarter ended March 31, 1997 and $1.7
million for the year ended December 31, 1996.
At March 31, 1997 and December 31, 1996, included in other liabilities are
$220,000 and $100,000, respectively, in allowances for repurchase losses
related to possible off-balance sheet recourse and repurchase agreement
provisions.
The activity in the allowance related to possible off-balance sheet recourse
and repurchase agreement provisions is summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
THREE
MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ---------
<S> <C> <C>
Balance, beginning of period.......................... $100 $ --
Provisions for losses................................. 495 706
Charge-offs, net...................................... (375) (606)
---- ----
Balance, end of period................................ $220 $100
==== ====
</TABLE>
The Company has issued to Comerica warrants to purchase 100,000 shares of
Common Stock and has agreed to issue warrants to purchase, subject to the
completion of certain performance events by Comerica, an additional of 233,333
shares of Common Stock. The warrants are exercisable over five years at an
exercise price equal to the initial public offering price of the Company's
Common Stock, subject to vesting in equal installments on December 31, 1997,
1998 and 1999.
F-28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made in this Prospectus and, if given
or made, such information or representations must not be relied upon as having
been authorized by the Company, any of the Underwriters or the Selling
Stockholders. This Prospectus does not constitute an offer to sell or a
solicitation of any offer to buy any shares of Common Stock other than the
shares of Common Stock to which it relates or an offer to, or a solicitation
of, any person in any jurisdiction where such an offer or solicitation would be
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that the information
contained herein is correct as of any time subsequent to the date hereof.
-------------------
TABLE OF CONTENTS
-------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors............................................................... 10
Use of Proceeds............................................................ 22
Dividend Policy............................................................ 22
Dilution................................................................... 22
Capitalization............................................................. 24
Selected Consolidated Financial and Other Data............................. 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 28
Business................................................................... 39
Management................................................................. 58
Certain Relationships and Related Transactions............................. 68
Beneficial Ownership of Securities and Selling Stockholders................ 69
Description of Capital Stock............................................... 70
Shares Eligible for Future Sale............................................ 73
Underwriting............................................................... 74
Legal Matters.............................................................. 75
Experts.................................................................... 75
Available Information...................................................... 75
Index to Consolidated Financial Statements................................. F-1
</TABLE>
Until , 1997 (25 days after the date of this Prospectus), all dealers ef-
fecting transactions in the registered securities, whether or not participating
in this distribution, may be required to deliver a Prospectus. This is in addi-
tion to the obligation of the dealers to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,500,000 SHARES
[LOGO of New Century
FINANCIAL CORPORATION]
COMMON STOCK
----------------
PROSPECTUS
----------------
MONTGOMERY SECURITIES
PIPER JAFFRAY INC.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses, other than the underwriting
discount, payable by the Company in connection with the issuance and
distribution of the Common Stock being registered. All amounts are estimates
except the Securities and Exchange Commission registration fee, the NASD
filing fee and the Nasdaq listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........... $ 12,806.00
NASD filing fee............................................... 4,686.00
Nasdaq listing fee............................................ 42,116.00
Accounting fees and expenses.................................. 225,000.00
Legal fees and expenses....................................... 325,000.00
Blue Sky qualification fees and expenses...................... 10,000.00
Printing and engraving expenses............................... 100,000.00
Transfer agent and registrar fees............................. 2,000.00
Road show expenses............................................ 50,000.00
Miscellaneous................................................. 28,392.00
-----------
Total....................................................... $800,000.00
===========
</TABLE>
The Company intends to pay all expenses of registration, issuance and
distribution, excluding the underwriters' discount and commissions, with
respect to the shares being sold by the Selling Stockholders.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by applicable law a director of the Company shall not be
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director. Under the DGCL, liability of a director may not
be limited (i) for any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) in respect
of certain unlawful dividend payments or stock redemptions or repurchases and
(iv) for any transaction from which the director derives an improper personal
benefit. The effect of the provisions of the Company's Certificate of
Incorporation is to eliminate the rights of the Company and its stockholders
(through stockholders' derivative suits on behalf of the Company) to recover
monetary damages against a director for breach of the fiduciary duty of care
as a director (including breaches resulting from negligent or grossly
negligent behavior), except as provided in the situations described in clauses
(i) through (iv) above. This provision does not limit or eliminate the rights
of the Company or any stockholder to seek nonmonetary relief such as an
injunction or rescission in the event of a breach of a director's duty of
care.
The Bylaws of the Company provide that the Company will indemnify its
directors and officers to the fullest extent permitted by the DGCL. In
addition, the Company has entered into agreements with each of the directors
and officers of the Company pursuant to which the Company has agreed to
indemnify, subject to certain limitations, such director or officer from
claims, liabilities, damages, expenses, losses, costs, penalties or amounts
paid in settlement incurred by such director or officer in or arising out of
his capacity as a director, officer, employee and/or agent of the Company or
any other corporation of which such person is a director or officer at the
request of the Company to the maximum extent provided by applicable law. In
addition, such director or officer is entitled to an advance of expenses to
the maximum extent authorized or permitted by law.
II-1
<PAGE>
The Form of Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Company and
its directors and officers for certain liabilities arising under the
Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is an historical summary of transactions by the Company since
its incorporation involving sales of the Company's securities that were not
registered under the Securities Act. The numbers are not adjusted to reflect
the 2-for-1 stock split effected by the Company.
In November 1995, the Company issued 2,000,000 shares of Series A Preferred
Stock to Cornerstone Fund, I, L.L.C. for $2,000,000, 100,000 shares of Series
A Preferred Stock to MMSPC Defined Benefit Plan for $100,000, 100,000 shares
of Series A Preferred Stock to Harlan W. Smith for $100,000, 100,000 shares of
Series A Preferred Stock to Harcol Limited Partnership for $100,000, 100,000
shares of Series A Preferred Stock to David Krinsky for $100,000 and 100,000
shares of Series A Preferred Stock to Cornerstone Equity Partners, L.L.C. for
$100,000. The sale and issuance of securities described in this paragraph were
exempt from the registration requirements of the Securities Act by virtue of
Section 4(2) of the Securities Act and Regulation D thereunder.
In November 1995, the Company issued 70,000 shares of Series B Preferred
Stock to Robert K. Cole for $70,000, 70,000 shares of Series B Preferred Stock
to Brad A. Morrice for $70,000 and 20,000 shares of Series B Preferred Stock
to Edward F. Gotschall for $20,000. The sale and issuance of securities
described in this paragraph were exempt from the registration requirements of
the Securities Act by virtue of Section 4(2) of the Securities Act and
Regulation D thereunder.
In November 1995, the Company issued 88,103 units each consisting of one
share of Common Stock together with a warrant ("Warrant") to purchase 7.68505
shares of Common Stock ("Units") to Robert K. Cole for $80,000, 88,103 Units
to Brad A. Morrice for $80,000 and 88,103 Units to Edward F. Gotschall for
$80,000. In December 1995, the Company increased the total number of shares of
Common Stock issuable under each of the Warrants by 57,884 shares, from
677,076 to 734,960 shares. The sale and issuance of securities described in
this paragraph were exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) of the Securities Act and Regulation
D thereunder.
In December 1995, the Company issued 150,000 shares of Series A Preferred
Stock to Michael M. Sachs for $150,000, 75,000 shares of Series A Preferred
Stock to Martin F. Ryan, Ltd. Defined Benefit Pension Plan for $75,000 and
25,000 shares of Series A Preferred Stock to Oak Craft Inc. Employees Profit
Sharing Plan for $25,000. The sale and issuance of securities described in
this paragraph were exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) of the Securities Act and Regulation
D thereunder.
In December 1996, the Company issued an option to purchase 40,000 shares of
Common Stock, exercisable at $3.50 per share, to Edward F. Gotschall and an
option to purchase 80,000 shares of Common Stock, exercisable at $3.50 per
share, to Steve Holder. The sale and issuance of securities described in this
paragraph were exempt from the registration requirements of the Securities Act
by virtue of Section 4(2) of the Securities Act and Regulation D thereunder.
In December 1996, the Company issued warrants to purchase the following
number of shares of Common Stock, exercisable at $3.50 per share, to the
following stockholders in satisfaction of their preemptive rights: Cornerstone
Fund I, L.L.C. (220,656 shares), Westrec Rollover PS Plan (11,032 shares),
Michael M. Sachs (16,550 shares), Harlan W. Smith (11,032 shares), Harcol
Limited Partnership (11,032 shares), David Krinsky (11,032 shares),
Cornerstone Equity Partners, L.L.C. (11,032 shares), Oak Craft Inc. Employees
Profit Sharing Plan (2,758 shares), Martin F. Ryan, Ltd. Defined Benefit
Pension Plan (8,274 shares), Robert K. Cole (55,556 shares), Brad A. Morrice
(54,453 shares), Samantha H. Morrice Trust (1,103), Edward F. Gotschall
(50,040 shares), and Steve Holder (47,834 shares). The sale and issuance of
securities described in this paragraph were exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) of the Securities
Act and Regulation D thereunder.
II-2
<PAGE>
In May 1997, the Company issued to the following stockholders the following
number of shares of Common Stock upon the exercise by such stockholders of
certain Warrants to Purchase Common Stock of the Company: Cornerstone Fund I,
L.L.C. (220,656 shares), Westrec Rollover PS Plan (11,032 shares), Michael M.
Sachs (16,550 shares), Harlan W. Smith (11,032 shares), Harcol Limited
Partnership (11,032 shares), David Krinsky (11,032 shares), Cornerstone Equity
Partners, L.L.C. (11,032 shares), Oak Craft Inc. Employees Profit Sharing Plan
(2,758 shares), Martin F. Ryan, Ltd. Defined Benefit Pension Plan (8,274
shares), Robert K. Cole (858,080 shares), Brad A. Morrice (858,563 shares),
Samantha H. Morrice Trust (1,103 shares), Edward F. Gotschall (854,978
shares), and Steve Holder (853,737 shares). The sale and issuance of
securities described in this paragraph were exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) of the Securities
Act and Regulation D thereunder.
In May 1997, the Company issued to the following stockholders the following
number of shares of Common Stock upon the conversion by such stockholders of
shares of Series A and B Preferred Stock of the Company: Cornerstone Fund I,
L.L.C. (4,000,000 shares), Westrec Rollover PS Plan (200,000 shares), Michael
M. Sachs (300,000 shares), Harlan W. Smith (200,000 shares), Harcol Limited
Partnership (200,000 shares), David Krinsky (200,000 shares), Cornerstone
Equity Partners, L.L.C. (200,000 shares), Oak Craft Inc. Employees Profit
Sharing Plan (50,000 shares), Martin F. Ryan, Ltd. Defined Benefit Pension
Plan (150,000 shares), Robert K. Cole (140,000 shares), Brad A. Morrice
(120,000 shares), Samantha H. Morrice Trust (20,000 shares) and Edward F.
Gotschall (40,000 shares). The sale and issuance of securities described in
this paragraph were exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) of the Securities Act and Regulation
D thereunder.
In May 1997, the Company issued to Comerica 545,000 shares of Common Stock
for $4,087,500. The sale and issuance of securities described in this
paragraph were exempt from the registration requirements of the Securities Act
by virtue of Section 4(2) of the Securities Act and Regulation D thereunder.
From time to time since its incorporation, the Company issued stock options
to purchase Common Stock pursuant to the Company's 1995 Stock Option Plan to
officers and employees of the Company. During the period referred to above, no
options granted pursuant to the 1995 Stock Option Plan were exercised. With
respect to these grants of options, exemption from registration under the
Securities Act was unnecessary in that the transaction did not involve a
"sale" of securities as such term in used in Section 2(3) of the Securities
Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
+ 1.1 Form of Underwriting Agreement
* 3.1 Certificate of Incorporation of the Company
3.2 First Amended and Restated Certificate of Incorporation of the Company
* 3.3 Bylaws of the Company
3.4 First Amended and Restated Bylaws of the Company
+ 4.1 Specimen stock certificate
5.1 Opinion of O'Melveny & Myers LLP
+10.1 Form of Indemnity Agreement between the Company and each of its
executive officers and directors
*10.2 1995 Stock Option Plan
10.3 Founding Managers' Incentive Compensation Plan
*10.4 Agreement by and between New Century Mortgage Corporation and Advanta
Mortgage Corporation U.S.A. dated April 4, 1996, as amended on January
1, 1997
*10.5 Sub-Servicing Agreement by and between New Century Mortgage
Corporation and Advanta Mortgage Corp. USA dated February 1, 1997
10.6 Amended and Restated Credit Agreement by and between New Century
Mortgage Corporation and First Bank National Association dated October
25, 1996, as amended on December 31, 1996, March 14, 1997, March 28,
1997 and April 16, 1997
10.7 Form of Warrant to Purchase Common Stock
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
*10.8 Pooling and Servicing Agreement by and among Salomon Brothers Mortgage
Securities VII, Inc. ("Salomon"), New Century Mortgage Corporation and
First Trust National Association, dated February 1, 1997, incorporated
by reference from the Form 8-K, dated February 27, 1997, filed by
Salomon with the Securities and Exchange Commission
*10.9 Agreement by and between Salomon Brothers Realty Corp. and New Century
Mortgage dated November 4, 1996
10.10 Form of Founding Managers' Employment Agreement
*10.11 Office Building Lease by and between Koll Center Irvine Number Two and
New Century Financial Corporation dated April 11, 1997
10.12 Registration Rights Agreement, dated May 30, 1997, by and among the
Company and certain stockholders of the Company
10.13 Form of Equalization Option granted to two executive officers of the
Company
10.14 Amended and Restated 1995 Stock Option Plan
+10.15 Stock Purchase Agreement, dated May 30, 1997, by and between the
Company and Comerica
10.16 New Century Financial Corporation Warrant to Purchase Common Stock
issued to Comerica on
May 30, 1997
11.1 Statement re: Computation of Pro forma Earnings Per Share
*21.1 List of Subsidiaries
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of O'Melveny & Myers LLP (included in Exhibit 5.1)
*24.1 Power of Attorney (contained on page II-5)
*27.1 Financial Data Schedule
</TABLE>
- --------
* Previously filed.
+ To be filed by amendment.
(b) Financial Statement Schedules.
All schedules are omitted because they are not required, are not applicable,
or the information is included in the Consolidated Financial Statements or
notes thereto.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in the denominations and registered in the names as required by
the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether the indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of the registration
statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of those securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Newport Beach, County of Orange, State of California, on the 2nd
day of June, 1997.
NEW CENTURY FINANCIAL CORPORATION
By: /s/ Brad A. Morrice
----------------------------------
Brad A. Morrice
President
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 1 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the Board, Chief
- -------------------------- Executive Officer and Director June 2, 1997
Robert K. Cole
/s/ Brad A. Morrice Vice Chairman of the Board,
- -------------------------- President, General Counsel, Secretary June 2, 1997
Brad A. Morrice and Director
* Vice Chairman of the Board, Chief
- -------------------------- Operating Officer-- June 2, 1997
Edward F. Gotschall Finance/Administration and Director
(Principal Financial and
Accounting Officer)
* Vice Chairman of the Board, Chief
- -------------------------- Operating Officer--Loan June 2, 1997
Steven G. Holder Production/Operations and Director
*
- -------------------------- Director June 2, 1997
John C. Bentley
*
- -------------------------- Director June 2, 1997
Sherman I. Chu
*
- -------------------------- Director June 2, 1997
Harlan W. Smith
*
- -------------------------- Director June 2, 1997
Martin F. Ryan
*
- -------------------------- Director June 2, 1997
Michael M. Sachs
*By:
/s/ Brad A. Morrice June 2, 1997
- --------------------------
Brad A. Morrice
Attorney-in-fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION NUMBERED PAGE
------- ----------- -------------
<C> <S> <C>
+ 1.1 Form of Underwriting Agreement
* 3.1 Certificate of Incorporation of the Company
3.2 First Amended and Restated Certificate of
Incorporation of the Company
* 3.3 Bylaws of the Company
3.4 First Amended and Restated Bylaws of the Company
+ 4.1 Specimen stock certificate
5.1 Opinion of O'Melveny & Myers LLP
+10.1 Form of Indemnity Agreement between the Company and
each of its executive officers and directors
*10.2 1995 Stock Option Plan
10.3 Founding Managers' Incentive Compensation Plan
*10.4 Agreement by and between New Century Mortgage
Corporation and Advanta Mortgage Corporation U.S.A.
dated April 4, 1996, as amended on January 1, 1997
*10.5 Sub-Servicing Agreement by and between New Century
Mortgage Corporation and Advanta Mortgage Corp. USA
dated February 1, 1997
10.6 Amended and Restated Credit Agreement by and between
New Century Mortgage Corporation and First Bank
National Association dated October 25, 1996, as
amended on December 31, 1996, March 14, 1997, March
28, 1997 and April 16, 1997
10.7 Form of Warrant to Purchase Common Stock
*10.8 Pooling and Servicing Agreement by and among Salomon
Brothers Mortgage Securities VII, Inc. ("Salomon"),
New Century Mortgage Corporation and First Trust
National Association, dated February 1, 1997,
incorporated by reference from the Form 8-K, dated
February 27, 1997, filed by Salomon with the
Securities and Exchange Commission
*10.9 Agreement by and between Salomon Brothers Realty Corp.
and New Century Mortgage dated November 4, 1996
10.10 Form of Founding Managers' Employment Agreement
*10.11 Office Building Lease by and between Koll Center
Irvine Number Two and New Century Financial
Corporation dated April 11, 1997
10.12 Registration Rights Agreement, dated May 30, 1997, by
and among the Company and certain stockholders of the
Company
10.13 Form of Equalization Option granted to two executive
officers of the Company
10.14 Amended and Restated 1995 Stock Option Plan
+10.15 Stock Purchase Agreement, dated May 30, 1997, by and
between the Company and Comerica
10.16 New Century Financial Corporation Comerica Warrant to
Purchase Common Stock issued to Comerica on May 30,
1997
11.1 Statement re: Computation of Pro forma Earnings Per
Share
*21.1 List of Subsidiaries
23.1 Consent of KPMG Peat Marwick LLP
23.2 Consent of O'Melveny & Myers LLP (included in Exhibit
5.1)
*24.1 Power of Attorney (contained on page II-5)
*27.1 Financial Data Schedule
</TABLE>
- -------
* Previously filed.
+ To be filed by amendment.
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
NEW CENTURY FINANCIAL CORPORATION,
A DELAWARE CORPORATION
New Century Financial Corporation, a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware (the "Corporation"), does hereby certify that:
1. The name of the Corporation is New Century Financial Corporation.
The Corporation was originally incorporated under the same name, and the
original Certificate of Incorporation of the Corporation was filed with the
Secretary of State of the State of Delaware on November 17, 1995.
2. Amendments to the Corporation's Certificate of Incorporation were
filed with the Secretary of State of the State of Delaware on November 25, 1996
and January 9, 1997 and a Certificate of Designation of Series A and B Preferred
Stock of the Corporation was filed with the Secretary of State of the State of
Delaware on November 20, 1995.
3. Pursuant to Sections 242 and 245 of the General Corporation Law of
the State of Delaware, and having been duly adopted in accordance therewith,
this Amended and Restated Certificate of Incorporation restates and amends the
provisions of the Certificate of Incorporation of this Corporation, as it may
have heretofore been amended or supplemented.
4. The text of the Certificate of Incorporation of the Corporation, as
it may have heretofore been amended or supplemented, is hereby further amended
and restated to read in its entirety as follows:
ARTICLE I.
NAME
The name of the corporation is New Century Financial Corporation (the
"Corporation").
ARTICLE II.
REGISTERED AGENT AND OFFICE
The name and address of the initial registered office and registered
agent of the corporation is Corporation Service Company, 1013 Center Road,
Wilmington, New Castle County, Delaware 19805.
<PAGE>
ARTICLE III.
PURPOSES
The nature of the business or purposes to be conducted or promoted by
the Corporation is to engage in any lawful act or activity for which
corporations may be organized under the General Corporation Law of the State of
Delaware.
ARTICLE IV.
CAPITAL STOCK
SECTION 4.1 CAPITAL STOCK. The total number of shares of capital stock
-------------
which the Corporation shall have the authority to issue is 52,500,000, of which
(i) 45,000,000 shares shall be Common Stock, par value $0.01 per share (the
"Common Stock"), and (ii) 7,500,000 shares shall be Preferred Stock, par value
$0.01 per share (the "Preferred Stock"). The Board of Directors of the
Corporation shall have the full authority permitted by law to fix by resolution
full, limited, multiple, fractional or non-voting rights, and such designations,
preferences, limitations or restrictions thereof of any series that may be
desired in respect of the Preferred Stock.
ARTICLE V.
DIRECTORS
SECTION 5.1 GENERAL. The business and affairs of the Corporation shall
-------
be managed by or under the direction of the Board of Directors, except as
otherwise provided herein or required by law.
SECTION 5.2 NUMBER OF DIRECTORS. The Board shall initially consist of
-------------------
nine directors; thereafter the number of directors shall be fixed or altered
exclusively by resolutions adopted by the Board of Directors. No decrease in the
number of directors shall shorten the term of any incumbent director.
SECTION 5.3 CLASSIFICATION AND TERMS OF DIRECTORS. The Directors,
-------------------------------------
other than those who may be elected by the holders of any series of Preferred
Stock of the Corporation, shall be classified, with respect to the term for
which they severally hold office, into three classes. The initial Class I
Directors shall serve for a term expiring at the annual meeting of stockholders
to be held in 1998, the initial Class II Directors shall serve for a term
expiring at the annual meeting of stockholders to be held in 1999, and the
initial Class III Directors shall serve for a term expiring at the annual
meeting of stockholders to be held in 2000. At each annual meeting of
stockholders, the successor or successors of the class of
2
<PAGE>
Directors whose term expires at that meeting shall be elected by a plurality of
the votes cast at such meeting and shall hold office for a term expiring at the
annual meeting of stockholders held in the third year following the year of
their election. The Directors elected to each class shall hold office until
their successors are duly elected and qualified or until their earlier
resignation or removal.
Notwithstanding the foregoing, whenever, pursuant to the provision of
Article IV of this Certificate of Incorporation, the holders of any one or more
series of Preferred Stock shall have the right, voting separately as a series or
together with holders of other such series, to elect Directors at an annual or
special meeting of stockholders, the election, term of office, filling of
vacancies and other features of such directorships shall be governed by the
terms of this Certificate of Incorporation and any certificate of designations
applicable thereto, and such Directors so elected shall not be divided into
classes pursuant to this Section 5.3.
During any period when the holders of any series of Preferred Stock
have the right to elect additional Directors as provided for or fixed pursuant
to the provisions of Article IV hereof, then upon commencement and for the
duration of the period during which such right continues: (i) the then otherwise
total authorized number of Directors of the Corporation shall automatically be
increased by such specified number of Directors, and the holders of such
Preferred Stock shall be entitled to elect the additional Directors so provided
for or fixed pursuant to said provisions, and (ii) each such additional Director
shall serve until such Director's successor shall have been duly elected or
qualified, or until such Director's right to hold such office terminates
pursuant to said provisions, whichever occurs earlier, subject to such
Director's earlier death, disqualification, resignation or removal. Except as
otherwise provided by the Board in the resolution or resolutions establishing
such series, whenever the holders of any series of Preferred Stock having such
right to elect additional Directors are divested of such right pursuant to the
provisions of such stock, the terms of office of all such additional Directors
elected by the holders of such stock, or elected to fill any vacancies resulting
from the death, resignation, disqualification or removal of such additional
Directors, shall forthwith terminate and the total and authorized number of
Directors of the Corporation shall be reduced accordingly.
SECTION 5.4 REMOVAL OF DIRECTORS. Subject to the rights, if any, of
--------------------
the holders of any series of Preferred Stock to elect directors and to remove
any director whom the holders of such stock have the right to elect, no director
may be removed from office by the stockholders except for cause with the
3
<PAGE>
affirmative vote of the holders of not less than a majority of the total voting
power of all outstanding securities of the Corporation then entitled to vote
generally in the election of directors, voting together as a single class.
ARTICLE VI.
LIMITATION OF LIABILITY
To the fullest extent permitted by the General Corporation Law of the
State of Delaware, as the same exists or may hereafter be amended, a director of
the Corporation shall not be liable to the Corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director. The liability of a
director of the Corporation to the Corporation or its stockholders for monetary
damages shall be eliminated to the fullest extent permissible under applicable
law in the event it is determined that Delaware law does not apply. The
Corporation shall, to the fullest extent permitted by law, indemnify its
directors and officers against any liabilities, losses or related expenses which
they may incur by reason of serving or having served as directors or officers of
the Corporation. The Corporation is authorized to provide by Bylaw, agreement
or otherwise for indemnification of directors, officers, employees and agents in
excess of the indemnification otherwise permitted by applicable law. Any repeal
or modification of this Article VI shall not result in any liability of a
director or officer, or any change or reduction in the indemnification to which
a director, officer, employee or agent would otherwise be entitled, with respect
to any action or omission occurring prior to such repeal or modification.
ARTICLE VII.
AMENDMENT OF BYLAWS
Except as otherwise provided by law, the Bylaws of the Corporation may
be amended or repealed by the Board of Directors.
ARTICLE VIII.
STOCKHOLDERS MEETING REQUIREMENT
Any election or other action by stockholders of this Corporation must
be effected at an annual or special meeting of stockholders and may not be
effected by written consent without a meeting.
4
<PAGE>
5. The foregoing Amended and Restated Certificate of Incorporation has
been approved by the Corporation's Board of Directors by written consent in
accordance with Section 141(f) of the Delaware General Corporation Law.
6. Pursuant to the provisions of Section 228 of the Delaware General
Corporation Law, the stockholders of this Corporation consented to the above
Amended and Restated Certificate of Incorporation.
5
<PAGE>
IN WITNESS WHEREOF, New Century Financial Corporation has caused this
Amended and Restated Certificate of Incorporation to be signed by Robert K.
Cole, its Chief Executive Officer, and attested by Brad A. Morrice, its
Secretary, this ____ day of May, 1997.
NEW CENTURY FINANCIAL CORPORATION
By: /s/ ROBERT K. COLE
-----------------------
Robert K. Cole
Chief Executive Officer
ATTEST:
By: /s/ BRAD A. MORRICE
-----------------------------------------
Brad A. Morrice
Secretary
6
<PAGE>
EXHIBIT 3.4
AMENDED AND RESTATED BYLAWS
OF
NEW CENTURY FINANCIAL CORPORATION
I
Stockholders
1.1. Annual Meetings. An annual meeting of stockholders shall be held
---------------
for the election of directors at such date, time and place either within or
without the State of Delaware as may be designated by the Board of Directors
from time to time. Any other proper business may be transacted at the annual
meeting.
1.2. Special Meetings. Special meetings of stockholders may be called
----------------
at any time by the Board of Directors, to be held at such date, time and place
either within or without the State of Delaware as may be stated in the notice of
the meeting. Business transacted at any special meeting shall be limited to the
purposes stated in the notice of the special meeting.
1.3. Notice of Meetings. Whenever stockholders are required or
------------------
permitted to take any action at a meeting, a written notice of the meeting shall
be given which shall state the place, date and hour of the meeting, and, in the
case of a special meeting, the purpose or purposes for which the meeting is
called. Unless otherwise provided by law, the written notice of any meeting
shall be given not less than ten nor more than sixty days before the date of the
meeting to each stockholder entitled to vote at such meeting. If mailed, such
notice shall be deemed to be given when deposited in the United States mail,
postage prepaid, directed to the stockholder at such stockholder's address as it
appears on the records of the Corporation.
1.4. Adjournments. Any meeting of stockholders, annual or special, may
------------
adjourn from time to time to reconvene at the same or some other place, and
notice need not be given of any such adjourned meeting if the time and place
thereof are announced at the meeting at which the adjournment is taken. At the
adjourned meeting the Corporation may transact any business which might have
been transacted at the original meeting. If the adjournment is for more than
thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder of record entitled to vote at the meeting.
<PAGE>
1.5. Quorum. At each meeting of stockholders, except where otherwise
------
provided by law or the certificate of incorporation or these bylaws, the holders
of a majority of the voting power of the issued and outstanding shares of
capital stock entitled to vote at the meeting, present in person or represented
by proxy, shall constitute a quorum. For purposes of the foregoing, two or more
classes or series of stock shall be considered a single class if the holders
thereof are entitled to vote together as a single class at the meeting. In the
absence of a quorum, the stockholders so present may, by majority vote, adjourn
the meeting from time to time in the manner provided by Section 1.4 of these
bylaws until a quorum shall attend. Shares of its own capital stock belonging
on the record date for the meeting to the Corporation or to another corporation,
if a majority of the shares entitled to vote in the election of directors of
such other corporation is held, directly or indirectly, by the corporation,
shall neither be entitled to vote nor be counted for quorum purposes; provided,
however, that the foregoing shall not limit the right of the Corporation to vote
stock, including but not limited to its own stock, held by it in a fiduciary
capacity. The Chairman of the meeting may determine that a quorum is present
based upon any reasonable evidence of the presence in person or by proxy of
stockholders holding a majority of the outstanding votes, including without
limitation, evidence from any record of stockholders who have signed a register
indicating their presence at a meeting.
1.6. Organization. Meetings of stockholders shall be presided over by
------------
the Chairman of the Board, or in the absence of the Chairman of the Board, by a
chairman designated by the Board of Directors, or in the absence of such
designation, by a chairman chosen by stockholders at the meeting. The Secretary
shall act as secretary of the meeting, or in the absence of the Secretary by an
Assistant Secretary, or in their absence the chairman of the meeting may appoint
any person to act as secretary of the meeting.
1.7. Voting; Proxies. Unless otherwise provided in the certificate of
---------------
incorporation, each stockholder entitled to vote at any meeting of stockholders
shall be entitled to one vote for each share of stock held by such stockholder
which has voting power upon the matter in question. Each stockholder entitled
to vote at a meeting of stockholders or to express consent or dissent to
corporate action in writing without a meeting may authorize another person or
persons to act for such stockholder by proxy, but no such proxy shall be voted
or acted upon after three years from its date, unless the proxy provides for a
longer period. A duly executed proxy shall be irrevocable if it states that it
is irrevocable and if, and only as long as, it is coupled with an interest
sufficient in law to support an irrevocable power. A stockholder may revoke any
proxy which is not irrevocable by attending the meeting and voting in person or
by
2
<PAGE>
filing an instrument in writing revoking the proxy or another duly executed
proxy bearing a later date with the Secretary of the corporation. Voting at
meetings of stockholders need not be by written ballot unless so ordered by the
Chairman, or, if for election of directors, unless requested by any stockholder
present at the meeting. At all meetings of stockholders for the election of
directors a plurality of the votes cast shall be sufficient to elect. With
respect to other matters, unless otherwise provided by law or by the certificate
of incorporation or these bylaws, the affirmative vote of the holders of a
majority of the voting power of the issued and outstanding shares of capital
stock present in person or represented by proxy at the meeting and entitled to
vote on the subject matter shall be the act of the stockholders. Where a
separate vote by class is required, the affirmative vote of the holders of a
majority of the voting power of the issued and outstanding shares of each class
present in person or represented by proxy at the meeting shall be the act of
such class, except as otherwise provided by law or by the certificate of
incorporation or these bylaws.
1.8. Inspectors of Election. The Board of Directors shall, in advance
----------------------
of any meeting of stockholders, appoint one or more inspectors to act at the
meeting and make a written report thereof. The Board of Directors may appoint
one or more alternate inspectors to replace any inspector who fails to act. The
inspector shall ascertain the number of shares outstanding and the voting power
of each, determine the shares represented at the meeting and the validity of the
proxies and ballots, count all votes and ballots, determine and retain for a
reasonable period a record of the disposition of any challenges made to any
determination by the inspectors and certify their determination of the number of
shares represented at the meeting and their count of all votes and ballots. The
inspector shall perform his or her duties and shall make all determinations in
accordance with the Delaware General Corporation Law including, without
limitation, Section 231 of the Delaware General Corporation Law.
The date and time of the opening and closing of the polls for each matter
upon which the stockholders will vote at a meeting shall be announced at the
meeting. No ballot, proxies or votes, nor revocations thereof or changes
thereto, shall be accepted by the inspectors after the closing of the polls
unless the Court of Chancery upon application by a stockholder shall determine
otherwise.
The appointment of an inspector or inspectors of election shall be in the
discretion of the Board until such time as the Corporation has a class of voting
stock that is (i) listed on a national securities exchange, (ii) authorized for
quotation on an interdealer quotation system of a registered national securities
association, or (iii) held of record by more than 2,000 stockholders, at which
time appointment of inspectors shall be obligatory.
3
<PAGE>
1.9. Fixing Date for Determination of Stockholders of Record. In
-------------------------------------------------------
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of stockholders or any adjournment thereof, or to
express consent to corporate action in writing without a meeting, or entitled to
receive payment of any dividend or other distribution or allotment of any
rights, or entitled to exercise any rights in respect of any change, conversion
or exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix, in advance, a record date, which shall not be more than sixty
nor less than ten days before the date of such meeting, nor more than sixty days
prior to any other action. If no record date is fixed: (1) the record date for
determining stockholders entitled to notice of or to vote at a meeting of
stockholders shall be at the close of business on the day next preceding the day
on which notice is given, or, if notice is waived, at the close of business on
the day next preceding the day on which the meetings in held; (2) the record
date for determining stockholders entitled to express consent to corporate
action in writing without a meeting, when no prior action by the Board is
necessary shall be the day on which the first written consent is expressed; and
(3) the record date for determining stockholders for any other purpose shall be
at the close of business on the day on which the Board adopts the resolution
relating thereto. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board may fix a new record date for the
adjourned meeting.
1.10. List of Stockholders Entitled to Vote. The Secretary shall
-------------------------------------
prepare and make, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof and may be inspected by any stockholder who is
present.
1.11. Conduct of Meetings. The date and time of the opening and the
-------------------
closing of the polls for each matter upon which the stockholders will vote at a
meeting shall be announced at such meeting by the person presiding over the
meeting. The Board of Directors of the Corporation may adopt by resolution such
rules or regulations for the conduct of meetings of stockholders as it shall
deem appropriate. Except to the extent inconsistent with such rules and
regulations as adopted by the
4
<PAGE>
Board of Directors, the chairman of any meeting of stockholders shall have the
right and authority to prescribe such rules, regulations and procedures and to
do all such acts as, in the judgment of such chair, are appropriate for the
proper conduct of the meeting. Such rules, regulations or procedures, whether
adopted by the Board of Directors or prescribed by the chairman of the meeting,
may include, without limitation, the following: (1) the establishment of an
agenda or order of business for the meeting; (2) rules and procedures for
maintaining order at the meeting and the safety of those present; (3)
limitations on attendance at or participation in the meeting to stockholders of
record of the Corporation, their duly authorized and constituted proxies or such
other persons as the chairman shall permit; (4) restrictions on entry to the
meeting after the time fixed for the commencement thereof; and (5) limitations
on the time allotted to questions or comments by participants. Unless, and to
the extent, determined by the Board of Directors or the chairman of the meeting,
meetings of stockholders shall not be required to be held in accordance with
rules of parliamentary procedure.
1.12. Notice of Business. At any meeting of stockholders, only such
------------------
business shall be conducted as shall have been brought before the meeting (a) by
or at the direction of the Board, (b) in accordance with Rule 14a-8 under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), or (c) by any
stockholder of the Corporation who was a stockholder of record at the time of
giving of notice provided for in this bylaw, who is entitled to vote at the
meeting and who complies with the notice procedures set forth in this bylaw.
For business to be properly brought before a meeting by a stockholder pursuant
to clause (c) of this bylaw, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation and such other business
must otherwise be a proper matter for stockholder action. To be timely, a
stockholder's notice shall be delivered to the Secretary at the principal
executive offices of the Corporation not later than the close of business on the
60th day nor earlier than the close of business on the 90th day prior to the
meeting; provided, however, that if less than 70 days' notice of the date of the
-------- -------
meeting is given by the Corporation, notice by the stockholder to be timely must
be so delivered no later than the 10th day following the day on which public
announcement of the date of such meeting is first made by the Corporation. In
no event shall the public announcement of an adjournment of a meeting commence a
new time period for the giving of a stockholder's notice as described above.
Such stockholder's notice shall set forth (i) as to any business that the
stockholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest in such business of such
stockholder and the beneficial owner, if any, on whose behalf the proposal is
made; and (ii) as to the stockholder
5
<PAGE>
giving the notice and the beneficial owner, if any, on whose behalf the proposal
is made (x) the name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial owner and (y) the class and number
of shares of stock of the Corporation which are owned beneficially and of record
by such stockholder and such beneficial owner. If notice has not been given
pursuant to this Section, the chairman of the meeting may declare to the meeting
that the proposed business was not properly brought before the meeting, and such
business may not be transacted at the meeting. The foregoing provisions of this
Section do not relieve any stockholder of any obligation to comply with all
applicable requirements of the Exchange Act and rules and regulations
thereunder. For purposes of these bylaws, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service, Associated
Press or comparable national news service or in a document publicly filed by the
corporation with the Securities Exchange Commission pursuant to Section 13, 14
or 15(d) of the Exchange Act.
1.13. Nomination of Directors. At any meeting of stockholders, a
-----------------------
person may be a candidate for election to the Board only if such person is
nominated (a) by or at the direction of the Board, (b) by any nominating
committee or person appointed by the Board, or (c) by a stockholder of record
entitled to vote at such meeting who complies with the notice procedures set
forth in this Section and has given timely notice of such nomination in writing
to the Secretary of the Corporation. To be timely, a stockholder's notice shall
be delivered to the Secretary at the principal executive offices of the
Corporation not later than the close of business on the 60th day nor earlier
than the close of business on the 90th day prior to the meeting; provided,
--------
however, that if less than 70 days' notice of the date of the meeting is given
- -------
by the Corporation, notice by the stockholder to be timely must be so delivered
no later than the 10th day following the day on which public announcement of the
date of such meeting is first made by the Corporation. In no event shall the
public announcement of an adjournment of an annual meeting commence a new time
period for the giving of a stockholder's notice as described above. Such
stockholder's notice shall set forth as to each person whom the stockholder
proposes to nominate for election or reelection as a director all information
relating to such person that is required to be disclosed in solicitations of
proxies for election of directors in an election contest, or is otherwise
required, in each case pursuant to Regulation 14A under the Exchange Act and
Rule 14a-11 thereunder (including such person's written consent to being named
in the proxy statement as a nominee and to serving as a director if elected).
The Corporation may require such other information to be furnished respecting
any proposed nominee as may be reasonably necessary to determine whether the
proposed nominee has, or represents, interests which are opposed to or in
conflict with the interests of the Corporation. No person shall be eligible for
election as
6
<PAGE>
a director at any meeting unless nominated in accordance with this Section.
II
Board of Directors
2.1. Powers; Number; Qualifications. The business and affairs of the
------------------------------
Corporation shall be managed by or under the direction of the Board of
Directors, except as may be otherwise provided by law or in the certificate of
incorporation. The Board shall initially consist of nine members. Thereafter,
the number of directors shall be fixed or altered exclusively by an affirmative
vote of two-thirds of all of the directors of the Corporation.
2.2. Election; Term of Office; Resignation; Vacancies. Each director
------------------------------------------------
shall hold office in accordance with the provisions set forth in the certificate
of incorporation concerning the terms of the classes of directors and until his
or her successor is elected and qualified or until his or her earlier
resignation or removal. Any director may resign at any time upon written notice
to the Board of Directors or to the President or the Secretary of the
Corporation. Such resignation shall take effect at the time specified therein,
and unless otherwise specified therein no acceptance of such resignation shall
be necessary to make it effective. Any director may be removed from office,
solely for cause, by the vote of the holders of at least a majority of the
voting power of the issued and outstanding shares then entitled to vote at an
election of directors. Unless otherwise provided in the certificate of
incorporation or these bylaws, vacancies and newly created directorships
resulting from any increase in the authorized number of directors elected by all
of the stockholders having the right to vote as a single class or from any other
cause may be filled by a majority of the directors then in office, although less
than a quorum, or by the sole remaining director. Whenever the holders of any
class or classes of stock or series thereof are entitled to elect one or more
directors by the provisions of the certificate of incorporation, vacancies and
newly created directorships of such class or classes or series shall be filled
by a majority of the voting power of the issued and outstanding shares of
capital stock of such class or classes or series.
2.3. Regular Meetings. Regular meetings of the Board of Directors may
----------------
be held at such places within or without the State of Delaware and at such times
as the Board may from time to time determine, and if so determined notice
thereof need not be given.
7
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2.4. Special Meetings. Special meetings of the Board of Directors may
----------------
be held at any time or place within or without the State of Delaware whenever
called by the Chairman of the Board. Reasonable notice thereof shall be given by
the person or persons calling the meeting; reasonable notice shall include,
without limitation, notice sent by telecopy transmission at least 24 hours in
advance of a special meeting.
2.5. Meetings by Telephonic Communication. Unless otherwise restricted
------------------------------------
by the certificate or incorporation or these bylaws, members of the Board of
Directors, or any committee designated by the Board, may participate in a
meeting of the Board or of such committee, as the case may be, by means of
conference telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and participation in a
meeting pursuant to this bylaw shall constitute presence in person at such
meeting.
2.6. Quorum; Vote Required for Action. At all meetings of the Board of
--------------------------------
Directors a majority of the entire Board shall constitute a quorum for the
transaction of business. The vote of a majority of the voting power held by the
directors present at a meeting at which a quorum is present shall be the act of
the Board unless the certificate of incorporation or these bylaws shall
otherwise provide. In case at any meeting of the Board a quorum shall not be
present, the members of the Board present may adjourn the meeting from time to
time until a quorum shall attend.
2.7. Organization. Meetings of the Board of Directors shall be
------------
presided over by the Chairman of the Board, if or in the absence of the Chairman
of the Board, by a chairman chosen at the meeting. The Secretary, or in the
absence of the Secretary an Assistant Secretary, shall act as secretary of the
meeting, but in the absence of the Secretary and any Assistant Secretary, the
chairman of the meeting may appoint any person to act as secretary of the
meeting.
2.8. Unanimous Action by Directors Without Meeting. Unless otherwise
---------------------------------------------
restricted by the certificate of incorporation or these bylaws, any action
required or permitted to be taken at any action any meeting of the Board of
Directors, or of any committee thereof, may be taken without a meeting if all
members of the Board or of such committee, as the case may be, consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board or committee.
2.9. Compensation of Directors. The Board of Directors shall have the
-------------------------
authority to fix the compensation of directors.
8
<PAGE>
III
Committees
3.1. Committees. The Board of Directors may, by resolution passed by a
----------
majority of the voting power of the whole Board, designate one or more
committees, each committee to consist of two or more of the directors of the
Corporation. The Chairman may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. Any such committee, to the extent provided in the
resolution of the Board, shall have and may exercise all the powers and
authority of the Board in the management of the business and affairs of the
corporation, and may authorize the seal of the Corporation to be affixed to all
papers which may require it; but no such committee shall have power or authority
in reference to amending the certificate of incorporation (except that a
committee may, to the extent authorized in the resolutions providing for the
issuance of shares of preferred stock adopted by the Board of Directors, provide
for one or more series of such stock, and establish or change from time to time
the number of shares to be included in each such series, and fix the
designations, powers, preferences and the relative, participating, optional or
other special rights of the shares of each series and any qualifications,
limitations and restrictions thereof), adopting an agreement of merger or
consolidation, recommending to the stockholders the sale, lease or exchange of
all or substantially all of the Corporation's property and assets, recommending
to the stockholders a dissolution of the Corporation or a revocation of
dissolution, removing or indemnifying directors or amending these bylaws; and,
unless the resolution expressly so provides, no such committee shall have the
power or authority to declare a dividend or to authorize the issuance of stock.
3.2. Committee Rules. Unless the Board of Directors otherwise
---------------
provides, each committee designated by the Board may adopt, amend and repeal
rules for the conduct of its business. In the absence of a provision by the
Board or a provision in the rules of such committee to the contrary, a majority
of the entire authorized number of members of such committee shall constitute a
quorum for the transaction of business, the vote of a majority of the members
present at a meeting at the time of such vote if a quorum is then present shall
be the act of such committee, and in other respects each committee shall conduct
its business in the same manner as the Board conducts its business pursuant to
Article II of these bylaws.
9
<PAGE>
IV
Officers
4.1. Officers; Election. As soon as practicable after the annual
------------------
meeting of stockholders in each year, the Board of Directors shall elect a Chief
Executive Officer, a President and a Secretary, and it may, if it so determines,
elect from among its members a Chairman of the Board. The Board may also elect
one or more Vice Presidents, one or more Assistant Vice Presidents, one or more
Assistant Secretaries, a Treasurer and one or more Assistant Treasurers and such
other officers as the Board may deem desirable or appropriate and may give any
of them such further designations or alternate titles as it considers desirable.
Any number of offices may be held by the same person.
4.2. Term of Office; Resignation; Removal; Vacancies. Except as
-----------------------------------------------
otherwise provided in the resolution of the Board of Directors electing any
officer, each officer shall hold office until the first meeting of the Board
after the annual meeting of stockholders next succeeding his or her election,
and until his or her successor is elected and qualified or until his or her
earlier resignation or removal. Any officer may resign at any time upon written
notice to the Board or to the President or the Secretary of the Corporation.
Such resignation shall take effect at the time specified therein, and unless
otherwise specified therein no acceptance of such resignation shall be necessary
to make it effective. The Board may remove any officer with or without cause at
any time. Any such removal shall be without prejudice to the contractual rights
of such officer, if any, with the Corporation, but the election of an officer
shall not of itself create contractual rights. Any vacancy occurring in any
office of the Corporation by death, resignation, removal or otherwise may be
filled for the unexpired portion of the term by the Board at any regular or
special meeting.
4.3. Chairman of the Board. The Chairman of the Board, if any, shall
---------------------
preside at all meetings of the Board of Directors and of the stockholders at
which he or she shall be present and shall have and may exercise such powers as
may, from time to time, be assigned to him or her by the Board and as may be
provided by law.
4.4. Vice Chairman of the Board. The Vice Chairman of the Board, if
--------------------------
any, may exercise such powers as may, from time to time, be assigned to him or
her by the Board and as may be provided by law. The Board may elect one or more
Vice Chairmen.
4.5. Chief Executive Officer. The Chief Executive officer shall have
-----------------------
general charge and supervision of the business
10
<PAGE>
of the Corporation, and shall perform all duties as may, from time to time, be
assigned to him or her by the Board.
4.6. President. The President shall perform all duties incident to the
---------
office of president of a corporation and such other duties as may, from time to
time, be assigned to him or her by the Board or as may be provided by law.
4.7. Vice Presidents. The Vice President or Vice Presidents, at the
---------------
request of the President, shall perform the duties of the President, and when so
acting shall have the powers of the President. If there be more than one Vice
President, the Board of Directors may determine which one or more of the Vice
Presidents shall perform any of such duties; or if such determination is not
made by the Board, the President may make such determination; otherwise any of
the Vice Presidents may perform any of such duties. The Vice President or Vice
Presidents shall have such other powers and shall perform such other duties as
may, from time to time, be assigned to him or her or them by the Board or the
President or as may be provided by law.
4.8. Secretary. The Secretary shall have the duty to record the
---------
proceedings of the meetings of the stockholders, the Board of Directors and any
committees in a book to be kept for that purpose, shall see that all notices are
duly given in accordance with the provisions of these bylaws or as required by
law, shall be custodian of the records of the Corporation, may affix the
corporate seal to any document the execution of which, on behalf of the
Corporation, is duly authorized, and when so affixed may attest the same, and,
in general, shall perform all duties incident to the office of secretary of a
corporation and such other duties as may, from time to time, be assigned to him
or her by the Board or the President or as may be provided by law.
4.9. Treasurer. The Treasurer shall have charge of and be responsible
---------
for all funds, securities, receipts and disbursements of the Corporation and
shall deposit or cause to be deposited, in the name of the Corporation, all
moneys or other valuable effects in such banks, trust companies or other
depositories as shall, from time to time, be selected by or under authority of
the Board of Directors. If required by the Board, the Treasurer shall give a
bond for the faithful discharge of his or her duties, with such surety or
sureties as the Board may determine. The Treasurer shall keep or cause to be
kept full and accurate records of all receipts and disbursements in books of the
Corporation, shall render to the President and to the Board, whenever requested,
an account of the financial condition of the Corporation, and, in general, shall
perform all the duties incident to the office of treasurer of a corporation and
such other duties as may, from time to time, be assigned to him or her by the
Board or the President or as may be provided by law.
11
<PAGE>
Section 4.10. Other Officers. The other officers, if any, of the
--------------
Corporation shall have such powers and duties in the management of the
Corporation as shall be stated in a resolution of the Board of Directors which
is not inconsistent with these bylaws and, to the extent not so stated, as
generally pertain to their respective offices, subject to the control of the
Board. The Board may require any officer, agent or employee to give security for
the faithful performance of his or her duties.
V
Stock
5.1. Certificates. Every holder of stock in the Corporation shall be
------------
entitled to have a certificate signed by or in the name of the Corporation by
the Chairman of the Board of Directors, or the President or a Vice President,
and by the Treasurer or an Assistant Treasurer, or the Secretary or an Assistant
Secretary, of the Corporation, certifying the number of shares owned by such
holder in the Corporation. If such certificate is manually signed by one
officer or manually countersigned by a transfer agent or by a registrar, any
other signature on the certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate shall have ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if such person were such officer, transfer
agent or registrar at the date of issue.
5.2. Lost, Stolen or Destroyed Stock Certificates; Issuance of New
-------------------------------------------------------------
Certificates. The Corporation may issue a new certificate of stock in the place
- ------------
of any certificate theretofore issued by it, alleged to have been lost, stolen
or destroyed, and the Corporation may require the owner of the lost, stolen or
destroyed certificate, or such owner's legal representative, to give the
Corporation an affidavit certifying to the loss, theft or destruction of the
certificate and/or a bond sufficient to indemnify it against any claim that may
be made against it on account of the alleged loss, theft or destruction of any
such certificate or the issuance of such new certificate.
VI
Indemnification and Insurance
6.1. Indemnification.
----------------
12
<PAGE>
(a) Indemnification of Officers and Directors. Each person (and
-----------------------------------------
the estate, heirs, executors or administrators of such person) who was or is a
party to, or is threatened to be made a party to, or is involved in any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative or otherwise, by reason of the fact
that such person is or was a director or officer of the Corporation, or is or
was serving at the request of the Corporation as a director or officer of
another corporation, partnership, joint venture, trust or other enterprise,
shall be indemnified and held harmless by the Corporation to the fullest extent
permitted by the Delaware General Corporation Law against expenses (including
attorneys' fees), judgments, fines, and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding. The right to indemnification conferred in this Article VI shall also
include the right to be paid by the Corporation the expenses incurred in
connection with any such proceeding in advance of its final disposition to the
fullest extent permitted by the Delaware General Corporation Law. The right to
indemnification conferred in this Article VI shall be deemed a contract right.
(b) Indemnification of Other Agents. The Corporation may, by
-------------------------------
action of its Board of Directors, provide indemnification to such of the
employees and agents of the Corporation and such other persons serving at the
request of the Corporation as employees or agents of another corporation,
partnership, joint venture, trust or other enterprise to such extent and to such
effect as is permitted by the Delaware General Corporation Law and the Board of
Directors shall determine to be appropriate.
6.2. Insurance. The Corporation shall have power to purchase and
---------
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise against any expense,
liability or loss incurred by such person in any such capacity or arising out of
his status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the Delaware General Corporation Law.
6.3. Non-Exclusivity. The rights and authority conferred in this
---------------
Article VI shall not be exclusive of any other right which any person may
otherwise have or hereafter acquire. Any agreement for indemnification of or
advancement of expenses to any person may provide rights of indemnification or
advancement of expenses which are broader or otherwise different from these.
6.4. No Amendment. No amendment, modification or repeal of this
------------
Article VI, nor the adoption of any provision of the certificate of
incorporation or the bylaws of the
13
<PAGE>
Corporation, nor, to the fullest extent permitted by the Delaware General
Corporation Law, any amendment, modification, or repeal of law shall eliminate
or reduce the effect of this Article VI or adversely affect any right or
protection then existing hereunder in respect of any acts or omissions occurring
prior to such amendment, modification, repeal or adoption.
VII
Miscellaneous
7.1. Fiscal Year. The Company shall operate on a fiscal year ending on
-----------
December 31 or as shall otherwise be determined by resolution of the Board of
Directors.
7.2. Seal. The Corporation may have a corporate seal which shall have
----
the name of the Corporation inscribed thereon and shall be in such form as may
be approved from time to time by the Board of Directors. It shall not be
necessary to the validity of any instrument executed by any authorized officer
or officers of the Corporation that the execution of such instrument be
evidenced by the corporate seal, and all documents, instruments, contracts and
writings of all kinds signed on behalf of the Corporation by any authorized
officer or officers shall be as effectual and binding on the Corporation without
the corporate seal, as if the execution of the same had been evidenced by
affixing the corporate seal thereto. The Board may give general authority to any
officer to affix the seal of the Corporation and to attest the affixing by
signature.
7.3. Representation of Interests in Other Entities. Corporate stock,
---------------------------------------------
partnership or joint venture interests, or interests in any trust or other
entity whatever its form of organization, which may be owned or held by the
Corporation shall be voted and all rights incident thereto shall be represented
and exercised on behalf of the Corporation, as follows: (i) as the Board of the
Corporation may determine from time to time, or (ii) in the absence of such
determination, by the Chairman of the Board, or (iii) if there shall be no
Chairman or if the Chairman shall not vote or otherwise act with respect to the
matter, by the Chief Executive Officer. The foregoing authority may be
exercised either by any such officer in person or by any other person authorized
so to do by proxy or power of attorney duly executed by said officer.
7.4. Waiver of Notice of Meetings of Stockholders, Directors and
-----------------------------------------------------------
Committees. Whenever notice is required to be given by law or under any
- ----------
provision of the certificate of incorporation or these bylaws, a written waiver
thereof, signed by the person entitled to notice, whether before or after the
time stated therein, shall be deemed equivalent to notice.
14
<PAGE>
Attendance of a person at a meeting shall constitute a waiver of notice of such
meeting, except when the person attends a meeting for the express purpose of
objecting, at the beginning of the meeting, to the transaction of any business
because the meeting is not lawfully called or convened. Neither the business to
be transacted at, nor the purpose of, any regular or special meeting of the
stockholders, directors, or members of a committee of directors need be
specified in any written waiver of notice unless so required by the certificate
of incorporation or these bylaws.
7.5. Interested Directors; Quorum. No contract or transaction between
----------------------------
the Corporation and one or more of its directors or officers, or between the
Corporation and any other corporation, partnership, association or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or committee thereof which
authorizes the contract or transaction, or solely because his or her or their
votes are counted for such purpose, if: (1) the material facts as to his or her
relationship or interest and as to the contract or transaction are disclosed or
are known to the full Board and the Board in good faith authorizes the contract
or transaction by the affirmative vote of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or (2)
the material facts as to his or her relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders entitled
to vote thereon, and the contract or transaction is specifically approved in
good faith by the affirmative vote of the holders of the majority of the
outstanding shares entitled to vote thereon; or (3) the contract or transaction
is fair as to the Corporation as of the time it is authorized, approved or
ratified, by the Board or the stockholders. Common or interested directors may
be counted in determining the presence of a quorum at a meeting of the Board
which authorizes the contract or transaction.
7.6. Amendment of Bylaws. Except as otherwise provided by law, the
-------------------
Bylaws of the Corporation may be amended or repealed by the Board of Directors;
provided, however, that any amendment to Section 2.1 of these Bylaws with
respect to the vote required to fix or alter the number of directors requires
the affirmative vote of two-thirds of all of the directors of the Corporation.
15
<PAGE>
EXHIBIT 5.1
June
2nd
1 9 9 7
619,481-3
NB1-312357.V1
New Century Financial Corporation
4910 Birch Street, Suite 100
Newport Beach, California 92660
Re: New Century Financial Corporation
Form S-1 Registration Statement
---------------------------------
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form
S-1 filed by you with the Securities and Exchange Commission in connection with
the registration under the Securities Act of 1933, as amended, of 4,025,000
shares of Common Stock, $0.01 par value (the "Shares"), of New Century Financial
Corporation, a Delaware corporation (the "Corporation"). We are familiar with
the proceedings taken and proposed to be taken by you in connection with the
authorization and proposed issuance and sale of the Shares.
It is our opinion that, subject to said proceedings being duly taken
and completed by you as now contemplated prior to the issuance of the Shares,
the Shares will, upon issuance and sale thereof in the manner referred to in the
Registration Statement, be legally and validly issued, fully paid and
nonassessable shares of Common Stock of the Corporation.
The law covered by this opinion is limited to the present General
Corporation Law of the State of Delaware. We express no opinion as to the laws
of any other jurisdiction and no opinion regarding the statutes, administrative
decisions, rules, regulations or requirements of any county, municipality,
subdivision or local authority of any jurisdiction.
<PAGE>
Page 2 - New Century Financial Corporation - June 2, 1997
We consent to your filing this opinion as an exhibit to the
Registration Statement and to the reference to us in the Registration Statement
under the heading "Legal Matters."
Respectfully submitted,
/s/ O'Melveny & Myers LLP
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
FOUNDING MANAGERS' INCENTIVE COMPENSATION PLAN
(Amended and Restated as of May 24, 1997)
ARTICLE I
TITLE, PURPOSE AND AUTHORIZED SHARES
This Plan shall be known as the "New Century Financial Corporation
Founding Managers' Incentive Compensation Plan." The purpose of this Plan is to
promote the success of New Century Financial Corporation by providing a means to
retain and motivate competent personnel by rewarding Participants with
additional incentive compensation for high levels of individual annual
performance and for significant efforts to enhance the financial performance of
New Century Financial Corporation. The total number of shares of Common Stock
that may be delivered pursuant to Restricted Stock Award Agreements under this
Plan is 250,000 shares, subject to adjustments contemplated by Section 6.3.
ARTICLE II
DEFINITIONS
"Award" shall mean an Incentive Award or a Special Incentive Award
granted under this Plan.
"Before-Tax Net Income" shall mean the Company's net income from
operations before reduction for income taxes as shown on the Company's financial
statements with the following adjustments: (i) benefits payable under the
Company's employee incentive compensation plans for the Performance Year for
employees other than the Founding Managers shall be deducted, but amounts
payable to the Founding Managers under this Plan shall not be deducted, and (ii)
the inclusion or exclusion of any income or loss from discontinued operations or
extraordinary items shall be determined by the Compensation Committee in its
discretion. Except as provided under Section 4.2(c), the amount of Before-Tax
Net Income shall be determined each year by the independent certified public
accountants of the Company, and such determination shall be conclusive and
binding for all purposes under this Plan.
"Beneficiary" shall mean the person, persons, trust or trusts entitled
by will or the laws of descent and distribution to receive the benefits
specified under this Plan in the event of the Participant's death.
"Board" shall mean the Board of Directors of the Company.
1
<PAGE>
"Committee" shall mean the Compensation Committee of the Board acting
in accordance with Article V.
"Company" shall mean New Century Financial Corporation, a Delaware
corporation, and its successors and assigns.
"Disability" shall mean the inability of a Participant, as determined
by the Committee based on competent medical evidence, as a result of mental or
physical disease or condition, to discharge his assigned duties.
"Fair Market Value" shall have the meaning set forth in the Company's
1995 Stock Option Plan.
"Founding Manager" shall mean Robert Cole, Edward Gotschall, Steve
Holder or Brad Morrice.
"Incentive Award" shall mean a dollar amount awarded under Section
4.2(a) of this Plan.
"Incentive Pool" shall mean the dollar amount available for Incentive
Awards and Special Incentive Awards for a Performance Year.
"Participant" shall mean each Founding Manager who has been granted an
Award.
"Performance Year" shall mean the fiscal year of the Company which is
the basis of a Participant's Awards.
"Personal Representative" shall mean the person or persons who, upon
the Disability or incompetence of a Participant, shall have acquired on behalf
of the Participant by legal proceeding or otherwise the right to receive the
benefits specified in this Plan.
"Plan" shall mean this New Century Financial Corporation Incentive
Compensation Plan, as amended.
"Restricted Stock" shall mean shares of Common Stock awarded to a
Participant under this Plan, subject to such conditions on vesting and such
transfer and other restrictions as are established in or pursuant to this Plan
and the applicable Restricted Stock Award Agreement.
"Restricted Stock Award Agreement" shall mean the writing setting
forth the terms of an award of Restricted Stock under this Plan in substantially
the form as attached hereto as Exhibit A.
"Special Incentive Award" shall mean an amount awarded in shares of
Restricted Stock under Section 4.3 of this Plan.
2
<PAGE>
"Special Incentive Pool" shall mean the dollar amount available for
Special Incentive Awards for a Performance Year.
"Total Stockholders' Equity" shall mean the Company's total
stockholders' equity as shown on the Company's audited financial statements as
of the first day of a Performance Year, increased for equity issued during the
Performance Year in the manner described in the next sentence. The amount of
such increase shall be equal to the amount of equity issued during the
Performance Year multiplied by a fraction, the numerator of which is the number
of days remaining in the Performance Year and the denominator of which is 365.
The amount of Total Stockholders' Equity shall be determined each year by the
independent certified public accountants of the Company, and such determination
shall be conclusive and binding for all purposes under this Plan.
ARTICLE III
PARTICIPATION
Each Founding Manager shall be eligible to receive Awards under the
Plan with respect to each Performance Year, under and subject to Article IV of
this Plan.
ARTICLE IV
INCENTIVE AWARDS
IV.1 The Incentive Pool. The Incentive Pool for each Performance Year
------------------
shall be equal to a percentage of the Company's Before-Tax Net Income for such
Performance Year, based on the ratio of Before-Tax Net Income to Total
Stockholders' Equity for the Performance Year and determined in accordance with
the following table:
<TABLE>
<CAPTION>
Ratio of Before-Tax Net Income Amount of Incentive
to Total Stockholders' Equity Pool
- ------------------------------ -------------------
<S> <C>
If ratio is less than 25% 0
If ratio is at least 25% but 5% of Before-Tax Net
less than 50% Income in excess of 25% of
Total Stockholders' Equity
If ratio is at least 50% 5% of Before-Tax Net Income in
excess of 25% of Total
Stockholders' Equity, plus 2% of
Before-Tax Net Income in excess
of 50% of Total Stockholders'
Equity
</TABLE>
3
<PAGE>
The Incentive Pool for a Performance Year shall be determined contemporaneously
with the preparation of the Company's audited financial statements for such
Performance Year.
IV.2 Determination and Payment of Incentive Awards.
---------------------------------------------
(a) Each year the Committee shall determine in accordance with this
Section the amount of an Incentive Award to be paid to each Participant with
respect to a particular Performance Year. The amount payable to each
Participant shall be equal to the Incentive Pool for such Performance Year
divided by four; provided, however, that in no event shall the aggregate
Incentive Awards for any Performance Year exceed 100% (or, effective for
Performance Years commencing on or after January 1, 1998, 200%) of the aggregate
annual base salaries of all Participants during such Performance Year. In the
event that the aggregate Incentive Awards for a Performance Year would exceed
the limitation described in the preceding sentence, the excess amount shall
constitute the "Special Incentive Pool" and shall be distributable in accordance
with Section 4.3.
(b) Each Incentive Award shall be paid in a cash lump sum within 10
days following the Company's receipt of audited financial statements for the
Performance Year. The amount payable to a Participant under this Section 4.2(b)
for a particular Performance Year shall be reduced by any amounts previously
distributed to the Participant during such Performance Year under Section
4.2(c). Payment shall be made to the Participant, or in the event of the
Participant's death, to the Participant's Beneficiary, or in the event of the
Participant's Disability, to the Participant's Personal Representative or, if
there is none, to the Participant.
(c) The Committee shall estimate the Incentive Pool and Incentive
Awards for a Performance Year as of June 30 and December 31 of such Performance
Year based on the Company's unaudited financial statements. As of July 31 of
the Performance Year, the Committee shall distribute to each Participant an
amount equal to 80% of his estimated Incentive Award based on the Company's
unaudited financial statements as of the preceding June 30. In addition, as of
January 31 of the Performance Year, the Committee shall distribute to each
Participant an amount equal to 80% of his estimated Incentive Award based on the
Company's unaudited financial statements as of the preceding December 31,
reduced by any amounts distributed in accordance with the preceding sentence.
Awards distributed under this Section 4.2(c) shall be paid in a cash lump sum.
(d) Notwithstanding anything else contained herein to the contrary, to
the extent that the amounts distributed to a Participant under Section 4.2(c)
with respect to a Performance Year exceed the amount payable to a Participant
under Section 4.2(b) with respect to such Performance Year, the Participant
4
<PAGE>
shall, unless the Company and the Participant agree otherwise, pay or provide
for payment in cash such amount to the Company within 10 days following the
Company's receipt of audited financial statements. Unless the Participant and
the Company agree otherwise, if a Participant fails to refund such amount, the
Company shall have the right to deduct such amount from any subsequent payment
hereunder or to withhold shares of Common Stock with an equivalent Fair Market
Value otherwise issuable to a Participant upon the lapse of restrictions or
forfeiture provisions.
IV.3 Special Incentive Awards.
------------------------
(a) Following the close of each Performance Year, the Committee shall
determine the amount of the Special Incentive Pool, if any, for such Performance
Year in accordance with Section 4.2(a). Next, the Committee shall determine in
accordance with this Section the amount of the Special Incentive Award to be
paid to each Participant with respect to the preceding Performance Year. The
amount payable to each Participant shall be equal to the Special Incentive Pool
divided by four. Each Participant's Special Incentive Award shall be
distributed in the form of shares of Restricted Stock with an equivalent Fair
Market Value and shall be evidenced and governed by the form of Restricted Stock
Award Agreement in substantially the form as attached hereto as Exhibit A.
(b) A certificate or certificates representing a Participant's
Restricted Stock shall be registered in the Participant's name. Certificates of
Common Stock representing Restricted Stock shall be imprinted with a legend to
the effect that neither the shares represented thereby nor any interest therein
may be sold, exchanged, transferred, pledged, hypothecated or otherwise disposed
of during the period that such shares are nontransferable or remain subject to a
risk of forfeiture. Each transfer agent for the Common Stock shall be
instructed to the same effect with respect to such shares. Such certificates
shall remain in the physical custody of the Company. The Company will issue
unlegended certificates in exchange for such certificates after the shares, or a
portion thereof, have become vested. A Participant receiving shares of
Restricted Stock shall be entitled to cash dividend and voting rights for all
shares issued even though they are not vested, provided that such rights shall
terminate as to any shares of Restricted Stock which cease to be eligible for
vesting.
(c) In the event that, as a result of an event giving rise to an
adjustment described in Section 6.3, the Participant shall, as the owner of
Restricted Stock, receive new or additional or different shares of stock or
securities, the certificate or certificates for, or other evidences of, such new
or additional or different shares or securities shall also be imprinted with a
legend as provided in subsection (b) and shall
5
<PAGE>
remain in the physical custody of the Company, and all provisions of this Plan
and the applicable Restricted Stock Award Agreement relating to the restrictions
and lapse of restrictions shall thereupon be applicable to such new or
additional or different shares or securities.
IV.4 Distribution Limitation. Notwithstanding anything else contained
-----------------------
herein to the contrary, in the event that the payment of a Participant's
benefits under this Plan would cause the Company to violate any covenant
contained in any agreement entered into by the Company with a third-party, or in
the event that the Company is in violation of any third party financial
covenant, the payment of benefits under the Plan shall be deferred until such
time as the Company would remain in compliance with such non-financial
covenants, or be in compliance with such financial covenants, after such
benefits are paid.
IV.5 Tax Withholding. The Company shall have the right to deduct from
---------------
any payment hereunder any amounts that federal, state, or local tax law requires
to be withheld with respect to such payment. If the Company, for any reason,
cannot satisfy the withholding obligation described in the preceding sentence,
the Participant shall pay or provide for payment in cash of the amount of any
taxes which the Company may be required to withhold with respect to the benefits
hereunder. Notwithstanding the foregoing, in any case where a tax is required
to be withheld in connection with the issuance or transfer of shares of Common
Stock under this Plan, the Participant may elect, pursuant to such rules as the
Committee may establish, to have the Company reduce the number of shares issued
or transferred by the appropriate number of shares to accomplish such
withholding.
ARTICLE V
ADMINISTRATION
V.1 The Committee. This Plan shall be administered by the
-------------
Compensation Committee of the Board. The Committee may delegate ministerial
functions to individuals who are officers of the Company. A member of the
Committee shall not vote or act upon any matter which relates to himself as a
Participant.
V.2 Power and Authority of the Committee. The Committee shall have
------------------------------------
full discretion to construe and interpret the terms and provisions of this Plan
and related agreements (including Participants' Restricted Stock Award
Agreements), which interpretation or construction shall be final and binding on
all parties, including but not limited to the Company and any Participant or
Beneficiary. The Committee shall administer such terms in a uniform and
nondiscriminatory manner and in full accordance with any and all laws applicable
to the Plan. In addition, the Committee shall have full power and authority to
prescribe, amend and rescind rules and regulations relating to
6
<PAGE>
the administration of this Plan, and to make all other determinations necessary
or advisable for the administration of this Plan.
V.3 Limitation of Liability. Any action taken by, or inaction of,
-----------------------
the Company, the Committee or the Board of Directors relating to this Plan shall
be within the absolute discretion of that entity or body and shall be conclusive
and binding upon all persons. No member of the Committee or the Board or
officer of the Company shall be liable for any such action or inaction of the
entity or body, or another person or, except in circumstances involving bad
faith, of himself or herself. Subject only to compliance with the express
provisions hereof, the Committee may act in its absolute discretion in matters
related to this Plan. Consistent with the preceding, the Company shall, to the
extent permitted by applicable state law, indemnify and save harmless the
Committee and each member thereof, and any delegate of the Committee who is an
employee of the Company against any and all expenses, liabilities and claims,
including legal fees to defend against such liabilities and claims arising out
of their discharge in good faith of responsibilities under or incident to the
Plan, other than expenses and liabilities arising out of willful misconduct.
This indemnity shall not preclude such further indemnities as may be available
under insurance purchased by the Company or provided by the Company under any
bylaw, agreement or otherwise, as such indemnities are permitted under state
law.
ARTICLE VI
MISCELLANEOUS
VI.1 Unsecured General Creditor. Participants and their
---------------------------
Beneficiaries, heirs, successors, and assigns shall have no legal or equitable
rights, claims, or interest in any specific property or assets of the Company.
No assets of the Company shall be held under any trust, or held in any way as
collateral security for the fulfilling of the obligations of the Company under
this Plan. Any and all of the Company's assets shall be, and remain, the
general, unpledged, unrestricted assets of the Company. The Company's
obligation under the Plan shall be merely that of an unfunded and unsecured
promise of the Company to pay money in the future, and the rights of the
Participants and Beneficiaries shall be no greater than those of unsecured
general creditors.
VI.2 Restriction Against Assignment. The Company shall pay all
------------------------------
amounts payable hereunder only to the person or persons designated by the Plan
and not to any other person or corporation. No part of a Participant's benefits
shall be liable for the debts, contracts, or engagements of any Participant, his
or her Beneficiary, or successors in interest, nor shall a Participant's
benefits be subject to execution by levy,
7
<PAGE>
attachment, or garnishment or by any other legal or equitable proceeding, nor
shall any such person have any right to alienate, anticipate, commute, pledge,
encumber, or assign any benefits or payments hereunder in any manner whatsoever.
If any Participant, Beneficiary or successor in interest is adjudicated bankrupt
or purports to anticipate, alienate, sell, transfer, assign, pledge, encumber or
charge any distribution or payment from the Plan, voluntarily or involuntarily,
the Committee, in its discretion, may cancel such distribution or payment (or
any part thereof) to or for the benefit of such Participant, Beneficiary or
successor in interest in such manner as the Committee shall direct.
VI.3 Adjustments in Case of Changes in Common Stock; Fractional
----------------------------------------------------------
Interests. In the event of any stock dividend, stock split, recapitalization,
- ----------
merger, consolidation, combination or exchange of shares, sale of all or
substantially all of the assets of the Company, split-up, split-off, spin-off,
liquidation or similar change in capitalization or any distribution to holders
of the Company's Common Stock other than cash dividends and distributions, the
Committee shall make appropriate adjustments in the number of shares of
Restricted Stock reserved for issuance under this Plan and in the number of
theretofore allocated to Participants so as to maintain the appropriate
proportionate numbers of shares of Restricted Stock. Such adjustments shall be
conclusive and binding for all purposes of this Plan. No fractional shares of
Restricted Stock shall be issued under this Plan and all such fractions shall be
disregarded.
VI.4 Governing Law. This Plan and any documents evidencing Awards and
--------------
all other related documents shall be governed by, and construed in accordance
with, the law of the State of California. If any provision shall be held by a
court of competent jurisdiction to be invalid and unenforceable, the remaining
provisions of this Plan shall continue to be fully effective.
VI.5 Amendment and Termination of Plan. The Board of Directors may,
---------------------------------
at any time, terminate or, from time to time, amend, modify or suspend this Plan
or any provision thereof. No Awards may be awarded during any suspension of
this Plan or after its termination. The amendment, suspension or termination of
this Plan shall not, without the consent of the Participant, alter or impair any
rights or obligations pertaining to any Awards theretofore awarded under this
Plan.
Subject to the foregoing general powers of the Board of Directors,
this Plan, as amended, shall be effective for the 1997 Performance Year and
shall be continued for all Performance Years thereafter.
VI.6 Masculine Gender includes Feminine and Neuter. As used in this
---------------------------------------------
Plan, the masculine gender shall include the
8
<PAGE>
feminine and neuter genders.
VI.7 Receipt or Release. Any cash payment or grant of Restricted
------------------
Stock to a Participant or the Participant's Beneficiary in accordance with the
provisions of the Plan shall, to the extent thereof, be in full satisfaction of
all claims against the Board and the Company. The Board may require such
Participant or Beneficiary, as a condition precedent to such payment or grant,
to execute a receipt and release to such effect.
VI.8 Headings, etc. Not Part of Agreement. Headings and subheadings
------------------------------------
in this Plan are inserted for convenience of reference only and are not to be
considered in the construction of the provisions hereof.
VI.9 Limitation on Participants' Rights. Participation in this Plan
----------------------------------
shall not give any Participant the right to be retained in the Company's employ
or any right or interest in the Plan other than as herein provided. The Company
reserves the right to dismiss any Participant without any liability for any
claim against the Company, except to the extent provided herein.
IN WITNESS WHEREOF, the Company has caused these presents to be
executed by its duly authorized officer as of the date first set forth above.
NEW CENTURY FINANCIAL CORPORATION
By: /s/ BRAD A. MORRICE
---------------------------------
Brad A. Morrice
Its: President
9
<PAGE>
EXHIBIT 10.6
AMENDED AND RESTATED
CREDIT AGREEMENT
BY AND BETWEEN
NEW CENTURY MORTGAGE CORPORATION,
FIRST BANK NATIONAL ASSOCIATION,
AS AGENT
AND
THE BANKS PARTY HERETO
OCTOBER 25, 1996
<PAGE>
TABLE OF CONTENTS
Page
SECTION 1. DEFINITIONS AND ACCOUNTING TERMS 1
1.01Certain Defined Terms 1
1.02Accounting Terms 14
1.03Computation of Time Periods 14
1.04Other Definitional Terms 14
SECTION 2. THE CREDIT FACILITIES 14
2.01The Warehousing Facility 14
2.02Interest on the Warehousing Note; Balances Deficiency Fees; Usage Fees;
Continuations and Conversions 21
2.03Payments and Computations 23
2.04Setoff 24
2.05Increased Capital Requirements 24
2.06Provisions Relating to Eurodollar Advances and Fixed Rate Advances 25
SECTION 3. REPRESENTATIONS AND WARRANTIES 27
3.01Formation; Powers; Good Standing; Subsidiaries; Agency Status 27
3.02Authorization; No Conflict; Governmental Consents; Binding Effect 27
3.03Financial Condition 29
3.04Title to Property; Liens 29
3.05Litigation; Adverse Facts 29
3.06Other Agreements; Performance 30
3.07Use of Proceeds 30
3.08Taxes 30
3.09ERISA 30
3.10Governmental Regulation 31
3.11Indebtedness 31
3.12No Material Adverse Event 31
3.13Licenses and Permits 31
3.14Guarantees 31
3.15Accuracy and Completeness of Information 31
SECTION 4. COVENANTS OF THE COMPANY 32
4.01Financial Statements and Other Reports 32
4.02Corporate Existence; Agency Status 35
4.03Compliance with Laws, Taxes, etc 35
4.04ERISA 35
4.05Assets and Insurance 36
4.06Inspection, Visitation, etc 36
62
<PAGE>
4.07Further Assurances 37
4.08Indebtedness 37
4.09Liens 37
4.10Investments 38
4.11Guarantees 39
4.12Net Worth 39
4.13Restriction on Fundamental Changes 39
4.14Restricted Payments 39
4.15Minimum Liquidity 40
4.16Subsidiaries 40
4.17Affiliate Transactions 40
4.18Escrow Imbalances 40
4.19Inconsistent Agreements 40
4.20Closing Procedures 40
4.21Underwriting 40
4.22Independence of Covenants 41
SECTION 5. CONDITIONS PRECEDENT 41
5.01Conditions Precedent to Effectiveness 41
5.02Conditions Precedent to all Warehousing Loans 43
SECTION 6. EVENTS OF DEFAULT; REMEDIES 43
6.01Events of Default 43
6.02Remedies 46
SECTION 7. THE AGENT 46
7.01Appointment and Authorization 46
7.02Note Holders 46
7.03Consultation With Counsel 47
7.04Documents 47
7.05Agent and Affiliates 47
7.06Action by Agent 47
7.07Credit Analysis 48
7.08Notices of Event of Default, etc. 48
7.09Indemnification 48
7.10Payments 49
7.11Sharing of Payments 49
7.12Successor Agent 49
7.13Inspection 50
SECTION 8. MISCELLANEOUS 50
8.01Waiver 50
8.02Notices 50
8.03Expenses; Indemnification 51
63
<PAGE>
8.04Confidentiality 51
8.05Releases, Amendments, Waivers, Consents and Exercise of Remedies 52
8.06Binding Effect; Assignments and Participations; Transferees; New Banks 52
8.07Governing Law and Construction 54
8.08Consent to Jurisdiction 54
8.09Waiver of Jury Trial 55
8.10Survival of Agreement 55
8.11Captions 55
8.12Entire Agreement 55
8.13Counterparts 55
8.14Company Acknowledgements 55
64
<PAGE>
AMENDED AND RESTATED CREDIT AGREEMENT
-------------------------------------
AMENDED and RESTATED CREDIT AGREEMENT dated as of October 25, 1996 by
and between NEW CENTURY MORTGAGE CORPORATION, a California corporation (the
"Company"), the lenders from time to time party hereto (each a "Bank" and
collectively, the "Banks"), and FIRST BANK NATIONAL ASSOCIATION ("First Bank"),
as agent for the Banks (in such capacity, together with any successor agents
appointed hereunder, the "Agent").
WHEREAS, the Company and First Bank are parties to that certain Credit
Agreement dated February 12, 1996 (as amended, the "Existing Credit Agreement")
pursuant to which First Bank provided the Company with a revolving mortgage
warehousing credit facility;
WHEREAS, the Company has requested that First Bank add Guaranty
Federal Bank ("GFB") as a lender under such facility, increase the amount of
such facility, and amend certain other provisions of the Existing Credit
Agreement.
Accordingly, the parties hereto hereby agree as follows:
SECTION 1. DEFINITIONS AND ACCOUNTING TERMS.
--------------------------------
1.01 Certain Defined Terms. As used herein, the terms defined in the
---------------------
introductory paragraphs hereof shall have the meanings given them therein and
the following terms shall have the following respective meanings (such terms to
be equally applicable to both the singular and plural forms of the terms
defined):
"Adjusted Eurodollar Rate:" on any date of determination, the rate
------------------------
(rounded upward, if necessary, to the next higher one hundredth of one
percent) determined by dividing the Eurodollar Rate for such date by 1.00
minus the Eurodollar Reserve Percentage.
"Adjusted Leverage Ratio": on any date of determination, the ratio
-----------------------
of (a) Total Indebtedness to (b) Adjusted Tangible Net Worth.
"Adjusted Tangible Net Worth": on the date of any determination
---------------------------
thereof, the sum of (a) Tangible Net Worth, minus (b) capitalized
-----
Servicing Rights and capitalized excess servicing fees, plus (c) an
----
amount equal to three quarters of one percent (0.75%) of the Eligible
Servicing Portfolio, and plus (d) deferred taxes arising from capitalized
---
excess servicing fees, plus an amount equal to three percent (3.00%) of
the outstanding principal balance of Mortgage Loans held by the Company
for sale.
"Advance": (a) a Reference Rate Advance, (b) a Fixed Rate Advance,
-------
or (c) a Eurodollar Advance.
<PAGE>
"Affiliate": with respect to any Person, any other Person directly or
---------
indirectly controlling, controlled by, or under common control with, such
Person, whether through the ownership of voting securities, by contract or
otherwise.
"Agreement": this Credit Agreement, as amended, supplemented,
---------
restated or otherwise modified and in effect from time to time.
"Applicable Margin": with respect to:
-----------------
(a) Reference Rate Advances, 0%; and
(b) Eurodollar Advances, 1.50%.
"Balance Calculation Period": each calendar quarter after the
--------------------------
Effective Date to and including the later of the date on which the
Warehousing Notes shall be paid in full or the Warehousing Termination
Date, except that the first Balance Calculation Period shall commence on
the Effective Date and the last Balance Calculation Period shall end on the
later of the date on which the Warehousing Notes shall have been paid in
full or the Warehousing Termination Date.
"Balances Deficiency": as such term is defined in Section 2.02(a)(i).
-------------------
"Balances Deficiency Fee": as such term is defined in Section 2.02
-----------------------
(a)(i).
"Balances Surplus": as such term is defined in Section 2.02(a)(i).
----------------
"Borrowing Date": the Business Day specified by the Company in a
--------------
Confirmation of Borrowing/Paydown/Conversion as the date on which it
requests the Banks to make Warehousing Loans or First Bank to make a
Swingline Loan.
"Business Day": any day of the year other than a Saturday, Sunday
------------
or other day on which commercial banks in Minneapolis, Minnesota are
required or authorized to close.
"Change of Control": the occurrence, after the Signing Date, of any
-----------------
of the following circumstances: (a) NCFC not owning, directly or
indirectly, all of the issued and outstanding capital stock of the Company;
or (b) any Person, or two or more Persons acting in concert, other than the
Management Shareholders, acquiring beneficial ownership (within the meaning
of Rule 13d-3 of the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended), directly or indirectly, of
securities of NCFC (or other securities convertible into such securities)
representing 35% or more of the combined voting power of all securities of
NCFC entitled to vote in the election of directors; or (c) any Person, or
two or more
-2-
<PAGE>
Persons acting in concert, other than the Management Shareholders,
acquiring by contract or otherwise, or entering into a contract or
arrangement which upon consummation will result in its or their acquisition
of, control over securities of NCFC (or other securities convertible into
such securities) representing 35% or more of the combined voting power of
all securities of NCFC entitled to vote in the election of directors.
"Code": the Internal Revenue Code of 1986, together with all
----
amendments from time to time thereto.
"Collateral Account": account number 1731-0097-1378 of the Company
------------------
with Agent.
"Compliance/Borrowing Base Certificate": a certificate in the form of
-------------------------------------
Exhibit A.
"Confirmation of Borrowing/Paydown/Conversion": a confirmation in
--------------------------------------------
the form of Exhibit B.
"Delivered Mortgage Loans": Mortgage Loans pledged to the Agent
------------------------
pursuant to the Pledge and Security Agreement with respect to which all of
the documents required to be delivered to the Agent pursuant to Section
4.02 of the Pledge and Security Agreement have been delivered.
"Effective Date": the date on or after the Signing Date on which
--------------
all of the conditions precedent set forth in Section 5.01 shall have been
satisfied or waived in writing by the Agent.
"Eligible Servicing Portfolio": on any date of determination, the
----------------------------
aggregate unpaid principal balance of all Mortgage Loans owned by Persons
other than the Company that are serviced by the Company pursuant to
Eligible Servicing Rights, excluding Servicing Rights that are subject to
an executed and delivered agreement to sell the same.
"Eligible Servicing Rights": all rights of the Company held for its
-------------------------
own account (and not as nominee or subservicer), whether pursuant to a
Servicing Contract or otherwise, to service Mortgage Loans or Mortgage Loan
pools for, or to service Mortgage Loans or Mortgage Loan pools that back
Mortgagebacked Securities issued or guaranteed by, FNMA, FHLMC, GNMA or
another Investor, other than rights to service Mortgage Loans:
(a) pursuant to Recourse Servicing Contracts;
-3-
<PAGE>
(b) with respect to which any payment is more than 59 days past
due; or
(c) with respect to which any obligor is the subject of a
bankruptcy, debt arrangement or other proceeding under any insolvency
law.
"ERISA": the Employee Retirement Income Security Act of 1974,
-----
together with all amendments from time to time thereto.
"ERISA Affiliate": any trade or business (whether or not
---------------
incorporated) that is a member of a group that is treated as a single
employer under Section 414 of the Code of which the Company is a member.
"Eurodollar Advance": an outstanding Warehousing Loan that bears
------------------
interest as provided in Section 2.02(a)(iii).
"Eurodollar Business Day": a Business Day which is also a day for
-----------------------
trading by and between banks in United States dollar deposits in the
interbank Eurodollar market and a day on which banks are open for business
in New York, New York.
"Eurodollar Rate": on any date of determination, the average
---------------
offered rate for deposits in United States dollars having a maturity of
thirty days (rounded upward, if necessary, to the nearest 1/16 of 1%) for
delivery of such deposits on such date of determination which appears on
the Reuters Screen LIBO page as of 11:00 a.m., London time (or such other
time as of which such rate appears) on such date of determination, or the
rate for such deposits determined by the Agent at such time based on such
other published service of general application as shall be selected by the
Agent for such purpose; provided, that in lieu of determining the rate in
the foregoing manner, the Agent may determine the rate based on rates at
which United States dollar deposits having a maturity of thirty days are
offered to the Agent in the interbank Eurodollar market at such time for
delivery in Immediately Available Funds on such date of determination in an
amount equal to $1,000,000 (round upward, if necessary, to the nearest 1/16
of 1%). "Reuters Screen LIBO page" means the display designated as page
"LIBO" on the Reuters Screen Money Rate Screen (or such other page as may
replace the LIBO page on such service for the purpose of displaying London
interbank rates of major banks for United States dollar deposits).
"Eurodollar Reserve Percentage": on any date of determination, that
-----------------------------
percentage (expressed as a decimal) which is in effect on such day, as
prescribed by the Board of Governors of the Federal Reserve System (or any
successor) for determining the maximum reserve requirement for a member
bank of the Federal Reserve System, with deposits comparable in amount to
those held by First Bank, in respect of "Eurocurrency Liabilities" (or in
respect of any other category of liabilities
-4-
<PAGE>
which includes deposits by reference to which the interest rate on
Eurodollar Rate Advances is determined or any category of extensions of
credit or other assets which includes loans by a non-United States office
of a Bank to United States residents).
"Event of Default": as such term is defined in Section 6.01.
----------------
"Existing First Bank Advances": as of the Effective Date, the
----------------------------
outstanding "Advances" (as such term is defined in the Existing Credit
Agreement) made by First Bank under the Existing Credit Agreement.
"Federal Funds Effective Rate": for any date of determination, the
----------------------------
weighted average of the quotations for such date for overnight federal
funds transactions received by First Bank from three (3) federal funds
brokers of recognized standing selected by First Bank; provided, that in
lieu of determining the rate in the foregoing manner, the Agent may
substitute the per annum rate for such transactions displayed on the
Telerate screen, page 120, at 10:00 A.M. (Minneapolis time) on such date
or, if such date is not a Business Day, the most recent Business Day.
"FHLMC": the Federal Home Loan Mortgage Corporation and any successor
-----
thereto.
"Fixed Rate": as defined in Section 2.02(a)(i).
----------
"Fixed Rate Advance": an outstanding Warehousing Loan that bears
------------------
interest as provided in Section 2.02(a)(i).
"Floating Rate Advance": an outstanding Warehousing Loan maintained
---------------------
as a Reference Rate Advance or a Eurodollar Advance.
"FNMA": the Federal National Mortgage Association and any successor
----
thereto.
"GAAP": generally accepted accounting principles in the United
----
States set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants
and statements and pronouncements of the Financial Accounting Standards
Board or in such other statements by such other entity as may be approved
by a significant segment of the accounting profession, which are applicable
to the circumstances as of the date of determination.
"GNMA": the Government National Mortgage Association and any
----
successor thereto.
-5-
<PAGE>
"Guarantee": any obligation, contingent or otherwise, of any Person
---------
guaranteeing or having the economic effect of guaranteeing any Indebtedness
of any other Person (the "primary obligor") in any manner, whether directly
or otherwise, (a) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Indebtedness or to purchase (or to advance or
supply funds for the purchase of) any direct or indirect security therefor,
(b) to purchase property, securities, or services for the purpose of
assuring the owner of such Indebtedness of the payment of such
Indebtedness, (c) to maintain working capital, equity capital, or other
financial statement condition of the primary obligor so as to enable the
primary obligor to pay such Indebtedness or otherwise to protect the owner
thereof against loss in respect thereof, or (d) entered into for the
purpose of assuring in any manner the owner of such Indebtedness of the
payment of such Indebtedness or to protect such owner against loss in
respect thereof; provided, that the term "Guarantee" shall not include
--------
endorsements for collection or deposit, in each case in the ordinary
course of business.
"Guaranty": the guaranty in the form of Exhibit C, or the same may be
--------
amended, supplemented or restated from time to time.
"Immediately Available Funds": funds with good value on the day and
---------------------------
in the city in which payment is received.
"Indebtedness": with respect to any Person at any time, without
------------
duplication, all obligations of such Person which, in accordance with GAAP,
consistently applied, should be classified as liabilities on an
unconsolidated balance sheet of such Person, but in any event shall
include: (a) all obligations of such Person for borrowed money, (b) all
obligations of such Person evidenced by bonds, debentures, notes or other
similar instruments, (c) all obligations of such Person upon which interest
charges are customarily paid or accrued, (d) all obligations of such Person
under conditional sale or other title retention agreements relating to
property purchased by such Person, (e) all obligations of such Person
issued or assumed as the deferred purchase price of property or services,
but excluding accrued expenses and trade payables incurred and paid in the
ordinary course of business, (f) all obligations of others secured by any
Lien on property owned or acquired by such Person, whether or not the
obligations secured thereby have been assumed, (g) all capitalized lease
obligations of such Person, (h) all obligations of such Person in respect
of interest rate protection agreements, (i) all obligations of such Person,
actual or contingent, in respect of letters of credit or banker's
acceptances, (j) all obligations of any partnership or joint venture as to
which such Person is or may become personally liable, and (k) all
Guarantees by such Person of Indebtedness of others.
"Investment": as applied to any Person, any direct or indirect
----------
purchase or other acquisition by that Person of, or a beneficial interest
in, stock or other securities
-6-
<PAGE>
of any other Person, or any direct or indirect loan, advance (other than
advances to employees for moving and travel expenses, drawing accounts and
similar expenditures in the ordinary course of business) or capital
contribution by that Person to any other Person, including all Indebtedness
and accounts receivable from that other Person which are not current assets
or did not arise from sales to that other Person in the ordinary course of
business.
"Investor": any bank, trust company, savings and loan association,
--------
pension fund, governmental authority, insurance company or other
responsible and substantial institutional investor, dealer or securities
broker designated by the Company and approved by the Required Banks (which
approval shall not be unreasonably withheld) with respect to Mortgage Loans
of a particular type; provided, that any Bank may at any time, by written
notice to the Company, reject any Investor designated by the Company or
designate any Investor as no longer acceptable. Upon receipt of such
written notice, the Person(s) named in such notice to the Company shall no
longer be considered Investors hereunder.
"Leverage Ratio": on any date of determination, the ratio of (a)
--------------
Total Indebtedness to (b) Net Worth.
"Lien": any security interest, mortgage, pledge, lien, charge,
----
encumbrance, title retention agreement or analogous instrument, in, of, or
on any of the assets or properties, now owned or hereafter acquired, of any
Person, whether arising by agreement or operation of law.
"Loan Documents": this Agreement, the Warehousing Note, the Pledge
--------------
and Security Agreement, the Guaranty, and all other agreements,
instruments, certificates and other documents executed and delivered
pursuant thereto or in connection therewith, as the same may be
supplemented, amended or otherwise modified from time to time after the
Signing Date.
"Loans": Warehousing Loans and Swingline Loans.
-----
"Management Shareholders": Robert K. Cole, Brad A. Morrice, Edward F.
-----------------------
Gotschall and Steven Holder.
"Material Adverse Event": any occurrence of whatsoever nature
----------------------
(including, without limitation, any adverse determination in any
litigation, arbitration or governmental investigation or proceeding) which
materially adversely affects the present or reasonably foreseeable
prospective financial condition or operations of NCFC or the Company or
materially impairs the ability of NCFC or the Company to perform its
respective obligations under the Loan Documents.
-7-
<PAGE>
"Mortgage": a mortgage or deed of trust on real property which has
--------
been improved by a completed single family (i.e., one to four family
----
units) dwelling unit (i.e., a detached house, townhouse or condominium).
----
"Mortgage-backed Security": a security (including, without
------------------------
limitation, a participation certificate) that is an interest in a pool of
Mortgage Loans or is secured by such an interest.
"Mortgage Banker's Financial Reporting Form": Form Number 1002-1055
------------------------------------------
of the FNMA Seller's Guide.
"Mortgage Loan": a Mortgage Note and the related Mortgage.
-------------
"Mortgage Note": a promissory note which has a term not exceeding
-------------
30 years evidencing a loan or advance which is secured by a Mortgage.
"Multiemployer Plan": a multiemployer plan, as such term is defined
------------------
in Section 4001 (a) (3) of ERISA, which is maintained (on the Closing Date,
within the five years preceding the Closing Date, or at any time after the
Closing Date) for employees of the Company or any ERISA Affiliate.
"NCFC": New Century Financial Corporation, a Delaware corporation.
----
"Net Worth": as to any Person, as of any date of determination, the
---------
net worth of such Person as of such date, determined in accordance with
GAAP.
"Obligations": all obligations of each of the Company and NCFC to the
-----------
Agent or any Bank now or hereafter existing under any Loan Document,
whether for principal, interest, fees, expenses, indemnification or
otherwise.
"PBGC": the Pension Benefit Guaranty Corporation created by Section
----
4002(a) of ERISA or any governmental body succeeding to the functions
thereof.
"Person": any natural person, corporation, partnership, joint
------
venture, firm, association, trust, unincorporated organization, government
or governmental agency or political subdivision or any other entity,
whether acting in an individual, fiduciary or other capacity.
"Plan": each employee benefit plan (whether in existence on the
----
Closing Date or thereafter instituted), as such term is defined in Section
3 of ERISA, maintained for the benefit of employees, officers or directors
of the Company or of any ERISA Affiliate, other than a Multiemployer Plan.
-8-
<PAGE>
"Pledge and Security Agreement": the pledge and security agreement
-----------------------------
in the form of Exhibit D, as the same may be amended, supplemented or
restated from time to time.
"Prohibited Transaction": the respective meanings assigned to such
----------------------
term in Section 4975 of the Code and Section 406 of ERISA.
"Pro Rata Share": with respect to each Bank, in each case expressed
--------------
as a percentage:
(a) as such term pertains to such Bank's obligation to make
Warehousing Loans, including its obligation to refinance any
outstanding Swingline Loans, the fraction which the amount of its
Warehousing Commitment is to the aggregate amount of all the
Warehousing Commitments,
(b) as such term pertains to such Bank's right to receive payment
of interest on and Usage Fees and Balances Deficiency Fees with
respect to its outstanding Warehousing Loans, the fraction which the
outstanding amount of interest, Usage Fees and Balances Deficiency
Fees payable to it on or with respect to the outstanding principal
balance of such Bank's Warehousing Loans is to the aggregate
outstanding amount of interest, Usage Fees and Balances Deficiency
Fees payable on or with respect to the aggregate unpaid principal
balance of all Warehousing Loans,
(c) as such term pertains to such Bank's right to receive payment
of principal of its outstanding Warehousing Loans, the fraction which
the amount of the unpaid principal balance of its Warehousing Loans is
to the aggregate unpaid principal balance of all outstanding
Warehousing Loans,
(d) as such term pertains to such Bank's right to receive
facility fees under Section 2.01(i), the fraction which such Bank's
Warehousing Commitment Amount is to the sum of all Warehousing
Commitment Amounts,
(e) as such term pertains to such Bank's obligations under
Section 7.09, and for all other purposes, the fraction which such
Bank's Warehousing Commitment Amount, or, if its Warehousing
Commitment has terminated, the unpaid principal balance of its
Warehousing Loans, is to the sum of the Warehousing Commitment Amounts
of all of the Banks or, if the Warehousing Commitments have
terminated, the unpaid principal balance of all of the Warehousing
Loans.
-9-
<PAGE>
"Recourse Servicing Contract": a Servicing Contract under which the
---------------------------
Company is obligated to repurchase or indemnify the holder of the Mortgage
Loans as a result of defaults on the Mortgage Loans at any time during the
term of such Mortgage Loans (other than those Servicing Contracts that are
customarily recognized in the trade as non-recourse but that may contain
repurchase or indemnification obligations related to breaches of usual and
customary representations and warranties made by the Company in connection
with the sale and servicing of the Mortgage Loans serviced thereunder and
usual and customary provisions for the advance of principal and interest on
Mortgage-backed Securities by the Company).
"Reference Rate": at the time of any determination thereof, the
--------------
rate per annum which is most recently publicly announced by First Bank as
its "reference rate", which may be a rate at, above or below which First
Bank lends to other Persons.
"Reference Rate Advance": an outstanding Warehousing Loan or a
----------------------
Swingline Loan that bears interest as provided in Section 2.02(a)(ii).
"Regulation D": Regulation D (or any substitute regulations) of the
------------
Board of Governors of the Federal Reserve System (or any successor
thereto), together with all amendments from time to time thereto.
"Regulatory Change": any change after the Signing Date in United
-----------------
States federal, state or foreign laws or regulations or the adoption or
making after such date of any interpretations, directives or requests
applying to a class of banks including any Bank under any United States
federal, state or foreign laws or regulations (whether or not having the
force of law) by any court or governmental or monetary authority charged
with the interpretation or administration thereof.
"Reportable Event": a reportable event as defined in Section 4043
----------------
of ERISA and the regulations issued under such Section, with respect to a
Plan, excluding, however, such events as to which the PBGC by regulation
has waived the requirement of Section 4043(a) of ERISA that it be notified
within 30 days of the occurrence of such event, provided, that a failure to
meet the minimum funding standard of Section 412 of the Code and of Section
302 of ERISA shall be a Reportable Event regardless of the issuance of any
waiver in accordance with Section 412(d) of the Code.
"Required Banks": at any time of determination, Banks whose Pro Rata
--------------
Shares (as defined under clause (e) of the definition of such term)
aggregate at least 66.67%; provided, that if there is more than one Bank,
the "Required Banks" shall not consist of fewer than two Banks.
"Reserve-Adjusted Balances": for any Balance Calculation Period, an
-------------------------
amount
-10-
<PAGE>
obtained by multiplying (a) the average net daily collected non-interest-
bearing balances of the Company on deposit with the Bank during such
Balance Calculation Period over and above the balances required to
compensate the Bank for services provided by the Bank for said Balance
Calculation Period, reductions in the interest payable on Indebtedness
(other than the Loans) outstanding to the Bank and assessments payable with
respect to such balances by the Bank to the Federal Deposit Insurance
Corporation (or any successor thereto) for such Corporation's insuring of
time deposits in dollars made at the Bank for such Balance Calculation
Period by (b) a percentage equal to 100%, minus the average daily Reserve
Percentage in effect for said Balance Calculation Period. For purposes of
the foregoing, "Reserve Percentage" shall mean, on any date of
------------------
determination, the percentage as prescribed by Regulation D for determining
the highest maximum reserve requirement (including, without limitation, any
marginal, emergency, supplemental, special or other reserve) that the Bank
determines it is required to maintain on such date in respect of deposits
of the type maintained with the Bank in the applicable Balance Calculation
Period.
"Restricted Payments": with respect to any Person, collectively, all
-------------------
dividends or other distributions of any nature (cash, securities, assets or
otherwise), and all payments, by virtue of redemption or otherwise, on any
class of equity securities (including, without limitation, warrants,
options or rights therefor) issued by such Person, whether such securities
are now or may hereafter be authorized or outstanding and any distribution
in respect of any of the foregoing, whether directly or indirectly.
"Securitization Date": the date on which the Company first
-------------------
capitalizes excess servicing fees receivable following the sale of Mortgage
Loans owned by the Company.
"Servicing Contract": a contract or agreement purchased by the
------------------
Company or entered into by the Company for its own account (and not as
nominee or subservicer), whether now existing or hereafter purchased or
entered into, pursuant to which the Company services Mortgage Loans or
Mortgage Loan pools for others.
"Servicing Rights": any and all rights of the Company held for its
----------------
own account (and not as nominee or subservicer), whether pursuant to a
Servicing Contract or otherwise, to service Mortgage Loans or Mortgage Loan
pools, including, without limitation, (i) all rights to collect payments
due and enforce the rights of the mortgagee under any Mortgage Loans, (ii)
all rights to receive compensation and termination fees under any Servicing
Contract and (iii) all rights to receive the proceeds from any sale or
other transfer of the Company's interest in any Servicing Contract.
"Signing Date": the Business Day on which counterparts of this
------------
Agreement,
-11-
<PAGE>
duly executed by the Company and the Banks, have been delivered to the
Agent.
"Subsidiary": as to any Person, any corporation or other entity of
----------
which securities or other ownership interests having ordinary voting power
to elect a majority of the board of directors or other Persons performing
similar functions are at the time owned directly or indirectly by such
Person.
"Take-Out Commitment": as defined in Exhibit E.
-------------------
"Tangible Net Worth": as of any date of determination, the
------------------
consolidated Net Worth of NCFC and its subsidiaries, less the consolidated
net book value of all assets of NCFC and its subsidiaries (to the extent
reflected as an asset in the balance sheet of NCFC or any subsidiary at
such date) which will be treated as intangibles under GAAP, including,
without limitation, such items as deferred financing expenses, net
leasehold improvements, good will, trademarks, trade names, service marks,
copyrights, patents, licenses, deferred excess servicing rights with
respect to the foregoing, and unamortized debt discount and expense.
"Total Indebtedness": at any time of determination, the amount, on a
------------------
consolidated basis, of the liabilities of NCFC and its subsidiaries,
determined in accordance with GAAP, minus obligations under gestation
repurchase agreements or similar arrangements under which NCFC or its
subsidiaries are required to repurchase Mortgage-backed Securities or
Mortgage Loans from any Bank or other counterparty reasonably satisfactory
to the Agent, whether or not such obligations are reflected on NCFC's
balance sheet; provided, that such gestation repurchase agreements are
entered into in the ordinary course of business in contemplation of the
subsequent non-recourse sale of such Mortgage-backed Securities or Mortgage
Loans .
"Transferees": as such term is defined in Section 7.06.
-----------
"Transferred Interest": as such term is defined in Section 7.06.
--------------------
"Underwriting Guidelines": the Company's underwriting guidelines as
-----------------------
in effect on the Signing Date, a copy of which is attached hereto as
Schedule 1.01 (a), as the same may be modified from time to time in
accordance with this Agreement.
"Unmatured Event of Default": any event which with the lapse of time,
--------------------------
with notice to the Company or with both would constitute an Event of
Default.
"Usage Fees": as defined in Section 2.02(b).
----------
"Warehousing Borrowing Base": as of a date of determination, an
--------------------------
amount equal to 100% of the Warehousing Collateral Value of the Warehousing
Collateral, as
-12-
<PAGE>
determined by the Agent from its records.
"Warehousing Collateral": the "Collateral" as defined in the Pledge
----------------------
and Security Agreement.
"Warehousing Collateral Value": on the date of any determination,
----------------------------
with respect to the Warehousing Collateral or any portion thereof, as
determined by the Agent in accordance with the provisions of Exhibit E.
"Warehousing Commitment": as to any Bank, the obligation of such
----------------------
Bank to make Warehousing Loans pursuant to Section 2.01(a).
"Warehousing Commitment Amount": as to any Bank, the amount set
-----------------------------
opposite such Bank's name as its "Warehousing Commitment" in Schedule
1.01(b), as the same may be (i) reduced pursuant to Section 2.01(e), (ii)
changed as the result of an assignment pursuant to Section 8.06(a) or (iii)
increased pursuant to Section 8.06(b).
"Warehousing Loan": a loan made by the Bank to the Company pursuant
----------------
opposite Section 2.01(a).
"Warehousing Note": as such term is defined in Section 2.02(d).
----------------
"Warehousing Termination Date": the earliest of (a) June 30, 1997,
----------------------------
(b) the date on which the Warehousing Commitments are terminated or reduced
to zero pursuant to Section 2.01(e) or (c) the date on which the
Warehousing Commitments are terminated pursuant to Section 6.02.
1.02 Accounting Terms. Except as provided to the contrary herein, all
----------------
accounting terms used herein shall be interpreted and all accounting
determinations hereunder shall be made in accordance with GAAP. To the extent
any change in GAAP affects any computation or determination required to be made
pursuant to this Agreement, such computation or determination shall be made as
if such change in GAAP had not occurred unless the Company and the Banks agree
in writing on an adjustment to such computation or determination to account for
such change in GAAP.
1.03 Computation of Time Periods. In this Agreement, in the
---------------------------
computation of a period of time from a specified date to a later specified date,
unless otherwise stated the word "from" means "from and including" and the word
"to" or "until" each means "to but excluding".
1.04 Other Definitional Terms. The words "hereof", "herein" and
------------------------
"hereunder" and words of similar import when used in this Agreement shall refer
to this
-13-
<PAGE>
Agreement as a whole and not to any particular provision of this Agreement, and
section, schedule, exhibit and like references are to this Agreement unless
otherwise specified. Unless the context in which used herein otherwise clearly
requires, "or" has the inclusive meaning represented by the phrase "and/or".
SECTION 2. THE CREDIT FACILITIES.
---------------------
2.01 The Warehousing Facility.
------------------------
(a) Warehousing Credit Commitment. Upon the terms and subject to
-----------------------------
the conditions of this Agreement, during the period beginning on the Effective
Date and ending on the Warehousing Termination Date, each Bank agrees, severally
but not jointly, to lend (and after repayment, to relend) to the Company, at
such times and in such amounts as the Company shall request, up to an aggregate
principal amount at any time outstanding equal to such Bank's Warehousing
Commitment Amount, subject to the following limitations:
(i) the aggregate principal amount of Warehousing Loans and
Swingline Loans at any time outstanding shall not exceed the sum of
the Warehousing Commitment Amounts of all the Banks; and
(ii) the aggregate principal amount of Warehousing Loans and
Swingline Loans at any time outstanding shall not exceed the
Warehousing Borrowing Base, as determined by the Agent from its
records.
The Bank shall not be obligated to make Warehousing Loans if, after giving
effect thereto, either of the foregoing limitations would be exceeded. The
failure of any one or more of the Banks to make a Warehousing Loan in accordance
with its Warehousing Commitment shall not relieve the other Banks of their
several obligations hereunder, but no Bank shall be liable with respect to the
obligation of any other Bank hereunder or be obligated in any event to make
Warehousing Loans which, together with its Pro Rata Share of outstanding
Swingline Loans, would exceed its Warehousing Commitment Amount.
(b) Discretionary Swingline Commitment. Upon the terms and subject
----------------------------------
to the conditions of this Agreement, until the Termination Date, First Bank, in
its sole discretion, may lend to the Company loans (each such loan, a "Swingline
Loan") at such times and in such amounts as the Company shall request, up to an
aggregate principal amount at any time outstanding equal to the amount by which
First Bank's Warehousing Commitment Amount exceeds the principal amount of
outstanding Warehousing Loans made by First Bank; provided, that First Bank will
not make a Swingline Loan if, after giving effect thereto, either of the
limitations set forth in Section 2.01(a) would be exceeded.
-14-
<PAGE>
(c) Manner of Borrowing. The Company shall give the Agent telephonic
-------------------
notice of each request for Warehousing Loans or Swingline Loans not later than
12:00 noon (Minneapolis time) on the requested Borrowing Date if Warehousing
Loans are requested and not later than 3:30 p.m. (Minneapolis time) on the
requested Borrowing Date if Swingline Loans are requested. On the Effective
Date, the Company shall be deemed to have requested Warehousing Loans in an
amount equal to the outstanding principal balance of all Existing First Bank
Advances, and such Warehousing Loans shall be used to refund such Existing First
Bank Advances. Each request for Warehousing Loans or Swingline Loans shall
specify the aggregate amount of Warehousing Loans or Swingline Loans, as the
case may be, requested and whether such Loans to be made by each Bank are to be
funded as Eurodollar Advances, Fixed Rate Advances or Reference Rate Advances;
provided, that any portion of a Loan not so designated shall be funded as a
Eurodollar Advance. The Company shall promptly confirm any such request by
delivering to the Agent a duly completed and executed Confirmation of
Borrowing/Paydown/Conversion. The Agent shall notify each Bank by not later
than 1:00 p.m. (Minneapolis time) on the date it receives such request of each
request for Warehousing Loans received from the Company, of such Bank's Pro Rata
Share of the Warehousing Loans requested and whether such Bank's Warehousing
Loans are to be funded as Reference Rate Advances, Eurodollar Advances or Fixed
Rate Advances. Each Bank shall deposit into the Collateral Account in
Immediately Available Funds by not later than 2:30 P.M. (Minneapolis time) on
the Borrowing Date the total amount of the Warehousing Loans to be made by such
Bank. On the Borrowing Date of requested Swingline Loans, First Bank may
deposit into the Collateral Account in Immediately Available Funds by not later
than 4:00 p.m. (Minneapolis time) on the requested Borrowing Date the amount of
the requested Swingline Loans. Unless the Agent shall have received notice from
a Bank prior to 2:30 P.M. (Minneapolis time) on any Borrowing Date that such
Bank will not make available to the Agent the Warehousing Loans to be made by
such Bank on such date, the Agent may assume that such Bank has made such
Warehousing Loan available to the Agent on such date and the Agent in its sole
discretion may, in reliance upon such assumption, make available to the Company
on such date a corresponding amount on behalf of such Bank. If a Bank shall not
have timely given such a notice, and to the extent such Bank shall not have so
made available to the Agent the Warehousing Loans to be made by such Bank on
such date and the Agent shall have so made available to the Company a
corresponding amount on behalf of such Bank, such Bank shall, on demand, pay to
the Agent such corresponding amount together with interest thereon, at the
Federal Funds Effective Rate, for each day from the date such amount shall have
been so made available by the Agent to the Company until the date such amount
shall have been repaid to the Agent. If such Bank does not pay such
corresponding amount promptly upon the Agent's demand therefor, the Agent shall
promptly notify the Company and the Company shall immediately repay such
corresponding amount to the Agent together with accrued interest thereon at the
applicable rate or rates provided in Section 2.04.
-15-
<PAGE>
Each request for Warehousing Loans shall be deemed to be a representation by the
Company that (i) no Event of Default or Unmatured Event of Default has occurred
or will exist upon the making of the requested Warehousing Loans and (ii) the
representations and warranties contained in Section 3 hereof, in Section 5 of
the Pledge and Security Agreement, and in Section 15 of the Guaranty are true
and correct with the same force and effect as if made on and as of the date of
such request.
(e) Refinancing of Swingline Loans.
------------------------------
(i) Permitted Refinancings of Swingline Loans. First Bank,
-----------------------------------------
at any time in its sole and absolute discretion, may, upon notice given to
each other Bank by not later than 1:00 p.m. (Minneapolis time) on any
Business Day, request that each Bank (including First Bank) make a
Warehousing Loan in an amount equal to its Pro Rata Share of the portion of
the aggregate unpaid principal amount of any outstanding Swingline Loans
for the purpose of refinancing such Swingline Loans. Such Revolving Loans
shall be made as Eurodollar Advances, unless the Company specifies
otherwise.
(ii) Mandatory Refinancings of Swingline Loans. Not later than
-----------------------------------------
1:00 p.m. (Minneapolis time) on Thursday of each week, First Bank will
notify each other Bank of the aggregate amount of Swingline Loans which are
then outstanding and the amount of Warehousing Loans required to be made by
each Bank (including First Bank) to refinance such outstanding Swingline
Loans (which shall be in the amount of each Bank's Pro Rata Share of such
outstanding Swingline Loans). Such Revolving Loans shall be made as
Eurodollar Advances, unless the Company specifies otherwise.
(iii) Banks' Obligation to Fund Refinancings of Swingline
---------------------------------------------------
Loans. Upon the giving of notice by First Bank under Section
-----
2.01(e)(i) or 2.01(e)(ii), each Bank (including First Bank) shall make a
Warehousing Loan in an amount equal to its Pro Rata Share of the aggregate
principal amount of Swingline Loans to be refinanced, and provide proceeds
of such Warehousing Loans, in Immediately Available Funds, by not later
than 4:00 p.m. (Minneapolis time) on the date such notice was received;
provided, however, that a Bank shall not be obligated to make any such
Warehousing Loan unless (A) First Bank believed in good faith that all
conditions to making the subject Swingline Loan were satisfied at the time
such Swingline Loan was made, or (B) if the conditions to such Swingline
Loan were not satisfied, such Bank had actual knowledge, by receipt of the
statements furnished to it pursuant to Section 5.1 or otherwise, that any
such condition had not been satisfied and failed to notify First Bank in a
writing received by First Bank prior to the time it made such Swingline
Loan that First Bank was not authorized to make a
-16-
<PAGE>
Swingline Loan until such condition had been satisfied, or (C) the
satisfaction of any such condition that was not satisfied had been waived
in a writing by the Majority Banks prior to or at the time such Swingline
Loan was made. The proceeds of Warehousing Loans made pursuant to the
preceding sentence shall be paid to First Bank (and not to the Company) and
applied to the payment of principal of the outstanding Swingline Loans, and
the Company authorizes the Agent to charge the Company's operating account
or any other account (other than escrow or custodial accounts) maintained
by it with the Agent (up to the amount available therein) in order to
immediately pay First Bank the principal amount of such Swingline Loans to
the extent amounts received from the other Banks are not sufficient to
repay in full the principal of the outstanding Swingline Loans requested or
required to be refinanced. Upon the making of a Warehousing Loan by a Bank
pursuant to this Section 2.01(e)(iii), the amount so funded shall become
due under such Bank's Warehousing Note and the outstanding principal amount
of the Swingline Loans shall be correspondingly reduced. If any portion of
any such amount paid to First Bank should be recovered by or on behalf of
the Company from First Bank in bankruptcy or otherwise, the loss of the
amount so recovered shall be ratably shared among all the Banks in the
manner contemplated by Section 7.11. Each Bank's obligation to make
Warehousing Loans referred to in this Section 2.01(e) shall, subject to the
proviso to the first sentence of this Section 2.01(e)(iii), be absolute and
unconditional and shall not be affected by any circumstance, including,
without limitation, (1) any setoff, counterclaim, recoupment, defense or
other right which such Bank may have against First Bank, the Company or
anyone else for any reason whatsoever; (2) the occurrence or continuance of
a Default or an Event of Default; (3) any adverse change in the condition
(financial or otherwise) of the Company or the Guarantor; (4) any breach of
this Agreement by the Company, the Agent or any Bank; or (5) any other
circumstance, happening or event whatsoever, whether or not similar to any
of the foregoing; provided, that in no event shall a Bank be obligated to
make a Revolving Loan if, after giving effect thereto, the outstanding
principal balance of such Bank's Warehousing Note would exceed its
Warehousing Commitment Amount.
(f) Warehousing Notes. Warehousing Loans made by each Bank shall be
-----------------
evidenced by the Company's promissory note in the form of Exhibit F (together
with any promissory note subsequently executed and delivered by the Company to
evidence such Bank's Warehousing Loans, the "Warehousing Note"), which shall be
made payable to the order of such Bank in an amount equal to such Bank's
Warehousing Commitment Amount, shall be dated the Effective Date and shall
mature on the Warehousing Termination Date. First Bank's Warehousing Note shall
also evidence the Swingline Loans made by it hereunder. The aggregate amount of
the Warehousing Loans and, in the case of First Bank, Swingline Loans made by a
-17-
<PAGE>
Bank, less all repayments of principal thereof shall be the principal amount
owing and unpaid on the Warehousing Note. The principal amount of each
Warehousing Loan made by a Bank and all principal payments and prepayments
thereof may be noted by such Bank on a schedule attached to the Warehousing Note
and shall be entered by such Bank on its ledgers and computer records. First
Bank shall enter in its ledgers and records the amount of each Swingline Loan,
and the payments made thereon, and First Bank is authorized by the Company to
enter on a schedule attached to its Warehousing Note a record of such Swingline
Loans and payments. The failure of any Bank to make such notations or entries
shall not affect the principal amount owing and unpaid on the Warehousing Notes.
The entries made by any Bank on its ledgers and computer records and any
notations made by such Bank on any such schedule annexed to such Bank's
Warehousing Note shall be presumed to be accurate until the contrary is
established.
(g) Payment and Prepayment of Warehousing Loans and Swingline Loans.
---------------------------------------------------------------
The Company shall pay the principal of the Warehousing Loans and Swingline Loans
as follows:
(i) Mandatory Payments. The entire unpaid principal balance of
------------------
each Bank's Warehousing Note shall be due and payable on the Warehousing
Termination Date.
(ii) Mandatory Prepayments. If, at any time, the aggregate
---------------------
principal amount of all Warehousing Loans and Swingline Loans outstanding
exceeds the Warehousing Borrowing Base, the Company shall immediately make
principal prepayments of the Warehousing Notes in an aggregate amount equal
to the amount of such excess, which amount shall be paid to the Agent and
distributed to the Banks ratably on the basis of each Bank's Pro Rata Share
of outstanding principal balances of the Warehousing Notes.
(iii) Optional Prepayments. The Company shall have the right to
--------------------
prepay, without penalty, the outstanding principal balances of the
Warehousing Notes in whole or in part at any time and from time to time,
each such principal prepayment to be paid to the Agent and distributed to
the Banks ratably on the basis of each Bank's Pro Rata Share of outstanding
principal balances of the Warehousing Notes.
(iv) Confirmation. The Company shall promptly send the Agent a
------------
Confirmation of Borrowing/Paydown/Conversion confirming any payment or
prepayment of principal made on the Warehousing Notes
(h) Termination and Reduction of the Warehousing Commitment.
-------------------------------------------------------
-18-
<PAGE>
(i) The Company may, at any time, upon not less than
thirty days' prior written notice to the Agent, a copy of which shall
be promptly provided by the Agent to each Bank, reduce the aggregate
Warehousing Commitment Amount, with any such reduction in a minimum
amount of $5,000,000, or, if more, in an integral multiple of
$1,000,000 in excess thereof; provided, that the Company may not
reduce the aggregate Warehousing Commitment Amount below the aggregate
principal amount of outstanding Warehousing Loans and Swingline Loans.
The Company may, upon not less than thirty days' prior written notice
to the Agent, a copy of which shall be promptly provided by the Agent
to each Bank, terminate the Warehousing Commitments in their entirety.
Upon termination of the Warehousing Commitments pursuant to this
Section, the Company shall pay to the Bank the aggregate amount of all
outstanding Warehousing Loans, all accrued and unpaid interest
thereon, any unpaid fees accrued to the date of such termination and
all other unpaid obligations of the Company to the Banks in respect of
their Warehousing Commitments hereunder.
(ii) Notwithstanding the foregoing, any termination of the
Warehousing Commitments pursuant to Section 6.02 shall supersede any
notice of termination or reduction under this Section 2.02(h). Once
the Warehousing Commitments have been terminated or reduced, they may
not be reinstated.
(i) Facility Fees. The Company shall pay each Bank a facility
-------------
fee for the period beginning on the Effective Date and ending on the
Warehousing Termination Date at a per annum rate of one-half of one percent
(0.50%) on the average daily amount of such Bank's Warehousing Commitment
Amount, whether used or unused.
(j) Use of Proceeds. Except as otherwise provided in Section
---------------
2.01(e) with respect to refinancing Swingline Loans, the proceeds of the
Loans shall be used to make, originate or acquire Mortgage Loans, to
finance Mortgage Loans previously made, originated or acquired or, in the
case of Warehousing Loans made on the Effective Date, to repay in full the
advances outstanding under the Existing Credit Agreement.
2.02 Interest on the Warehousing Note; Balances Deficiency Fees; Usage
-----------------------------------------------------------------
Fees; Continuations and Conversions.
- -----------------------------------
(a) Interest Rates; Balances Deficiency Fees. The Company will
----------------------------------------
pay each Bank interest on the unpaid principal balance of each Advance of
such Bank from time to time outstanding as follows:
(i) with respect to Fixed Rate Advances, at the per annum
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<PAGE>
rate (the "Fixed Rate") of 1.50%; provided, that if for any Balance
Calculation Period the average daily Reserve-Adjusted Balances maintained
by the Company with any Bank are less than an amount equal to the average
daily aggregate unpaid principal balance of the Fixed Rate Advances owed to
such Bank during such Balance Calculation Period (such deficiency being
herein referred to as the "Balances Deficiency"), the Company will pay such
Bank a fee (the "Balances Deficiency Fee") for said Balance Calculation
Period on the Balances Deficiency at a per annum rate equal to 1.50% below
the average daily Reference Rate in effect during said Balance Calculation
Period; and provided further, that if the weighted average Reserve-Adjusted
Balances maintained by the Company with any Bank for any Balance
Calculation Period exceeds the weighted average daily aggregate unpaid
principal balance of the Fixed Rate Advances owed to such Bank during such
Balance Calculation Period (such excess being defined herein as the
"Balances Surplus"), then such Balances Surplus, or, if the Company and
such Bank shall so agree, the charges reduction benefit for such Balances
Surplus (as determined by such Bank), may be carried forward and applied to
succeeding Balance Calculation Periods (but not to any Balance Calculation
Period occurring in any subsequent calendar year);
(ii) with respect to Reference Rate Advances, the Reference
Rate, plus the Applicable Margin, as adjusted automatically on and as of
the effective date of any change in the Reference Rate;
(iii) with respect to Eurodollar Advances, the Adjusted
Eurodollar Rate, plus the Applicable Margin, as adjusted automatically on
and as of the effective date of any change in the Adjusted Eurodollar Rate;
and
(iv) with respect to any Obligations not paid when due (i)
consisting of Fixed Rate Advances, a rate per annum equal to the Fixed
Rate, plus 2.0%, and (ii) consisting of other Obligations, a rate per annum
equal to the Reference Rate, plus the Applicable Margin, plus 2.0%, for the
period from the date such Obligations were due until the same are paid.
(b) Usage Fees. The Company will pay the Banks fees ("Usage Fees") in
----------
an amount equal to one-quarter of one percent (0.25%) per annum of the average
daily amount by which the aggregate principal amount of Warehousing Loans and
Swingline Loans outstanding exceeds the Warehousing Collateral Value of
Delivered Mortgage Loans.
(c) Payment of Interest, Usage Fees, Facility Fees and Balances
-----------------------------------------------------------
Deficiency Fees. The Agent shall use its best efforts to provide the Company
- ---------------
with a statement for interest on the Warehousing Notes, the Usage Fees, the
facility fees
-20-
<PAGE>
with respect to the Warehousing Commitments and the warehousing fees with
respect to Mortgage Loans pledged under the Pledge and Security Agreement,
in each case accrued through the last day of each calendar month, on or
before the third Business Day of the next succeeding calendar month, but
shall have no liability to the Company for its failure to do so. Interest
on the Warehousing Notes, Usage Fees, facility fees and warehousing fees
accrued through the last day of each calendar month shall be due and
payable on the second Business Day after the date the Company receives such
statement from the Bank; provided, that interest payable at the rates
provided for in Section 2.02 (a)(iv) shall be payable on demand. Any
Balances Deficiency Fee payable hereunder shall be due and payable
quarterly after each Balance Calculation Period within two Business Days
after receipt by the Company from any Bank of a statement therefor (a copy
of which shall be provided to the Agent) containing the calculations made
to determine such Balances Deficiency Fee, which statement shall be
conclusive absent manifest error.
(d) Designation and Conversions of Outstanding Advances.
---------------------------------------------------
Subject to the terms and conditions of this Agreement, the Company shall
designate, on any Borrowing Date, all or portions of the Loans to be made
on such Borrowing Date as one or more Eurodollar Advances, Fixed Rate
Advances or Reference Rate Advances. Any portion of an outstanding Loan not
designated as a Reference Rate Advance or a Fixed Rate Advance shall be
funded as an Eurodollar Advance. Thereafter, subject to the terms and
conditions of this Agreement, the Company shall have the option to convert
all or any portion of any outstanding Advance into Advances of another type
(i.e., Eurodollar Advances, Fixed Rate Advances or Reference Rate
Advances); provided, however, that (i) no Advance may be converted into a
Eurodollar Advance or, without the written consent of the Bank to which it
is owed (a copy of which shall be provided to the Agent), a Fixed Rate
Advance if an Event of Default or Unmatured Event of Default has occurred
and is continuing on the proposed date of conversion, and (ii) no Advance
owed to any Bank may be converted into a Fixed Rate Advance without the
prior consent of such Bank, which shall be confirmed to the Agent in
writing by such Bank, if the Reserve-Adjusted Balances maintained by the
Company at such Bank are less than the aggregate amount of Fixed Rate
Advances owed to such Bank, after giving effect to such conversion. The
Company shall provide the Agent with telephonic notice of each proposed
conversion or continuation not later than 12:00 noon (Minneapolis time) on
the date of any conversion, which notice shall set forth the proposed date
therefor. Each such notice shall specify (A) the amount to be continued or
converted, and (B) the date for the continuation or conversion. Any notice
given by the Company under this Section 2.02(d) shall be irrevocable. The
Company shall promptly confirm any such proposed conversion by delivering
to the Agent a duly completed and executed Confirmation of
Borrowing/Paydown/Conversion. The Agent shall notify each Bank affected by
such proposed conversion by not later than 1:00 p.m. (Minneapolis time) on
the date it receives such notice of the Advances of such Bank being
converted and the types of
-21-
<PAGE>
Advances into which such Advances are being converted.
(e) Agent's Fees. The Company shall pay to the Agent collateral
------------
handling fees in accordance with the terms of a letter dated October __,
1996, as the same may be amended, supplemented, restated or replaced from
time to time.
2.03 Payments and Computations.
-------------------------
(a) Payments. All payments and prepayments by the Company of
--------
principal of and interest on each Warehousing Note and all fees, expenses
and other obligations under this Agreement shall be made in Immediately
Available Funds to the Agent not later than 2:00 p.m. (Minneapolis time) on
the dates called for under this Agreement, at the main office of the Agent
in Minneapolis. Funds received after such hour shall be deemed to have been
received by the Agent on the next Business Day. The Company irrevocably
authorizes the Agent to charge the Collateral Account or any other account
of the Company (other than escrow or custodial accounts) maintained with
the Agent in an amount equal to any such payment or permitted prepayment of
principal, interest, fees, expenses and other Obligations then due and
payable by the Company to the Banks or the Agent under this Agreement and
the other Loan Documents, as the case may be.
(b) Computations. Balances Deficiency Fees, Usage Fees,
------------
facility fees and interest on each Warehousing Note shall be computed on
the basis of actual days elapsed and a year of 360 days.
2.04 Setoff. Whenever an Event of Default shall have occurred and be
------
continuing, the Company hereby irrevocably authorizes each Bank to set off the
Obligations owed to such Bank against all deposits and credits of the Company
with, and any and all claims of the Company against, such Bank, excluding
deposits of the Company with such Bank which the Company holds in escrow or in
trust for the benefit of third parties, whether or not the Obligations owed to
such Bank, or any part thereof, shall be then due. No Bank shall, except as
otherwise set forth in the Loan Documents, have any right to set off the
Obligations owed to such Bank against any such deposits or credits except during
the continuance of an Event of Default. Each Bank agrees to exercise any and
all rights of setoff, counterclaim or bankers' lien first fully against the
Obligations and participations therein held by such Bank, and only then to any
other indebtedness of the Company to such Bank.
2.05 Increased Capital Requirements. In the event that, as a result
------------------------------
of any Regulatory Change, compliance by any Bank with any applicable law or
governmental rule, requirement, regulation, guideline or order (whether or not
having the force of law) regarding capital adequacy has the effect of reducing
the rate of return on such Bank's capital as a consequence of such Bank's
Warehousing Commitment or amounts outstanding under
<PAGE>
such Bank's Warehousing Note to a level below that which such Bank would have
achieved but for such compliance (taking into consideration such Bank's policies
with respect to capital adequacy), then from time to time the Company shall pay
to such Bank, within thirty days after written demand by such Bank, such
additional amount or amounts as will compensate such Bank for such reduction;
provided, that the Company shall not be obligated to pay any such additional
amount (i) unless such Bank shall first have notified the Company in writing
that it intends to seek such compensation pursuant to this Section, or (ii) to
the extent such additional amount is attributable to the period ending 91 days
prior to the date of the first such notice with respect to such Regulatory
Change (the "Excluded Period"), except to the extent any amount is attributable
to the Excluded Period as a result of the retroactive application of the
applicable Regulatory Change. A certificate, which shall be conclusive except
for manifest error, as to the amount of any such reduction (including
calculations in reasonable detail showing how such Bank computed such reduction
and a statement that such Bank has not allocated to its Warehousing Commitment
or amounts outstanding under its Warehousing Note a proportionately greater
amount of such reduction than is attributable to each of its other commitments
to lend or to each of its other outstanding credit extensions that are affected
similarly by such compliance by such Bank, whether or not such Bank allocates
any portion of such reduction to such other commitments or credit extensions)
shall be furnished promptly by such Bank to the Company.
2.06 Provisions Relating to Eurodollar Advances and Fixed Rate
---------------------------------------------------------
Advances.
- --------
(a) Interest Rate Not Ascertainable, Etc. If, on the date for
------------------------------------
determining the Adjusted Eurodollar Rate in respect of any Eurodollar
Advance, any Bank determines (which determination shall be conclusive and
binding, absent error) that the Adjusted Eurodollar Rate will not
adequately and fairly reflect the cost to such Bank of funding such
Eurodollar Advance, then such Bank shall notify the Agent, and the Agent
shall notify the Company, of such determination, whereupon the obligation
of such Bank to make, or to convert any Advances to, Eurodollar Advances
shall be suspended until such Bank notifies the Agent, and the Agent
notifies the Company, that the circumstances giving rise to such suspension
no longer exist. Outstanding Eurodollar Advances owed to such Bank shall
thereupon automatically be converted to Reference Rate Advances.
(b) Increased Cost. If, after the date hereof, any Regulatory
--------------
Change or compliance with any request or directive (whether or not having
the force of law) of any governmental authority, central bank or comparable
agency:
(i) shall subject any Bank to any tax, duty or other charge
with respect to Eurodollar Advances, its Warehousing Note or its
obligation to make Eurodollar Advances, or shall change the basis of
taxation of payment to such Bank of the principal of or interest on
Eurodollar Advances or any other amounts due under this Agreement in
respect of Eurodollar Advances or its
-23-
<PAGE>
obligation to make Eurodollar Advances (except for changes in the rate
of tax on the overall net income of such Bank imposed by the laws of
the United States or any jurisdiction in which such Bank's principal
office is located); or
(ii) shall impose, modify or deem applicable any
reserve, special deposit, capital requirement or similar requirement
(including, without limitation, any such requirement imposed by the
Board of Governors of the Federal Reserve System, but excluding any
such requirement to the extent included in calculating the applicable
Adjusted Eurodollar Rate) against assets of, deposits with or for the
account of, or credit extended by, any Bank or shall impose on any
Bank or on the interbank Eurodollar market any other condition
affecting Eurodollar Advances, such Bank's Warehousing Note or its
obligation to make Eurodollar Advances;
and the result of any of the foregoing is to increase the cost to such Bank
of making or maintaining any Eurodollar Advance, or to reduce the amount of
any sum received or receivable by such Bank under this Agreement or under
its Warehousing Note, then, within 30 days after written demand by such
Bank, the Company shall pay to such Bank such additional amount or amounts
as will compensate such Bank for such increased cost or reduction;
provided, that the Company shall not be obligated to pay any such
additional amount (i) unless such Bank shall first have notified the
Company in writing that it intends to seek such compensation pursuant to
this Section, or (ii) to the extent such additional amount is attributable
to the period ending 91 days prior to the date of the first such notice
with respect to such Regulatory Change (the "Excluded Period"), except to
the extent any amount is attributable to the Excluded Period as a result of
the retroactive application of the applicable Regulatory Change. A
certificate of any Bank claiming compensation under this Section 2.06,
setting forth the additional amount or amounts to be paid to it hereunder
and stating in reasonable detail the basis for the charge and the method of
computation, shall be conclusive in the absence of manifest error. In
determining such amount, such Bank may use any reasonable averaging and
attribution methods. Failure on the part of any Bank to demand compensation
for any increased costs or reduction in amounts received or receivable with
respect to any period shall not constitute a waiver of such Bank's rights
to demand compensation for any increased costs or reduction in amounts
received or receivable in any subsequent period.
(c) Illegality. If, after the date of this Agreement, the adoption
----------
of, or any change in, any applicable law, rule or regulation, or any change
in the interpretation or administration thereof by any governmental
authority, central bank or comparable agency charged with the
interpretation or administration thereof, or compliance by any Bank with
any request or directive (whether or not having the force of law) of any
such authority, central bank or comparable agency shall make it unlawful or
impossible for such Bank to make, maintain or fund Eurodollar Advances
-24-
<PAGE>
or Fixed Rate Advances, such Bank shall notify the Company and the Agent,
whereupon the obligation of such Bank to make Eurodollar Advances or Fixed
Rate Advances, shall be suspended until such Bank notifies the Company and
the Agent that the circumstances giving rise to such suspension no longer
exist. If any Bank determines that it may not lawfully continue to maintain
any Eurodollar Advances or Fixed Rate Advances, all of the affected
Advances shall be automatically converted to Reference Rate Advances as of
the date of such Bank's notice.
(d) Discretion of Banks as to Manner of Funding. Each Bank
-------------------------------------------
shall be entitled to fund and maintain its funding of Eurodollar Advances
in any manner it may elect, it being understood, however, that for the
purposes of this Agreement all determinations hereunder (including, but not
limited to, determinations under Section 2.06(d), but excluding
determinations of the Eurodollar Rate that the Agent may elect to make from
the Reuters screen) shall be made as if such Bank had actually funded and
maintained each Eurodollar Advance during the Interest Period for such
Advance through the purchase of deposits having a maturity corresponding to
the last day of the applicable Interest Period and an interest rate equal
to the Eurodollar Rate.
SECTION 3. REPRESENTATIONS AND WARRANTIES. In order to induce the
------------------------------
Banks to enter into this Agreement and to make and maintain the Warehousing
Loans, the Company makes the following representations and warranties to the
Banks effective on and as of the Signing Date, the Effective Date and each
Borrowing Date:
3.01 Formation; Powers; Good Standing; Subsidiaries; Agency Status.
-------------------------------------------------------------
(a) Formation and Powers. NCFC is a corporation duly organized,
--------------------
validly existing and in good standing under the laws of the State of
Delaware, the Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of California, and each of
NCFC and the Company has all requisite corporate power and authority to own
and operate its properties, to carry on its business as now conducted and
proposed to be conducted, to enter into each Loan Document to which it is
or will be a party and to carry out the transactions contemplated hereby
and thereby.
(b) Good Standing. Each of NCFC and the Company is in good
-------------
standing wherever necessary to carry on its business and operations, except
in jurisdictions in which the failure to be in good standing would not
preclude it from enforcing its rights with respect to any material asset or
expose it to any material liability.
(c) Subsidiaries, Joint Ventures and Partnerships. NCFC has no
---------------------------------------------
Subsidiaries other than the Company and the Company has no Subsidiaries.
Neither NCFC nor the Company is a member of any joint venture or
partnership.
-25-
<PAGE>
3.02 Authorization; No Conflict; Governmental Consents; Binding
----------------------------------------------------------
Effect.
- ------
(a) Authorization of Borrowing. The execution, delivery and
--------------------------
performance by each of NCFC and the Company of each Loan Document to which
it is or will become a party, the carrying out of the transactions
contemplated hereby and thereby, and the issuance, delivery and payment of
the Warehousing Notes have been duly authorized by all necessary corporate
action by each of them.
(b) No Conflict. The execution, delivery and performance by
-----------
each of NCFC and the Company of each Loan Document to which it is or will
be a party, the carrying out of the transactions contemplated hereby and
thereby, and the issuance, delivery and payment of the Warehousing Notes
does not and will not (i) violate any provision of law applicable to it,
its articles or certificate of incorporation or bylaws or any order,
judgment or decree of any court or other agency of government binding on
it, (ii) conflict with, result in a breach of or constitute (with due
notice or lapse of time or both) a default under any of its contractual
obligations, (iii) result in or require the creation or imposition of any
Lien, charge or encumbrance of any nature whatsoever upon any of its
properties or assets except the Liens granted to the Agent for the benefit
of the Banks under the Pledge and Security Agreement or (iv) require any
approval of shareholders or any approval or consent of any Person under any
of its contractual obligations other than approvals or consents which have
been obtained.
(c) Governmental Consents. The execution, delivery and
---------------------
performance by each of NCFC and the Company of, and the validity and
enforceability of, each Loan Document to which it is or will be a party,
the carrying out of the transactions contemplated hereby and thereby, and
the issuance, delivery and payment of the Warehousing Notes by the Company
do not and will not require any registration with, consent or approval of,
or notice to, or other action of, with or by, any Federal, state or other
governmental authority or regulatory body or other Person except those that
have been obtained. Any registration with, consent or approval of or other
action by any federal, state or other governmental authority or regulatory
body or other Person which has been obtained and has been disclosed in
writing to the Banks shall remain in effect and shall not be modified
except as may be approved in writing by the Agent, which approval shall not
be unreasonably withheld.
(d) Binding Obligations. Each of the Loan Documents to which
-------------------
it is a party is, and each of the Loan Documents to which it will be a
party will be, the legally valid and binding obligations of each of NCFC
and the Company, and each of the Loan Documents has been or will be duly
executed, and is or will be enforceable against it in accordance with its
terms, except as enforcement may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws or equitable principles relating
to or limiting creditors' rights generally.
-26-
<PAGE>
3.03 Financial Condition. NCFC has heretofore delivered to the
-------------------
Banks its audited consolidated balance sheet as at November 30, 1995, its
unaudited consolidated balance sheet as at August 31, 1996 and the related
statements of income, shareholders' equity and cash flow for the periods then
ended. Such financial statements have been prepared in accordance with GAAP and
fairly present the consolidated financial condition of NCFC and the Company as
of the dates indicated and the results of its operations and cash flow for the
periods indicated. As of the Signing Date, neither NCFC nor the Company has any
material contingent obligation, contingent liability or liability for taxes,
long-term lease or unusual forward or long-term commitment, which is not
reflected in the foregoing financial statements or in the notes thereto.
3.04 Title to Property; Liens. NCFC and the Company each has good,
------------------------
sufficient and legal title to all the properties and assets reflected in the
balance sheet dated as at November 30, 1995 referred to in Section 3.03 and all
assets held by NCFC and the Company on the Signing Date but acquired subsequent
to the date of such balance sheet, except for assets disposed of in the ordinary
course of business. All such properties and assets are free and clear of Liens,
except as permitted hereunder. The grant of a security interest pursuant to the
Pledge and Security Agreement creates a valid security interest in the property
subject thereto and the Lien on the Collateral created by the Pledge and
Security Agreement will be a first priority Lien thereon, free and clear of any
other Liens except as permitted hereunder.
3.05 Litigation; Adverse Facts. There is no action, suit, proceeding
-------------------------
or arbitration at law or in equity or before or by any federal, state, municipal
or other governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, pending or, to the knowledge of NCFC or
the Company, threatened against or affecting NCFC or the Company or any of their
respective properties that would, if decided in a manner adverse to it, result
in any material adverse change in its business, operations, properties, assets
or condition (financial or otherwise) or would materially adversely affect its
ability to perform its obligations under each Loan Document to which it is or
will be a party, and there is no basis known to it for any action, suit or
proceeding which would have such an effect. Neither NCFC nor the Company is (i)
in violation of any applicable law if such violation materially adversely
affects or may materially adversely affect its business, operations, properties,
assets or condition (financial or otherwise) or (ii) subject to any final
judgment, writ, injunction, decree, rule or regulation of any court or federal,
state, municipal or other governmental department, commission, board, bureau,
agency or instrumentality, domestic or foreign, which could have a material
adverse effect on its business, operations, properties, assets or condition
(financial or otherwise). There is no action, suit, proceeding or investigation
pending or, to the knowledge of NCFC or the Company, threatened against or
affecting NCFC or the Company, which questions the validity or the
enforceability of any Loan Document.
3.06 Other Agreements; Performance.
-----------------------------
-27-
<PAGE>
(a) Agreements. Neither NCFC nor the Company is a party to or
----------
subject to any contractual obligation or charter or other internal
restriction materially adversely affecting its business, properties,
assets, operations or condition (financial or otherwise).
(b) Performance. Neither NCFC nor the Company is in default in
-----------
the performance, observance or fulfillment of any of the obligations,
covenants or conditions contained in any of its material contractual
obligations, and no condition exists which, with the giving of notice or
the lapse of time or both, would constitute such a default, except where
the consequences, direct or indirect, of such default or defaults, if any,
would not have a material adverse effect on its business, properties,
assets, operations or condition (financial or otherwise). To the best
knowledge of NCFC and the Company, the other parties to any of the
contractual obligations of NCFC or the Company are not in default
thereunder, except where the consequences, direct or indirect, of such
default or defaults, if any, would not have a material adverse effect on
its business, properties, assets, operations or condition (financial or
otherwise).
3.07 Use of Proceeds. All proceeds of the Warehousing Loans will be
---------------
used only in accordance with Section 2.01(h). No part of the proceeds of the
Warehousing Loans or the Swingline Loans will be used by the Company to purchase
or carry any margin stock (as such term is defined in Regulation U of the Board
of Governors of the Federal Reserve System (or any successor thereto)) or to
extend credit to any other Person for the purpose of purchasing or carrying any
margin stock.
3.08 Taxes. Each of NCFC and the Company has filed all tax returns
-----
required to be filed by it, and has paid all taxes and assessments payable by it
which have become due, other than those not yet delinquent and except for those
contested in good faith by appropriate proceedings for which adequate reserves
in conformity with GAAP have been provided. No material tax Liens have been
filed and, to their knowledge, no material claims or assessments are being
asserted or will be asserted with respect to any such taxes or other charges.
3.09 ERISA. Each Plan is in substantial compliance with all
-----
applicable requirements of ERISA and the Code and with all material applicable
rulings and regulations issued under the provisions of ERISA and the Code
setting forth those requirements. No Reportable Event has occurred and is
continuing with respect to any Plan. All of the minimum funding standards
applicable to such Plans have been satisfied and there exists no event or
condition which would reasonably be expected to result in the institution of
proceedings to terminate any Plan under Section 4042 of ERISA. With respect to
each Plan subject to Title IV of ERISA, as of the most recent valuation date for
such Plan, the present value (determined on the basis of reasonable assumptions
employed by the independent actuary for such Plan and previously furnished in
writing to the Banks) of such Plan's
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projected benefit obligations did not exceed the fair market value of such
Plan's assets. Neither the Company nor any ERISA Affiliate is required to make
contributions to any Multiemployer Plan.
3.10 Governmental Regulation. Neither NCFC nor the Company is subject
-----------------------
to regulation under the Public Utility Holding Company Act of 1935, the Federal
Power Act, the Interstate Commerce Act, the Investment Company Act of 1940 or
any federal or state statute or regulation limiting its ability to incur
Indebtedness for money borrowed.
3.11 Indebtedness. As of the Signing Date, neither NCFC nor the
------------
Company has any Indebtedness outstanding except the Indebtedness permitted
pursuant to Section 4.08.
3.12 No Material Adverse Event. Since November 30, 1995, neither the
-------------------------
business, operations, properties nor assets of NCFC or the Company have been
affected in any material adverse way as the result of any Material Adverse
Event, including, without limitation, fire, explosion, accident, act of God,
strike, lockout, flood, drought, storm, earthquake, or combination of workmen or
other labor disturbance, riot, activity of armed forces or of the public enemy,
embargo or nationalization, condemnation, requisition or taking of property, or
cancellation or modification of contracts, by any domestic or foreign government
or any instrumentality or agency thereof.
3.13 Licenses and Permits. Each of NCFC and the Company has all
--------------------
federal, state and local licenses and permits required to be maintained in
connection with and material to the current operation of its businesses, and all
such licenses and permits are valid and fully effective.
3.14 Guarantees. Neither NCFC nor the Company has made, or is liable
----------
in respect of, any Guarantee, other than the Guaranty.
3.15 Accuracy and Completeness of Information. No representation or
----------------------------------------
warranty of NCFC or the Company contained in this Agreement or the other Loan
Documents, no representation or warranty contained in any other document,
certificate or written statement furnished to the Agent or any Bank by NCFC or
the Company for use in connection with the transactions contemplated by the Loan
Documents and no representation or warranty contained in any other document,
certificate or written statement furnished to the Agent or any Bank by or on
behalf of any other Person for use in connection with the transactions
contemplated by the Loan Documents, contains any untrue statement of a material
fact or omits to state a material fact (known to it in the case of any document
not furnished by it) necessary in order to make the statements contained herein
or therein not materially misleading. There is no fact known to NCFC or the
Company (other than matters of a general economic nature) which materially
adversely affects the business, operations, property, assets or condition
(financial or otherwise) of NCFC or the Company which has not been disclosed
herein or in such other documents, certificates and statements furnished to
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the Agent or any Bank for use in connection with the transactions contemplated
hereby.
SECTION 4. COVENANTS OF THE COMPANY. So long as the Warehousing
------------------------
Commitments are in effect and thereafter so long as any Obligation shall remain
unpaid, the Company covenants that, unless the Required Banks shall otherwise
consent in writing, it will perform all the covenants set forth in this Section
4.
4.01 Financial Statements and Other Reports. NCFC and the Company
--------------------------------------
will each maintain a system of accounting established and administered in
accordance with sound business practices such as to permit the preparation of
financial statements in accordance with GAAP and furnish or cause to be
furnished to each Bank:
(a) as soon as available and in any event within 30 days after
the end of each calendar month, a copy of the unaudited financial
statements of NCFC (on a consolidated and a consolidating basis) and the
Company as at the end of such month, consisting of at least a balance sheet
and the related statements of income, shareholders' equity and cash flow of
NCFC and the Company for such month and from the beginning of the then
current fiscal year of NCFC and the Company to the end of such month,
setting forth in each case in comparative form the figures for the
corresponding date or period of the previous fiscal year, all in reasonable
detail, and certified by the chief financial officer of NCFC as being
complete and correct in all material respects and fairly presenting NCFC's
and the Company's financial condition and results of operations, subject to
changes resulting from normal year-end adjustments;
(b) as soon as available and in any event within 90 days after
the end of each fiscal year, financial statements of NCFC (on a
consolidated and a consolidating basis) and the Company, consisting of at
least a balance sheet as at the end of such fiscal year and the related
statement of income, shareholders' equity and cash flow for such fiscal
year of NCFC and the Company, setting forth in each case in comparative
form the corresponding figures as of the end of and for the previous fiscal
year, all in reasonable detail, accompanied by a report thereon of the
accounting firm of KMP&G Peat Marwick or other independent certified public
accountants selected by NCFC and reasonably satisfactory to the Agent,
which report shall be unqualified and shall state that such financial
statements present fairly the financial condition of NCFC and the Company
as at the date indicated and the results of their operations for the
periods indicated in conformity with GAAP applied on a basis consistent
with prior fiscal years (except as otherwise required by GAAP and stated
therein) and that the examination of such accountants in connection with
such consolidated financial statements has been made in accordance with
generally accepted auditing standards, accompanied by a letter from such
accounting firm addressed to the Banks acknowledging that the Banks are
extending credit in reliance on such statements and authorizing such
reliance, and also by any management letters to the
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<PAGE>
Company or its board of directors furnished by such accounting firm in
connection with its audit of the Company's consolidated financial
statements;
(c) with the financial statements furnished pursuant to Section
4.01(a) for each calendar month:
(i) a certificate signed by the chief financial
officer of the Company stating that to the best of his knowledge,
after due inquiry, there exists no Event of Default or Unmatured Event
of Default, or, if such Event of Default or Unmatured Event of Default
exists, stating the nature thereof, the period of existence thereof,
and what action the Company proposes to take with respect thereto;
(ii) a properly completed Compliance/Borrowing Base
Certificate as of the end of such month;
(iii) a servicing/delinquency report showing with respect
to the Eligible Servicing Portfolio: the number of Mortgage Notes
(including Mortgage Notes backing Mortgage-backed Securities) included
therein, the total outstanding principal amount thereof, Investor
type, weighted average coupon, delinquency status and foreclosure
experience; and
(iv) such additional information concerning the Eligible
Servicing Portfolio and such selective detail by segments and
categories thereof as may from time to time be reasonably requested by
any Bank.
(d) within five days after the end of each (i) week (for the
purposes of this paragraph (d), each week shall be deemed to end on a
Friday), with respect to the Agent, and (ii) month, with respect to all the
Banks, an inventory/pipeline position report showing with respect to each
Take-Out Commitment: the type, Investor type, expiration date, price,
interest rate and/or required yield, the original amount or aggregate
amount thereof and the portions thereof that have been utilized and the
portions thereof that remain available, future contracts, hedged positions,
repurchase agreements and profit and loss, indicating the number of
Mortgage Notes owned by the Company, the aggregate principal balance
thereof and the warehouse and pipeline balances (for purposes of this
clause (d), "inventory" means Mortgage Notes owned by the Company which
have been fully funded or with respect to which the Company has paid the
full purchase price and "pipeline" means the Mortgage Notes (or
applications for Mortgages) as to which the Company has made either firm or
floating price quotes to purchase or fund but which have not been purchased
or funded by the Company), together with copies of any new Take-Out
Commitments issued to or entered into by the Company during such week or
month, as the case may be;
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<PAGE>
(e) within five Business Days after any officer of the Company
has knowledge of their occurrence, notice of each of the following events:
(i) the commencement of any action, suit, proceeding or
arbitration against NCFC or any Subsidiary of NCFC, or any material
development in any action, suit, proceeding or arbitration pending or
threatened against NCFC or any such Subsidiary, (A) in which the
aggregate uninsured amount claimed is more than $50,000, (B) which
would, if decided in a manner adverse to NCFC or such Subsidiary,
constitute a Material Adverse Event or (C) which relates to this
Agreement or any document executed pursuant hereto or any transaction
financed or to be financed in whole or in part directly or indirectly
with the proceeds of the loans made pursuant hereto;
(ii) any Event of Default or Unmatured Event of Default
and what actions, if any, the Company is taking or contemplates taking
in regard thereto;
(iii) any notice from any Investor that it intends to put
the Company on probation or that it will cease purchasing Mortgage
Loans from the Company or that it will cease permitting the Company to
service Mortgage Notes owned, sold or guaranteed by it; and
(iv) notice of any other Material Adverse Event, including
any material adverse development which occurs in any litigation,
arbitration or governmental investigation or proceeding previously
disclosed by the Company to the Banks;
(f) prior to the end of each fiscal year, final annual budgets,
forecasts and pro-forma cash flow projections developed by NCFC and the
Company for its next succeeding fiscal year;
(g) as soon as available, copies of all financial statements,
reports and returns sent to NCFC's stockholders and copies of all regular,
periodic, or special reports which the Company or NCFC is or may be
required to file with any governmental department, bureau, commission or
agency; and
(h) from time to time, such other information regarding the
business, operations, affairs and financial condition of NCFC and the
Company as the Bank may reasonably request.
4.02 Corporate Existence; Agency Status. The Company and NCFC will
----------------------------------
each (a) maintain its corporate existence in good standing under the laws of the
jurisdiction
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<PAGE>
of its incorporation and (b) its right to carry on its business and operations
in each jurisdiction in which the character of the properties owned or leased by
it or the business conducted by it makes such qualification necessary and the
failure to be in good standing would preclude NCFC or the Company from enforcing
its rights with respect to any material assets or expose the Company to any
material liability.
4.03 Compliance with Laws, Taxes, etc. The Company and NCFC will each
--------------------------------
comply in all material respects with all applicable laws, rules, regulations and
orders (including without limitation Regulations G, T, U and X of the Board of
Governors of the Federal Reserve System), the failure to be in compliance with
which would have a materially adverse effect on the financial condition of NCFC
or the Company, such compliance to include, without limitation, paying before
the same become delinquent all taxes, assessments and governmental charges
imposed upon it or upon its property except to the extent contested in good
faith by appropriate proceedings and for which any reserves required by GAAP
have been established. In the event the Company or NCFC fails to satisfy its
obligations under this Section 4.03 as to taxes, assessments and governmental
charges, the Banks may but are not obligated to satisfy such obligations in
whole or in part and any payments made and expenses incurred in doing so shall
constitute Obligations, shall bear interest at the rate set forth in Section
2.02(a)(iv) from the date incurred and shall be paid or reimbursed by the
Company on demand.
4.04 ERISA. The Company and NCFC will each maintain, and cause each
-----
ERISA Affiliate to maintain, each Plan in compliance with all material
applicable requirements of ERISA and of the Code and with all applicable rulings
and regulations issued under the provisions of ERISA and of the Code and will
not and not permit any of the ERISA Affiliates to (a) engage in any transaction
in connection with which the Company or any of the ERISA Affiliates would be
subject to either a civil penalty assessed pursuant to Section 502(i) of ERISA
or a tax imposed by Section 4975 of the Code, in each case in an amount
exceeding $10,000, or (b) fail to make full payment when due of all amounts
which, under the provisions of any Plan, the Company, NCFC or any ERISA
Affiliate is required to pay as contributions thereto, or permit to exist any
accumulated funding deficiency (as such term is defined in Section 302 of ERISA
and Section 412 of the Code), whether or not waived with respect to any Plan in
an aggregate amount exceeding $10,000. The Company and NCFC will not permit,
and will not allow any ERISA Affiliate to permit, any event to occur or
condition to exist which would permit any Plan to terminate under any
circumstances which would cause the Lien provided for in Section 4068 of ERISA
to attach to any assets of the Company, NCFC or any Subsidiary of the Company;
and the Company and NCFC will not permit, as of the most recent valuation date
for any Plan subject to Title IV of ERISA, the present value (determined on the
basis of reasonable assumptions employed by the independent actuary for such
Plan and previously furnished in writing to the Banks) of such Plan's projected
benefit obligations to exceed the fair market value of such Plan's assets. The
Company and NCFC will not, and will not permit any ERISA Affiliate to, become a
party to any Multiemployer Plan.
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<PAGE>
4.05 Assets and Insurance. The Company and NCFC will each maintain
--------------------
or require to maintain in full force and effect (a) an adequate errors and
omissions insurance policy, (b) such other insurance coverage by financially
sound and respectable insurers, on all properties of a character usually insured
by organizations engaged in the same or similar business (including, without
limitation, all real property covered by Mortgages to the extent normally
required by prudent mortgagees) against loss or damage of a kind customarily
insured against by such organizations, (c) adequate public liability insurance
against tort claims which may be asserted against NCFC or the Company, and (d) a
mortgage bankers blanket bond insurance policy in at least the amount
customarily maintained by organizations engaged in the same or similar business
and under similar circumstances as NCFC and the Company.
4.06 Inspection, Visitation, etc. The Company and NCFC will each
---------------------------
permit any Person designated by any Bank in writing, at such Bank's expense, to
visit and inspect any of the properties, corporate books and financial records
of NCFC or the Company and discuss its affairs and finances with the principal
officers of NCFC or the Company and their independent public accountants, all at
such times as any such Bank shall reasonably request.
4.07 Further Assurances. The Company and NCFC will each take all such
------------------
further actions and execute all such further documents and instruments as the
Agent may at any time reasonably determine in its sole discretion to be
necessary or advisable to further carry out and consummate the transactions
contemplated by the Loan Documents and to perfect or protect the Liens granted
to the Agent for the benefit of the Banks under any Loan Document.
4.08 Indebtedness. The Company and NCFC will not, directly or
------------
indirectly, create, incur, assume, guarantee, or otherwise become or remain
directly or indirectly liable with respect to, any Indebtedness, except:
(a) the Obligations;
(b) current liabilities not more than 90 days overdue, unless
contested in good faith by appropriate proceedings and any reserves
required by GAAP have been established, incurred by NCFC or the Company in
the ordinary course of business otherwise than for money borrowed; and
(c) Indebtedness incurred to finance the purchase of equipment
and secured solely by Liens on such equipment, in an aggregate amount not
to exceed $2,000,000;
provided, that in no event shall the Company permit (i) the Adjusted Leverage
Ratio, from the Effective Date to the Securitization Date, to be greater than 10
to 1, and (ii) the Leverage Ratio, from the Securitization Date to the
Warehousing Termination Date, to be greater than
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<PAGE>
(A) 8 to 1 as of the last day of each fiscal quarter of the Company, and (B) 10
to 1 at any other time.
4.09 Liens. The Company and NCFC will not, directly or indirectly,
-----
create, incur, assume or permit to exist, any Lien with respect to any property
now owned or hereafter acquired by NCFC or the Company, or any income or profits
therefrom, except:
(a) the security interests granted to the Agent for the benefit
of the Banks under the Loan Documents;
(b) Liens in connection with deposits or pledges to secure
payment of workers' compensation, unemployment insurance, old age pensions
or other social security obligations, in the ordinary course of business of
NCFC or the Company;
(c) Liens for taxes, fees, assessments and governmental charges
not delinquent or which are being contested in good faith by appropriate
proceedings and for which appropriate reserves have been established in
accordance with GAAP;
(d) encumbrances consisting of zoning regulations, easements,
rights of way, survey exceptions and other similar restrictions on the use
of real property and minor irregularities in title thereto which do not
materially impair their use in the operation of its business; and
(e) Liens on equipment arising under any capitalized lease
obligation or other purchase money Liens on equipment acquired after the
Signing Date to secure Indebtedness permitted pursuant to Section 4.08(c).
(f) Liens incurred in connection with gestation repurchase
agreements or similar arrangements under which NCFC or its subsidiaries are
required to repurchase Mortgage-backed Securities or Mortgage Loans from
any Bank or other counterparty reasonably satisfactory to the Agent;
provided, that such gestation repurchase agreements are entered into in the
ordinary course of business in contemplation of the subsequent non-recourse
sale of such Mortgage-backed Securities or Mortgage Loans.
4.10 Investments. The Company and NCFC will not, directly or
-----------
indirectly, make or own any Investment, except Investments in (a) marketable
direct obligations issued or unconditionally guaranteed by the United States
Government or issued by any agency thereof and backed by the full faith and
credit of the United States, in each case maturing within one year from the date
of acquisition thereof, (b) marketable direct obligations issued by any state of
the United States of America or any political subdivision of any such state or
any public instrumentality thereof maturing within one year from the date of
acquisition thereof and, at the time of acquisition, having the highest rating
obtainable from either
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<PAGE>
Standard & Poor's Corporation or Moody's Investors Service, Inc., (c) commercial
paper maturing no more than one year from the date of creation thereof and, at
the time of acquisition, having the highest rating obtainable from either
Standard & Poor's Corporation or Moody's Investors Service, Inc., (d) in the
case of the Company, Mortgage Loans originated or acquired by the Company in the
ordinary course of the Company's business, and in the case of NCFC, other
consumer debt obligations originated or acquired by NCFC in the ordinary course
of NCFC's business, (e) certificates of deposits or bankers acceptances issued
by any of the Banks or any other commercial bank organized under the laws of the
United States or any State thereof and having a combined capital and surplus of
at least $500,000,000, or by United States offices of foreign banks having the
highest rating obtainable from a nationally recognized rating agency, in each
case maturing within one year from the date of acquisition thereof, (f)
investments in mutual funds that invest substantially all of their assets in
Investments of the types described in subsections (a), (b), (c) and (e) of this
Section 4.10, and (g) in the case of NCFC, the capital stock of the Company.
4.11 Guarantees. The Company and NCFC will not, directly or
----------
indirectly, create or become or be liable with respect to any Guarantee, other
than the Guaranty and Guarantees by NCFC of Indebtedness of the Company secured
by liens described in Section 4.09(e), in an amount not to exceed $500,000.
4.12 Net Worth. NCFC will at all times:
---------
(a) prior to the Securitization Date, maintain Adjusted Tangible
Net Worth of not less than the greater of (i) $2,500,000 or (ii) from and
after January 1, 1997, eighty-five percent (85%) of the Adjusted Tangible
Net Worth at the end of its most recently completed fiscal year or, in the
case of the Adjusted Tangible Net Worth at the end of any fiscal year, its
prior fiscal year; and
(b) after the Securitization Date, maintain Net Worth of not
less than the greater of (i) $4,250,000 or (ii) from and after January 1,
1997, eighty-five percent (85%) of the Net Worth at the end of its most
recently completed fiscal year or, in the case of the Net Worth at the end
of any fiscal year, its prior fiscal year.
4.13 Restriction on Fundamental Changes. The Company and NCFC will
----------------------------------
not engage in any business activities or operations substantially different from
or unrelated to those in which the Company and NCFC were engaged on the Signing
Date, enter into any transaction of merger or consolidation, or liquidate, wind
up or dissolve itself (or suffer any liquidation or dissolution), or convey,
sell, lease, transfer or otherwise dispose of, in one transaction or a series of
transactions, any of its assets, whether now owned or hereafter acquired, or
acquire by purchase or otherwise all or substantially all the business or
property of, or stock or other evidence of beneficial ownership of, any Person,
except:
(a) the Company or NCFC may sell or otherwise dispose of
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<PAGE>
property in the ordinary course of business, provided such sales do not
include all or substantially all of the assets of NCFC or the Company; and
(b) NCFC and its Subsidiaries other than the Company may engage in
any business involving the origination, acquisition, servicing or sale of
consumer Indebtedness other than Mortgage Loans.
4.14 Restricted Payments. The Company and NCFC will not make any
-------------------
Restricted Payments.
4.15 Minimum Liquidity. The Company will ensure that, as of the end
-----------------
of each calendar month, beginning November 30, 1996, it will have cash on hand
in an amount of not less than $1,500,000.
4.16 Subsidiaries. The Company will not create or acquire any
------------
Subsidiaries, and NCFC will not create or acquire any Subsidiaries other than
the Company and Subsidiaries engaged solely in any business involving the
origination, acquisition, servicing and sale of consumer Indebtedness other than
Mortgage Loans.
4.17 Affiliate Transactions. The Company and NCFC will not enter into
----------------------
any transaction with an Affiliate of the Company or NCFC, other than
transactions in the ordinary course of business on terms no less favorable to
the Company than those that would be obtained in an arm's-length transaction.
4.18 Escrow Imbalances. The Company will, no later than five (5)
-----------------
Business Days after learning (from any source) of any material imbalance in any
escrow account, fully and completely correct and eliminate such imbalance.
4.19 Inconsistent Agreements. The Company and NCFC will not, directly
-----------------------
or indirectly, enter into any agreement containing any provision which would be
violated or breached by any borrowing by the Company hereunder or by the
performance by the Company or NCFC of their respective obligations hereunder or
under any other Loan Document.
4.20 Closing Procedures. The Company will provide closing
------------------
instructions to each Closing Agent (as defined in the Pledge and Security
Agreement) which (a) require, in connection with Mortgage Loans tablefunded by
the Company, that (i) the Mortgage Note evidencing each such Mortgage Loan shall
be endorsed to the Company, (ii) the assignment of the applicable Mortgage to
the Company shall be recorded simultaneously with but separate from the related
Mortgage and (iii) the Mortgage Note evidencing each such Mortgage Loan and
other related loan documents shall be delivered to the Company promptly upon the
closing of such Mortgage Loan, and (b) in the case of Mortgage Loans funded by a
wire transfer of funds from the Wet Funding Wire Clearing Account (as defined in
the
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<PAGE>
Pledge and Security Agreement) in accordance with Section 4.01(b)(ii) of the
Pledge and Security Agreement, contain a statement substantially in the form set
forth in Exhibit G. The Company shall review for accuracy and completeness each
Mortgage Note, Mortgage, assignment and other document evidencing or securing
each Mortgage Loan originated or purchased by the Company.
4.21 Underwriting. All Mortgage Loans pledged to the Agent, for the
------------
benefit of Banks, pursuant to the Pledge and Security Agreement will conform
with, and will be assigned a Risk Rating in accordance with, the Underwriting
Guidelines. The Company shall not make any material change in the Underwriting
Guidelines and shall review the Underwriting Guidelines periodically to confirm
that they are being complied with in all material respects and are adequate to
meet the Company's business objectives.
4.22 Independence of Covenants. All covenants hereunder shall be
-------------------------
given independent effect so that if a particular action or condition is not
permitted by any of such covenants, the fact that it would be permitted by an
exception to, or be otherwise within the limitations of, another covenant shall
not avoid the occurrence of an Event of Default or Unmatured Event of Default if
such action is taken or condition exists.
SECTION 5. CONDITIONS PRECEDENT.
--------------------
5.01 Conditions Precedent to Effectiveness. The several obligations
-------------------------------------
of the Banks to make the initial Warehousing Loans and the effectiveness of this
Agreement are subject to the satisfaction on or before the Effective Date of
each and every of the following conditions:
(a) The following documents, certificates and opinion, each in
form and substance satisfactory to the Banks and their counsel, shall have
been delivered to the Agent:
(i) the Warehousing Notes, duly executed by the Company;
(ii) the Pledge and Security Agreement, duly executed by
the Company, together with such financing statements and other
instruments required by the Agent to create and perfect the security
interests granted under the Pledge and Security Agreement;
(iii) the Guaranty, duly executed by NCFC;
(iv) completed responses to requests for information or
other evidence satisfactory to the Agent that the financing statements
and other instruments delivered to the Agent pursuant to Section
5.01(a)(ii) have been filed in all appropriate filing offices and that
such filed financing statements
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<PAGE>
perfect a first priority security interest in favor of the Agent for
the benefit of the Banks in the property described therein;
(v) copies of the resolutions of the Boards of Directors
of the Company and NCFC, certified by the respective Secretary or
Assistant Secretary of each of them, authorizing the execution,
delivery and performance of each Loan Document to which it is or will
be a party and the other matters contemplated hereby;
(vi) a certificate signed by the Secretary or an Assistant
Secretary of each of the Company and NCFC certifying (A) as to the
names, incumbency and true signatures of the respective persons
authorized to execute and deliver each Loan Document to which it is or
will be a party and any other instrument or agreement hereunder and
under any other Loan Documents and (B) that the Agent and the Banks
may conclusively rely on such certificate until the Agent shall have
received a further certification of its Secretary or an Assistant
Secretary cancelling or amending such certificate and submitting the
names, incumbency and signatures of the officers named in such further
certificate;
(vii) a certificate by the Secretary of each of the Company
and NCFC certifying that their respective Articles of Incorporation
have not been repealed, rescinded, amended or otherwise modified since
copies of the same were delivered to First Bank in connection with the
closing of the Existing Credit Agreement, together with copies of the
Article of Incorporation of each of the Company and NCFC with all
amendments thereto, certified by the appropriate governmental official
of the jurisdiction of their respective incorporation;
(viii) certificates of good standing for each of the Company
and NCFC in the jurisdiction of its incorporation and certificates of
good standing for the Company in each of the jurisdictions in which
the Company is required to be qualified to do business, certified by
the appropriate governmental officials as of a date not more than ten
days prior to the Closing Date;
(ix) a certificate of the Secretary or an Assistant
Secretary of each of the Company and NCFC certifying to true and
correct copies of its respective bylaws, as amended to the Effective
Date;
(x) the favorable written opinions of Brad A. Morrice,
counsel to the Company and NCFC, addressed to the Banks, as to the
matters and effect set forth in Exhibit H; and
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<PAGE>
(xi) a certificate of the Secretary or Assistant Secretary
of the Company in the form set forth as Exhibit I.
(b) The requirements of Sections 5.02 shall have been satisfied.
5.02 Conditions Precedent to all Warehousing Loans. The obligation of
---------------------------------------------
each Bank to make each Warehousing Loan (including the initial Warehousing Loan)
is subject to the satisfaction of each and every of the following additional
conditions:
(a) the Agent shall have received a timely and properly
completed notice under Section 2.01(c);
(b) there shall not have been any Regulatory Change after the
Signing Date which would render the transactions contemplated hereby
unlawful or which would impose a cost on or increase the cost to such Bank
for making or maintaining its Warehousing Loans or which would reduce any
amount payable to such Bank under this Agreement or its Warehousing Note;
(c) no Event of Default or Unmatured Event of Default shall have
occurred and be continuing or will exist upon making the requested Loan;
(d) all the representations and warranties set forth in Section
3 of this Agreement, in Section 5 of the Pledge and Security Agreement and
in Section 15 of the Guaranty shall be true and correct in all material
respects as though made on and as of the applicable Borrowing Date;
(e) no material adverse change in, or development likely to have
a material adverse effect on, the business, operations, prospects, assets
or condition (financial or otherwise) of NCFC or the Company shall have
occurred and no occurrence or event which is likely to have a material
adverse effect on the rights and remedies of the Banks or the ability of
NCFC or the Company to perform their respective obligations to the Banks
shall have occurred; and
(f) the requested Loan is permitted under Section 2.01.
SECTION 6. EVENTS OF DEFAULT; REMEDIES.
---------------------------
6.01 Events of Default. The occurrence of any one or more of the
-----------------
following events shall constitute an Event of Default:
(a) The Company shall fail to make when due, whether by acceleration
of maturity or otherwise, any payment of principal of the Warehousing Note,
or shall fail to pay within five days after the same becomes due, whether
by
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acceleration of maturity or otherwise, any payment of interest on any
Warehousing Note or any fee or other amount required to be paid to the
Agent or any Bank pursuant to this Agreement or any other Loan Document; or
(b) Any representation or warranty made by the Company in this
Agreement or by the Company or NCFC in any other Loan Documents or in any
certificate, statement, report or document furnished to the Agent or the
Banks pursuant to or in connection with any Loan Document shall be untrue
or misleading in any material respect on the date as of which the facts set
forth are stated or certified; or
(c) The Company shall fail to comply with any agreement, covenant,
condition, provision or term contained in the Pledge and Security Agreement
or in Section 4.02(a), 4.08, 4.09, 4.11, 4.12, 4.13, 4.14, 4.15, 4.16 or
4.21, or shall fail to comply with any agreement, covenant, condition,
provision or term contained in Sections 4.02(b), 4.04 or 4.10 and such
failure shall not be remedied within 10 calendar days after an executive
officer of the Company shall have become aware of such failure to comply;
or
(d) The Company or NCFC shall fail to comply with any other
agreement, covenant, condition, provision or term contained in this
Agreement or any other Loan Document then in effect (other than those
hereinabove set forth in this Section 6.01) and such failure to comply is
not remedied within 30 calendar days after the earliest of (i) the date the
Agent has given the Company written notice of the occurrence thereof, (ii)
the date the Company gives notice of such failure to the Agent or (iii) the
date the Company should have given such notice of such failure to the Agent
pursuant to Section 4.01(f)(ii); or
(e) Any creditor or representative of any creditor of the Company or
NCFC shall become entitled to declare any Indebtedness in the amount of
$100,000 or more owing on any bond, debenture, note or other evidence of
Indebtedness for borrowed money to be due and payable prior to its
expressed maturity, whether or not such Indebtedness is actually declared
to be immediately due and payable, or any such Indebtedness becomes due and
payable prior to its expressed maturity by reason of any default by the
Company or NCFC in the performance or observance of any obligation or
condition and such default shall not have been effectively waived or shall
not have been cured within any grace period allowed therefor or any such
Indebtedness shall have become due by its terms and shall not have been
promptly paid or extended; or
(f) The Company or NCFC shall become insolvent or shall generally not
pay its debts as they mature or shall apply for, shall consent to, or shall
acquiesce in the appointment of a custodian, trustee or receiver of the
Company or
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<PAGE>
NCFC or for a substantial part of the property thereof or, in the absence
of such application, consent or acquiescence, a custodian, trustee or
receiver shall be appointed for the Company or NCFC or for a substantial
part of the property thereof and shall not be discharged within 60 days, or
the Company or NCFC shall make an assignment for the benefit of creditors;
or
(g) Any bankruptcy, reorganization, debt arrangement or other
proceeding under any bankruptcy or insolvency law shall be instituted by or
against the Company or NCFC, and, if instituted against the Company or
NCFC, shall have been consented to or acquiesced in by the Company or NCFC,
or shall remain undismissed for 60 days, or an order for relief shall have
been entered against the Company or NCFC; or
(h) Any dissolution or liquidation proceeding shall be instituted or
against the Company or NCFC and, if instituted against the Company or NCFC,
shall be consented to or acquiesced in by the Company or NCFC or such
Subsidiary or shall remain for 60 days undismissed; or
(i) A judgment or judgments for the payment of money in excess of the
sum of $100,000 in the aggregate shall be rendered against the Company or
NCFC and either (i) the judgment creditor executes on such judgment or (ii)
such judgment remains unpaid or undischarged for more than 60 days from the
date of entry thereof or such longer period during which execution of such
judgment shall be stayed during an appeal from such judgment.
(j) Any execution or attachment shall be issued whereby any
substantial part of the property of the Company or NCFC shall be taken or
attempted to be taken and the same shall not have been vacated or stayed
within 30 days after the issuance thereof; or
(k) The Pledge and Security Agreement or the Guaranty, shall, at any
time, cease to be in full force and effect or shall be judicially declared
null and void, or the validity or enforceability thereof shall be contested
by the Company or NCFC, or the Agent shall cease to have a valid and
perfected security interest having the priority contemplated under the
Pledge and Security Agreement in any part of the collateral described
therein, other than by action or inaction of the Agent, unless the Company
shall, within two Business Days after the earlier of the date it receives
notice thereof from the Agent or the date an officer of the Company has
knowledge thereof, repay the outstanding Warehousing Loans in an amount
sufficient to reduce the aggregate outstanding principal balance of the
Warehousing Loans to the aggregate Warehousing Collateral Value of the
Warehousing Collateral; or
(l) A Change of Control shall occur.
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6.02 Remedies. If (a) any Event of Default described in Section
--------
6.01(f), (g) or (h) shall occur, the Commitments shall automatically terminate
and the Obligations shall automatically become immediately due and payable, in
each case without presentment, demand, protest or other notice of any kind, all
of which are hereby waived, anything in this Agreement or any other Loan
Document to the contrary notwithstanding, and thereafter the Required Banks may
direct the Agent to attempt to enforce its rights under any one or more of the
Loan Documents; or (b) any other Event of Default shall occur and be continuing,
then, the Required Banks may do any or all of the following: (i) declare the
Warehousing Commitments terminated, whereupon the Warehousing Commitments shall
be terminated, (ii) declare the Obligations to be forthwith due and payable,
whereupon the Obligations shall immediately become due and payable, in each case
without presentment, demand, protest or other notice of any kind, all of which
are hereby expressly waived, anything in this Agreement or in any other Loan
Document to the contrary notwithstanding and (iii) direct the Agent to attempt
to enforce its rights under any one or more of the Loan Documents.
SECTION 7. THE AGENT
---------
7.01 Appointment and Authorization. Each Bank appoints and authorizes
-----------------------------
the Agent to take such actions as agent on its behalf and to exercise such
powers under this Agreement and the other Loan Documents as are delegated to
the Agent by the terms hereof and thereof, together with such powers as are
reasonably incidental thereto. Neither the Agent nor any of its directors,
officers or employees shall be liable for any action taken or omitted to be
taken by it or them under or in connection with this Agreement or the other Loan
Documents, WHETHER OR NOT AMOUNTING TO SIMPLE NEGLIGENCE, except for its or
their own gross negligence or willful misconduct; provided, however, that the
Agent shall be protected in acting or refraining from acting upon the
instruction of the requisite Banks under Section 8.05; and provided, further,
that the Agent shall not be required to take any action that exposes it to
personal liability or is contrary to any Loan Document, other agreement or
applicable law. The Agent shall act as an independent contractor in performing
its obligations as the Agent hereunder and under the other Loan Documents and
nothing herein contained shall be deemed to create a fiduciary relationship
among or between the Agent, the Company or the Banks.
7.02 Note Holders. The Agent may treat the payee of any Note as the
------------
holder thereof until written notice of transfer shall have been filed with it
signed by such payee.
7.03 Consultation With Counsel. The Agent may consult with legal
-------------------------
counsel selected by it and shall not be liable for any action taken or suffered
in good faith by it in accordance with the advice of such counsel.
7.04 Documents. The Agent shall not be under a duty to examine into
----------
or pass upon the validity, effectiveness, genuineness or value of the Notes, the
other Loan Documents
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<PAGE>
or any other instrument or document furnished pursuant thereto or thereunder.
The Agent makes no representation or warranty to any Bank, nor shall the Agent
be responsible for any representations, warranties or statements made in
connection with this Agreement or any other Loan Document. The Agent shall be
entitled to assume that this Agreement and the other Loan Documents are valid,
effective and genuine and what they purport to be. The Agent (i) shall execute
and deliver the Pledge and Security Agreement in the form of Exhibit D hereto,
whereupon each provision thereof which is contemplated to be binding upon the
Banks shall be binding upon the Banks and each of them; and (ii) shall not
waive, amend or otherwise modify any provision of the Pledge and Security
Agreement without the written consent of the Banks required pursuant to Section
8.05.
7.05 Agent and Affiliates. With respect to its Commitments and the
--------------------
Loans made by it in its capacity as a Bank, the Agent shall have the same rights
and powers under this Agreement and the other Loan Documents as any other Bank
and may exercise the same as though it were not the Agent, and the Agent and its
Affiliates may accept deposits from, lend money to and generally engage in any
kind of business with the Company or any Subsidiary as if it were not the Agent.
7.06 Action by Agent. The Agent shall be entitled to use its
---------------
discretion with respect to exercising or refraining from exercising any rights
which may be vested in it by, or with respect to taking or refraining from
taking any action or actions which it may be able to take under or in respect
of, this Agreement and the other Loan Documents. The Agent shall incur no
liability under or in respect of this Agreement or any of the other Loan
Documents by acting upon any notice, consent, certificate, warranty or other
paper or instrument believed by it to be genuine or authentic or to be signed by
the proper party or parties, or with respect to anything which it may do or
refrain from doing in the reasonable exercise of its judgment, or which may seem
to it to be necessary or desirable in the premises. The Agent may employ agents
and attorneys-in-fact in carrying out its responsibilities under the Loan
Documents, and shall not be responsible for the negligence or misconduct of any
such agents or attorneys-in-fact as long as the Agent was not grossly negligent
in selecting or directing such agents or attorneys-in-fact, EVEN IF SUCH
SELECTION AMOUNTED TO SIMPLE NEGLIGENCE.
7.07 Credit Analysis. Each Bank has made, and shall continue to make,
---------------
its own independent investigation or evaluation of the operations, business,
property and condition, financial and otherwise, of the Company in connection
with its Commitments and Loans and has made its own appraisal of the
creditworthiness of the Company. Except as explicitly provided herein, the
Agent has no duty or responsibility, either initially or on a continuing basis,
to provide any Bank with any credit or other information with respect to such
operations, business, property, condition or creditworthiness, whether such
information comes into its possession on or before the first Event of Default or
at any time thereafter.
7.08 Notices of Event of Default, etc. In the event that any Bank
---------------------------------
shall have
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acquired actual knowledge of any Event of Default or Unmatured Event of Default,
other than as a result of its receipt of financial statements delivered to it
pursuant to Section 4.01, such Bank shall promptly give notice thereof to the
Agent. The Agent shall, promptly upon receipt of any such notice provide a copy
thereof to the other Banks. Upon receipt from any Bank of a request that the
Agent give notice to the Company of the occurrence of an Event of Default or
Unmatured Event of Default under Section 6, the Agent shall promptly forward
such request to the other Banks and will take such action and assert such rights
under this Agreement and the other Loan Documents as the requisite Banks under
Section 8.05 shall direct in writing.
7.09 Indemnification. Each Bank agrees to indemnify the Agent (to the
----------------
extent not reimbursed by the Company), ratably according to its Pro Rata Share
(determined under clause (e) of the definition thereof), from and against any
and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind or nature
whatsoever which may be imposed on, incurred by or asserted against the Agent in
any way relating to or arising out of this Agreement or the other Loan Documents
or any action taken or omitted by the Agent under this Agreement or the other
Loan Documents, WHETHER OR NOT THE AGENT'S SIMPLE NEGLIGENCE CAUSES THE SAME IN
WHOLE OR IN PART; provided that no Bank shall be liable for any portion of such
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements resulting from the Agent's gross negligence or
willful misconduct. Without limitation of the foregoing, each Bank agrees to
reimburse the Agent promptly upon demand for its Pro Rata Share (determined
under clause (l) of the definition thereof) of any out-of-pocket expenses
(including counsel fees) incurred by the Agent in connection with the
preparation, execution, delivery, administration, modification, amendment or
enforcement (whether through negotiations, legal proceedings or otherwise) of,
or legal advice in respect of rights or responsibilities under, this Agreement
and the other Loan Documents, to the extent that the Agent is not reimbursed for
such expenses by the Company, WHETHER OR NOT SUCH OUT-OF-POCKET EXPENSES
RESULTED, IN WHOLE OR IN PART, FROM THE AGENT'S SIMPLE NEGLIGENCE; provided,
that no Bank shall be liable for any portion of any such expenses resulting from
the Agent's gross negligence or willful misconduct.
7.10 Payments. All payments of principal of the Notes and all other
---------
funds received by the Agent in respect of any payments made by the Company
pursuant to this Agreement, the Notes or the other Loan Documents, other than
payments under Sections 2.05 and 2.06, and subject to the effect of Section
7.11, shall be distributed forthwith by the Agent (in like currency and funds)
to the Banks on the date received or deemed received pursuant to Section
2.03(a), in accordance with Section 2.02(c) in the case of payments of interest,
Usage Fees and Balances Deficiency Fees, and ratably according to each Bank's
Pro Rata Share in the case of any other payment received by the Agent. If the
Agent does not make any such distribution (or provide Federal Reserve Bank
reference numbers for the wire transfer of the amount thereof) on the date any
such payment is received or deemed received pursuant to Section 2.03(a), the
Agent will pay interest to each Bank entitled to receive a portion of such
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<PAGE>
distribution on the amount distributable to it at the Federal Funds Effective
Rate from such date until the date such distribution is made, such interest to
be payable with such distribution.
7.11 Sharing of Payments. If any Bank shall receive and retain any
-------------------
payment during the continuance of an Event of Default or Unmatured Event of
Default, whether by setoff, application of deposit balance or security, or
otherwise, in respect of the Obligations in excess of such Bank's Pro Rata Share
of all payments of the Obligations, then such Bank shall purchase from the other
Banks for cash and at face value and without recourse, such participation in the
Obligations held by them as shall be necessary to cause such excess payment to
be shared ratably as aforesaid with each of them; provided, that if such excess
payment or part thereof is thereafter recovered from such purchasing Bank, the
related purchases from the other Banks shall be rescinded ratably and the
purchase price restored as to the portion of such excess payment so recovered,
but without interest. Each Bank agrees to exercise any and all rights of
setoff, counterclaim or bankers' lien first fully against the Obligations and
participations therein held by such Bank, and only then to any other
indebtedness of the Company to such Bank.
7.12 Successor Agent. The Agent may resign at any time by giving ten
---------------
days written notice thereof to the Banks and the Company. The Required Banks
may remove the Agent at any time with or without cause by notifying the Agent
and the Company in writing. In addition, the Banks with an aggregate Pro Rata
Share (determined under clause (a) of the definition thereof) of 66 2/3% may at
any time, if such Banks determine, in the reasonable exercise of their judgment,
that the Agent is not handling the Warehousing Collateral in accordance with
accepted industry practices, appoint a custodian reasonably acceptable to the
Company to perform the Agent's responsibilities under the Pledge and Security
Agreement and, with respect to the Warehousing Collateral and the determination
of the Warehousing Borrowing Base, hereunder. Upon any such resignation or
removal, the Required Banks or, in the case of a removal pursuant to the
preceding sentence, the removing Banks shall have the right to appoint a
successor Agent, which successor Agent shall (unless an Event of Default has
then occurred and is continuing) be reasonably acceptable to the Company. If no
successor Agent shall have been so appointed and shall have accepted such
appointment within 30 days after the retiring Agent's giving of notice of its
resignation or the removal of the Agent, then the retiring Agent may, on behalf
of the Banks, appoint an Agent or custodian which shall be a Bank or a
commercial bank organized under the laws of the United States of America or of
any State thereof and having a combined capital and surplus of at least
$100,000,000 and which shall be reasonably acceptable to the Company. Any such
resignation or removal shall be effective upon the appointment of a successor
Agent. Upon the acceptance of any appointment as the Agent hereunder by a
successor Agent, such successor Agent shall thereupon succeed to and become
vested with all the rights, powers, privileges and duties of the retiring Agent,
and the retiring Agent shall be discharged from its duties and obligations,
under this Agreement and the other Loan Documents. After any retiring Agent's
resignation or removal hereunder as the Agent, the provisions of this Section 7
shall inure to its benefit as to any actions taken or omitted to be taken by it
while it was acting as the Agent under this
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<PAGE>
Agreement and any other Loan Document.
7.13 Inspection. The Banks and their agents, accountants, attorneys
----------
and auditors will be permitted during normal business hours at any time and from
time to time upon reasonable notice to examine (to the extent permitted by
applicable law) the files, documents, records and other papers in the possession
or under the control of the Agent relating to any or all Warehousing Collateral
and to make copies thereof. Any such examination will be at the cost and
expense of the Bank conducting such examination.
SECTION 8. MISCELLANEOUS.
-------------
8.01 Waiver. No failure on the part of the Agent or the Banks to
------
exercise and no delay in exercising, and no course of dealing with respect to,
any right, power or privilege under this Agreement or any other Loan Document
shall operate as a waiver thereof; nor shall any single or partial exercise of
any right, power or privilege under this Agreement or any other Loan Document
preclude any other or further exercise thereof or the exercise of any other
right, power or privilege. The remedies provided herein and in the other Loan
Documents are cumulative and not exclusive of any remedies provided by law.
8.02 Notices. Except as otherwise specifically provided for herein,
-------
all notices and other communications provided for herein shall be in writing
(including teletransmission communication) and, unless otherwise required herein
or by law, shall be teletransmitted, mailed or delivered to the intended
recipient at the "Address for Notices" specified below its name on the signature
pages hereof; or, as to any party, at such other address as shall be designated
by such party in a notice to the other parties in accordance with this Section
8.02. All notices and other communications hereunder shall be effective when
transmitted by telex or telecopier, delivered or, in the case of a mailed notice
or notice sent by overnight courier, upon receipt thereof as conclusively
evidenced by the signed receipt therefor, in each case given or addressed as
aforesaid except that notices to the Agent under the provisions of Section 2
shall not be effective until received by the Agent.
8.03 Expenses; Indemnification. The Company agrees to pay on demand:
-------------------------
(a) the reasonable fees and expenses of Dorsey & Whitney, special counsel to the
Agent in connection with the negotiation, preparation, approval, execution and
delivery of the Loan Documents, (b) the reasonable fees and expenses of counsel
for the Agent in connection with any amendment, modification or waiver of any of
the terms of any Loan Document and (c) all reasonable costs and expenses of the
Agent and each Bank (including reasonable counsel's fees) in connection with the
enforcement (whether through negotiations, legal proceedings or otherwise) of
this Agreement, the Notes and the other Loan Documents. The Company hereby
agrees to indemnify the Banks and their directors, officers, agents and
employees from and hold each of them harmless against any and all losses,
liabilities, claims, damages or expenses incurred by any of them arising out of
or by reason of any investigation, litigation or other proceedings related to
any use made or proposed to be made by the Company of the proceeds
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of the Warehousing Loans or the Swingline Loans or the operation of the
Company's business, including, without limitation, the reasonable fees and
disbursements of counsel incurred in connection with any such investigation,
litigation or other proceedings, WHETHER OR NOT SUCH OUT-OF-POCKET EXPENSES
RESULTED, IN WHOLE OR IN PART, FROM THE AGENT'S OR ANY BANK'S SIMPLE NEGLIGENCE
(but excluding, for all purposes under this Section 8.03, any such losses,
liabilities, claims, damages or expenses incurred by reason of the gross
negligence or willful misconduct of the Person to be indemnified).
8.04 Confidentiality. The Agent and each Bank shall use reasonable
---------------
efforts to assure that information about the Company, NCFC and their respective
operations, affairs and financial condition, not generally disclosed to the
public or to trade and other creditors, which is furnished to the Agent or such
Bank, as the case may be, pursuant to the provisions hereof is used only for the
purposes of this Agreement and any other relationship between the Banks and the
Company and NCFC and shall not be divulged to any Person other than the Agent,
the Banks, their respective Affiliates and their respective officers, directors,
employees and agents, except: (a) to their attorneys and accountants, (b) in
connection with the enforcement of the rights of the Agent and the Banks
hereunder and under the other Loan Documents or otherwise in connection with
applicable litigation, (c) in connection with assignments and participations and
the solicitation of prospective assignees and participants referred to in the
immediately preceding Section, and (d) as may otherwise be required or
requested by any regulatory authority having jurisdiction over the Agent or any
Bank or by any applicable law, rule, regulation or judicial process, the opinion
of the Agent's counsel concerning the making of such disclosure to be binding on
the parties hereto. Neither the Agent nor any Bank shall incur any liability to
the Company or NCFC by reason of any disclosure permitted by this Section 8.04.
8.05 Releases, Amendments, Waivers, Consents and Exercise of Remedies.
----------------------------------------------------------------
Except as otherwise provided in this Section 8.05, any provision of this
Agreement or any other Loan Document may be amended or modified only by an
instrument or instruments in writing signed by the Required Banks and the
Company. Any amendment, waiver or consent reducing any principal of, or the
amount of or rate of interest on or fees with respect to the Warehousing Loans
or the Warehousing Commitments, postponing any date fixed for the payment of any
principal of, interest on or fees with respect to the Warehousing Loans or
Warehousing Commitments, releasing or subordinating any of the Warehousing
Collateral (except as provided in the Pledge and Security Agreement), amending
the definition of "Delivered Mortgage Loans," "Pro Rata Share," "Required
Banks," "Warehousing Borrowing Base" or "Warehousing Collateral Value," or
amending Section 2.01 or this Section 8.05 may only be made by an instrument or
instruments in writing signed by all of the Banks and the Company. In addition
to the foregoing requirements, (A) no amendment, waiver or consent shall, unless
in writing and signed by the Agent in addition to the requisite Banks indicated
above to take such action, affect the rights or duties of the Agent under this
Agreement or any Loan Document, and (B) no amendment may increase any Bank's
Warehousing Commitment unless it is in writing and signed by such Bank. No
waiver of any
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provision of this Agreement or any other Loan Document or consent to any
departure by the Company therefrom shall in any event be effective unless the
same shall be in writing and signed or consented to in writing by the requisite
Banks indicated above and then such waiver or consent shall be effective only in
the specific instance and for the purpose for which given.
8.06 Binding Effect; Assignments and Participations; Transferees; New
----------------------------------------------------------------
Banks. (a) This Agreement shall be binding upon and inure to the benefit of the
- -----
parties hereto and their respective successors and assigns, except that the
Company may not assign its rights or obligations hereunder, under the
Warehousing Notes or under any other Loan Document without the prior written
consent of the Required Bank. Each Bank may (i) grant participations in any
portion of its Warehousing Note and its Warehousing Commitment; and (ii) sell,
assign, transfer or otherwise dispose of any portion of its Warehousing
Commitment (with a proportionate share of its outstanding Warehousing Loans) or,
if its Warehousing Commitment has terminated, its outstanding Warehousing Loans
(each such grant of a participation or interest so sold, assigned, transferred
or disposed of being herein called a "Transferred Interest") to (y) banks
chartered under the laws of the United States or any State thereof or (z)
insurance companies, other lenders or mutual funds ("Transferees"). In
addition, the Bank may pledge any portion of its Warehousing Note for security
purposes to any Federal Reserve Bank. If a Bank makes any assignment to a
Transferee, then such Transferee, to the extent of such assignment (unless
otherwise provided therein), shall become a "Bank" hereunder and shall have all
the rights and obligations of the Banks hereunder, and the transferring Bank
shall be released from its duties and obligations under this Agreement to the
extent of such assignment. The Company agrees to issue new Warehousing Notes to
such Bank and/or Transferee following any such transfer that has the effect of
making the Transferee a "Bank" under this Agreement, to reflect the transfer of
the Transferred Interest to the Transferee. Without in any way limiting the
rights of Transferees hereunder, the Company agrees that each Transferee shall
be entitled to the benefits of Sections 2.05 and 2.06 to the extent of its
Transferred Interest as if it were a "Bank" holding a Warehousing Commitment in
an aggregate amount equal to such Transferred Interest, and that each Transferee
may exercise any and all rights of banker's lien, setoff and counterclaim
available pursuant to law with respect to its Transferred Interest as fully as
if such Transferee were a direct lender to the Company. Notwithstanding the
sale by a Bank of any participation hereunder, (i) no participant shall be
deemed to be or have the rights and obligations of a Bank hereunder except as
provided in the preceding sentence and (ii) no Bank shall, in connection with
selling any such participation, condition such Bank's rights in connection with
consenting to amendments or granting waivers concerning any matter under any
Loan Document upon obtaining the consent of such participant other than on
matters relating to (A) any reduction in the amount of any principal of, or the
amount of or rate of interest on, Warehousing Note or Warehousing Loan in which
such participation is sold, (B) any postponement of the date fixed for any
payment of principal of or interest on any Warehousing Note or Warehousing Loan,
or the termination of any Warehousing Commitment, in which such participation is
sold, or (C) the release or subordination of any material portion of any
collateral other than pursuant to the terms of any Loan Document.
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(b) From time to time, the Company may agree, with the prior written
consent of the Agent, to (i) permit a Bank to increase its Warehousing
Commitment Amount, and (ii) add a bank chartered under the laws of the United
States or any State thereof, an insurance company, another lender or a mutual
fund (a "New Bank") as a "Bank" under this Agreement with a Warehousing
Commitment, for the purpose of increasing the aggregate amount of the
Warehousing Commitments; provided that upon giving effect to any such new
Warehousing Commitment, the Warehousing Commitment Amount of the New Bank shall
not be less than $10,000,000; and provided, further, that the aggregate
Warehousing Commitment Amounts, after giving effect to any such increase, shall
not exceed $75,000,000. The Company and each Bank increasing its Warehousing
Commitment Amount or New Bank shall agree on the date as of which the increased
Warehousing Commitment Amount or the New Bank's Warehousing Commitment Amount
shall become effective, and each New Bank shall execute and deliver an
instrument in the form prescribed by the Agent to evidence its agreement to be
bound by this Agreement and the other Loan Documents. Upon the effective date
of an increase in any Bank's Warehousing Commitment Amount or inclusion of a New
Bank as a lender under this Agreement, the Agent shall deliver to the Company
and each of the Banks a revised Schedule 1.01(c) reflecting the revised
aggregate Warehousing Commitment Amounts and the Company shall execute and
deliver to the Bank increasing its Warehousing Commitment Amount or the New Bank
a Warehousing Note.
8.07 Governing Law and Construction. THE VALIDITY, CONSTRUCTION AND
------------------------------
ENFORCEABILITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED
BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO
CONFLICT OF LAWS PRINCIPLES THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS OF THE
UNITED STATES APPLICABLE TO NATIONAL BANKS. Whenever possible, each provision
of this Agreement and the other Loan Documents and any other statement,
instrument or transaction contemplated hereby or thereby or relating hereto or
thereto shall be interpreted in such manner as to be effective and valid under
such applicable law, but, if any provision of this Agreement, the other Loan
Documents or any other statement, instrument or transaction contemplated hereby
or thereby or relating hereto or thereto shall be held to be prohibited or
invalid under such applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of such provision or the remaining provisions of this Agreement, the other Loan
Documents or any other statement, instrument or transaction contemplated hereby
or thereby or relating hereto or thereto.
8.08 Consent to Jurisdiction. AT THE OPTION OF THE BANK, THIS
-----------------------
AGREEMENT AND THE OTHER LOAN DOCUMENTS MAY BE ENFORCED IN ANY FEDERAL COURT OR
MINNESOTA STATE COURT SITTING IN HENNEPIN COUNTY, MINNESOTA; AND THE COMPANY
CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH COURT AND WAIVES ANY ARGUMENT
THAT VENUE IN SUCH FORUMS IS NOT CONVENIENT. IN THE EVENT THE COMPANY COMMENCES
ANY ACTION IN ANOTHER JURISDICTION OR VENUE
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<PAGE>
UNDER ANY TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE
RELATIONSHIP CREATED BY THIS AGREEMENT, THE AGENT OR ANY BANK AT ITS OPTION
SHALL BE ENTITLED TO HAVE THE CASE TRANSFERRED TO ONE OF THE JURISDICTIONS AND
VENUES ABOVE-DESCRIBED, OR IF SUCH TRANSFER CANNOT BE ACCOMPLISHED UNDER
APPLICABLE LAW, TO HAVE SUCH CASE DISMISSED WITHOUT PREJUDICE.
8.09 Waiver of Jury Trial. THE COMPANY, THE AGENT AND EACH BANK
--------------------
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
8.10 Survival of Agreement. All representations, warranties,
---------------------
covenants and agreement made by the Company or NCFC herein or in the other Loan
Documents and in the certificates or other instruments prepared or delivered in
connection with or pursuant to this Agreement or any other Loan Document shall
be deemed to have been relied upon by the Banks and shall survive the making of
the Warehousing Loans, by the Banks and the execution and delivery to the Agent
by the Company and NCFC of the Loan Documents, regardless of any investigation
made by or on behalf of the Banks, and shall continue in full force and effect
as long as any Obligation is outstanding and unpaid and so long as the
Warehousing Commitment have not been terminated; provided, however, that the
obligations of the Company under Sections 2.05, 2.06 and 8.03 shall survive
payment in full of the Obligations and the termination of the Warehousing
Commitment.
8.11 Captions. The captions or headings herein and any table of
--------
contents hereto are for convenience only and in no way define, limit or describe
the scope or intent of any provision of this Agreement.
8.12 Entire Agreement. This Agreement and the other Loan Documents
----------------
embody the entire agreement and understanding between the Company, the Agent and
the Banks with respect to the subject matter hereof and thereof. This Agreement
supersedes all prior agreements and understandings relating to the subject
matter hereof. Nothing contained in this Agreement or in any other Loan
Document, expressed or implied, is intended to confer upon any Persons other
than the parties hereto any rights, remedies, obligations or liabilities
hereunder or thereunder.
8.13 Counterparts. This Agreement may be executed in any number of
------------
counterparts, all of which taken together shall constitute one and the same
instrument, and any of the parties hereto may execute this Agreement by signing
any such counterpart.
8.14 Company Acknowledgements. The Company hereby acknowledges that
------------------------
-51-
<PAGE>
(a) it has been advised by counsel in the negotiation, execution and delivery
of this Agreement and the other Loan Documents, (b) neither the Agent nor any
Bank has any fiduciary relationship to the Company, the relationship being
solely that of debtor and creditor, (c) no joint venture exists between the
Company, the Agent or any Bank, and (d) neither the Agent nor any Bank
undertakes any responsibility to the Company to review or inform the Company of
any matter in connection with any phase of the business or operations of the
Company and the Company shall rely entirely upon its own judgment with respect
to its business, and any review, inspection or supervision of, or information
supplied to, the Company by the Banks is for the protection of the Banks and
neither the Company nor any third party is entitled to rely thereon.
-52-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
NEW CENTURY MORTGAGE CORPORATION
By /s/ Brad A. Morrice
----------------------------
Its CEO
---------------------
Address for Notices:
-------------------
4910 Birch Street
Suite 100
Newport Beach, California 92660
Attention: Brad A. Morrice
Telephone Number: (714) 440-7030
Telecopier Number: (714) 440-7033
FIRST BANK NATIONAL ASSOCIATION
By /s/ Edwin D. Jenkins
----------------------------
Its Vice President
---------------------
Address for Notices:
-------------------
Mortgage Banking Services Division
First Bank Place MPFP 0801
601 Second Avenue South
Minneapolis, Minnesota 55402
Attention: Edwin D. Jenkins
Telephone Number: (612) 973-0588
Telecopier Number: (612) 973-0826
GUARANTY FEDERAL BANK, F.S.B.
By /s/ Abbie Y. Tidmore
----------------------------
Its Vice President
---------------------
S-53
<PAGE>
Address for Notices:
-------------------
8333 Douglas Ave.
Dallas, Texas 75225
Attention: Abbie Y. Tidmore
Telephone Number: (214) 360-2829
Telecopier Number: (214) 360-1660
S-54
<PAGE>
EXHIBITS
A Form of Compliance/Borrowing Base Certificate
B Form of Confirmation of Borrowing/Paydown/Conversion
C Guaranty
D Pledge And Security Agreement
E Formula for Determining Warehousing Collateral Value
F Form of Warehousing Note
G Closing Agent Instructions
H Matters to be Covered by Opinion of Counsel to the Company and NCFC
at closing
I Operational Certificate
<PAGE>
SCHEDULES
1.01(a) Underwriting Guidelines
1.01(b) Warehousing Commitment Amounts
3.05 Litigation
4.09Existing Liens
<PAGE>
SCHEDULE 1.01(a)
UNDERWRITING GUIDELINES
-----------------------
[To be provided by Company]
<PAGE>
SCHEDULE 1.01 (b)
WAREHOUSING COMMITMENT AMOUNTS
------------------------------
Bank
- ----
Warehousing Commitment
- ----------------------
First Bank National Association $30,000,000
Guaranty Federal Bank $15,000,000
-----------
Total $45,000,000
<PAGE>
SCHEDULE 3.05
LITIGATION
----------
None.
<PAGE>
SCHEDULE 4.09
EXISTING LIENS
--------------
See attached.
<PAGE>
EXHIBIT A TO AMENDED AND
RESTATED CREDIT AGREEMENT
FORM OF
COMPLIANCE/BORROWING BASE CERTIFICATE
First Bank National Association,
First Bank Place
601 Second Avenue South
Minneapolis, Minnesota 55402
Attention: Mortgage Banking Services Division
Guaranty Federal Bank, F.S.B.
8333 Douglas Avenue
Dallas, Texas 75225
Attention: _____________________________
Ladies and Gentlemen:
We submit this certificate to you in accordance with the terms of
Section 4.01(c)(ii) of the Credit Agreement dated as of October 25, 1996 (as
said Credit Agreement may be amended, supplemented or restated from time to
time, the "Credit Agreement") between New Century Mortgage Corporation, the
banks party thereto (the "Banks") and First Bank National Association, as Agent
for the Banks (in such capacity, the "Agent"). Each capitalized term used herein
has the same meaning ascribed to such term in the Credit Agreement or in Exhibit
E thereto.
The undersigned hereby certifies the following as of the close of
business on __________________, 199_:
1. The Warehousing Borrowing Base was calculated as follows:
--------------------------------------------------------
Warehousing Collateral Value
----------------------------
(a) Eligible Mortgage Loans $
"C" Mortgages $
"C-" Mortgages $
Mortgages with an Original Principal
Balance in Excess of $207,000
("Jumbo Mortgages") $
A-1
<PAGE>
Less:
----
(b) Pledged Mortgage Loans with No Collateral Value $
180 days or more since origination or
acquisition $
90 days or more in warehouse $
Promissory Note and/or Collateral Documents
not returned or purchased by an Investor
(45 days) $
Collateral Document not returned (21 days) $
In default (one full reporting period) $
Requested documents not delivered
(5 Business Days) $
Promissory Note and/or Collateral Documents
not delivered (wet funding loans;
5 Business Days) $
Wet funding loans in excess of sublimit $
Wet funding loans not closed $
Jumbo Mortgages in excess
of applicable sublimit $
Not marketable $
Plus:
----
(c) Other Assets $
TOTAL WAREHOUSING BORROWING BASE
$
2. Adjusted Leverage Ratio or Leverage
-----------------------------------
Ratio Requirements of Section 4.08:
----------------------------------
(a) Adjusted Leverage Ratio (prior to Securitization Date)
A-2
<PAGE>
(i) Maximum ratio permitted by Section 4.08: 10 to 1
(ii) The ratio of Total Indebtedness to Adjusted
Tangible Net Worth as of the end of the
period covered hereby:
Total Indebtedness at such date: $
to
--
Adjusted Tangible Net Worth at such date
(3(b) below): $ = ____to
1
(b) Leverage Ratio (after Securitization Date)
(i) Maximum ratio permitted by Section 4.08 as ____to
1
of the end of the period covered hereby:
(ii) The ratio of Total Indebtedness to Net
Worth at such date:
Total Indebtedness at such date: $
to
Net Worth at such date $ = ______
to 1
3. Net Worth Requirements of Section 4.12:
---------------------------------------
(a) Minimum Adjusted Tangible Net Worth
required by Section 4.12 (prior to Securitization Date):
(i) Greater of $2,500,000; or
(ii) 85 % of Adjusted Tangible Net
Worth at Prior Fiscal Year End $
(beginning 1/1/97)
(b) Adjusted Tangible Net Worth at the end of
the most recently concluded fiscal month:
(i) Net Worth of the Company at
such date: $
A-3
<PAGE>
less
----
(ii) Intangible assets at such date
consisting of:
Goodwill: $______
Other Intangibles: $__________
less
----
(iii) Capitalized Servicing Rights: $__________
less
----
(iv) Excess Servicing Fees: $__________
plus $
----
(v) Three-quarters of one percent of Eligible
Servicing Portfolio at such date:
$_______________ __________
plus
----
(vi) Deferred Taxes Arising From
Excess Servicing Fees $_________
_______________
plus
----
(vii) Three percent of the outstanding
principal balance of Mortgage Loans
held for sale $
Total $
(c) Minimum Net Worth required by Section 4.12
(after Securitization Date):
(i) Greater of $4,250,000; or
(ii) 85% of Net Worth at prior Fiscal Year
End (beginning 1/1/97) $
A-4
<PAGE>
(d) Net Worth (from 3(b)(i)): $
4. Minimum Liquidity under Section 4.15:
------------------------------------
(a) Minimum cash on hand as of the most
recently concluded fiscal month: $1,500,000
(b) Cash on had as of such date: $
5. (a) The undersigned is the duly elected chief financial officer of the
Company;
(b) The undersigned has reviewed the terms of the Credit Agreement and has
made, or has caused to be made under the supervision of the
undersigned, a detailed review of the transactions and conditions of
the Company during the accounting period covered by this Certificate;
and
(c) These examinations did not disclose, and the undersigned has no
knowledge, whether arising out of such examinations or otherwise, of
the existence of any condition or event that constitutes an Event of
Default or an Unmatured Event of Default during or at the end of the
accounting period covered by this Certificate, except as described in
a separate attachment to this Certificate, the exceptions listing, in
detail, the nature of the condition or event, the period during which
it has existed and the action that the Company has taken, is taking,
or proposes to take with respect to each such condition or event.
6. Attached hereto is a schedule of the "Pledged Mortgage Loans" (as defined in
the Pledge and Security Agreement) that have no Warehousing Collateral Value
at the date hereof.
Dated: _____________, 199____ NEW CENTURY MORTGAGE CORPORATION
By _________________________________
_____
Its __________________________
_____
A-5
<PAGE>
EXHIBIT B TO AMENDED AND
RESTATED CREDIT AGREEMENT
FORM OF
CONFIRMATION OF BORROWING/PAYDOWN/CONVERSION
--------------------------------------------
[On Company Letterhead]
[Date]
First Bank National Association,
as Agent
First Bank Place
601 Second Avenue South
Minneapolis, Minnesota 55402
Attention: Mortgage Banking Services Division
Re: Confirmation of Borrowing/Paydown/Conversion
Ladies and Gentlemen:
Reference is made to the Amended and Restated Credit Agreement dated
as of October 25, 1996 (as said Agreement may be amended, supplemented or
restated from time to time, the "Credit Agreement"), between New Century
Mortgage Corporation (the "Company"), the Banks party thereto and First Bank
National Association ("First Bank") as Agent for the Banks (in such capacity,
the "Agent"). Each capitalized term used herein shall have the meaning
ascribed to such term in the Credit Agreement.
The Company and the undersigned hereby confirm and certify to the
Agent as follows:
1. The undersigned is authorized to submit this Confirmation of
Borrowing/Paydown/Conversion on behalf of the Company.
2. On ______________________________ , 19__, the Company (a)
requested the Banks to make Warehousing Loans in the aggregate principal amount
of $_______________________, (b) requested First Bank to make a Swingline Loan
in the aggregate principal amount of $__________________, (c) made principal
payments on outstanding Warehousing Loans in the aggregate
B-1
<PAGE>
amount of $_________________, or (d) converted outstanding Advances to
outstanding Advances of another type,/1/ as follows:
<TABLE>
<CAPTION>
Warehousing Credit
------------------
Reference Rate Eurodollar Rate Fixed Rate
-------------- --------------- ----------
<S> <C> <C> <C>
Advance ______________ _______________ __________
Payment ______________ _______________ __________
Net Amount Outstanding
============== =============== ==========
Interest Rate _____________% ______________% _________%
</TABLE>
3. In connection with any requested Warehousing Loans or Swingline
Loans, please disburse $_______________ as follows [include wire instructions]:
4. In connection with any requested Warehousing Loans or Swingline
Loans: (a) no Event of Default or Unmatured Event of Default has occurred or
will exist upon the making of any such Warehousing Loans or Swingline Loans; (b)
the representations and warranties contained in Section 3 of the Credit
Agreement, in Section 5 of the Pledge and Security Agreement and in Section 15
of the Guaranty are true and correct in all material respects with the same
force and effect as if made on and as of the date hereof; and (c) after giving
effect to the Warehousing Loans or Swingline Loans requested herein the sum of
the outstanding principal balance under the Warehousing Notes shall not exceed
the Warehousing Borrowing Base.
Very truly yours,
NEW CENTURY MORTGAGE
CORPORATION
By____________________________________
______________________
/1// For purposes of this Certificate, Advances being converted shall be
described as principal payments, and the new Advances into which such
Advances are being converted shall be as new Advances.
B-2
<PAGE>
___________
Its_________________________________
___________
B-3
<PAGE>
EXHIBIT C TO AMENDED
AND RESTATED CREDIT
AGREEMENT
AMENDED AND RESTATED GUARANTY
-----------------------------
THIS AMENDED AND RESTATED GUARANTY dated as of October 25, 1996 (this
"Guaranty"), by the undersigned, NEW CENTURY FINANCIAL CORPORATION (the
"Guarantor"), a Delaware corporation, is for the benefit of the Banks (as
defined below) and FIRST BANK NATIONAL ASSOCIATION ("First Bank") as Agent for
the Banks (in such capacity, the "Agent") (the "Bank").
WITNESSETH, THAT:
A. The Guarantor owns all of the outstanding capital stock of New
Century Mortgage Corporation (the "Company"), a California corporation.
B. First Bank agreed to make certain loans to the Company pursuant
to that certain Credit Agreement dated February 12, 1996 (as the same has been
and may hereafter be amended, restated, or otherwise modified, the "Existing
Credit Agreement") by and among the Company and the Bank.
C. The Guarantor guaranteed the obligations of the Company to First
Bank under the Existing Credit Agreement pursuant to that certain Guaranty dated
as of February 12, 1996 (the "Existing Guaranty").
D. The Company and First Bank have agreed to amend and restate the
Existing Credit Agreement pursuant to that certain Amended and Restated Credit
Agreement dated as of October 25, 1996 (the "Credit Agreement") by and between
the Company, the Banks from time to time party thereto (the "Banks") and the
Agent.
E. It is a condition precedent to the Banks' obligation to make
loans to the Company pursuant to the terms of the Credit Agreement that this
Guaranty be executed and delivered by the Guarantor, which condition precedent
the Banks have not waived and will not waive.
F. The Guarantor finds it advantageous, desirable, and in its best
interest to comply with this requirement.
NOW, THEREFORE, in consideration of the foregoing and for other good
and valuable consideration, the Guarantor hereby covenants and agrees with the
Banks and the Agent as follows:
1
<PAGE>
1. Certain Defined Terms. All terms not otherwise defined herein
---------------------
that are capitalized and used herein shall have the meanings assigned to such
terms in the Credit Agreement.
2. The Guaranty. The Guarantor hereby absolutely, irrevocably, and
------------
unconditionally guarantees to the Banks and the Agent the payment when due
(whether at a stated maturity or earlier by reason of acceleration or otherwise)
and performance of (a) all of the obligations of the Company to the Banks and
the Agent due or to become due, direct or indirect, absolute or contingent,
joint or several, now existing or hereafter at any time created, arising or
incurred under or in connection with the Credit Agreement, the Warehousing Notes
and any reissuance, renewal, or extensions thereof, the Pledge and Security
Agreement, the other Loan Documents, and any other sums now or hereafter owing
by the Company to the Banks or the Agent (including but not limited to
principal, interest, reasonable attorneys' fees, filing, and recording costs,
out-of-pocket expenses, collection costs, and all other liabilities and
obligations of the Company to the Banks and the Agent) thereunder, all of the
foregoing being hereinafter referred to as the "Guarantied Obligations." The
Guarantor hereby agrees that its liabilities under this Guaranty shall be
primary and direct, and that neither the Banks nor the Agent shall be required
to pursue any right or remedy it may have (a) against the Company under the
Credit Agreement, the Warehousing Notes, the Pledge and Security Agreement, the
other Loan Documents, or otherwise or (b) against any other guarantor, and that
neither the Banks nor the Agent shall be required to first commence any action
or obtain any judgment against the Company, or any other guarantor, or against
property in which the Agent holds a security interest for the benefit of the
Banks or otherwise realize upon its security interest in such property, before
enforcing this Guaranty against the Guarantor.
3. Continuing Guaranty. This Guaranty is an absolute,
-------------------
unconditional, complete, and continuing guaranty of payment and performance of
the Guarantied Obligations by the Guarantor, and shall continue to be in force
and be binding upon the Guarantor until the Guarantied Obligations have been
paid and performed in full. No notice of the Guarantied Obligations to which
this Guaranty may apply or of any renewal or extension thereof need be given to
the Guarantor and none of the foregoing acts shall release the Guarantor from
liability hereunder. The Guarantor hereby expressly waives (a) demand of
payment, presentment, protest, notice of dishonor, nonpayment, or nonperformance
on any and all forms of the Guarantied Obligations; (b) notice of acceptance of
this Guaranty and notice of any liability to which it may apply; (c) all other
notices and demands of any kind and description relating to the Guarantied
Obligations now or hereafter provided for by any statute, law, rule, or
regulation; and (d) any and all defenses of the Company pertaining to the
Guarantied Obligations except for the defense of discharge by payment. The
Guarantor shall not be exonerated with respect to its liabilities under this
Guaranty by any act or thing except payment and performance in full of the
Guarantied Obligations.
4. Other Transactions. The Banks and the Agent are expressly
------------------
authorized (a) to exchange, surrender, or release with or without consideration
any or all collateral and
2
<PAGE>
security that may at any time be placed with it by the Company or by any other
person, or to forward or deliver any or all such collateral and security
directly to the Company for collection and remittance or for credit, or to
collect the same in any other manner without notice to the Guarantor; and (b) to
amend, modify, extend, or supplement the Credit Agreement, the Warehousing
Notes, the Pledge and Security Agreement, the other Loan Documents or other
agreement with respect to the Guarantied Obligations, waive compliance by the
Company with the respective terms thereof, and settle or compromise any of the
Guarantied Obligations without notice to the Guarantor and without in any manner
affecting the absolute liabilities of the Guarantor hereunder. The liabilities
of the Guarantor hereunder shall not be affected or impaired by any failure,
neglect, or omission on the part of the Banks or the Agent to realize upon any
of the Guarantied Obligations or upon any collateral or security for any or all
of the Guarantied Obligations, nor by the taking by the Banks or the Agent of
(or the failure to take) any other guaranty or guaranties to secure the
Guarantied Obligations, nor by the taking by the Banks or the Agent of (or the
failure to take or the failure to perfect its security interest in) collateral
or security of any kind. The Guarantor acknowledges that this Guaranty is in
effect and that possession of this Guaranty by any Bank or the Agent shall be
conclusive evidence of due delivery hereof by the Guarantor, and further agrees
that this Guaranty shall continue in full force and effect, both as to the
Guarantied Obligations then existing and/or thereafter created, notwithstanding
the release of or extension of time to any other guarantor of the Guarantied
Obligations or any part thereof.
5. Waiver of Subrogation. The Guarantor hereby waives all rights of
---------------------
subrogation that may arise in connection with this Guaranty (whether
contractual, under Section 509 of the Bankruptcy Code, under common law, or
otherwise) and all contractual, statutory, or common law rights of
reimbursement, contribution, or indemnity or any similar such right from the
Company that may otherwise have arisen in connection with this Guaranty until
the Guarantied Obligations are fully paid and discharged.
6. Application of Payments. Any and all payments upon the Guarantied
-----------------------
Obligations made by the Guarantor or by any other person, and/or the proceeds of
any or all collateral or security for any of the Guarantied Obligations, may be
applied by the Agent on such items of the Guarantied Obligations as the Agent
may elect.
7. Recovery of Payment. If any payment received by the Banks or the
-------------------
Agent and applied to the Guarantied Obligations is subsequently set aside,
recovered, rescinded, or required to be returned for any reason (including but
not limited to the bankruptcy, insolvency, or reorganization of the Company or
any other obligor), the Guarantied Obligations to which such payment was applied
shall for the purposes of this Guaranty be deemed to have continued in
existence, notwithstanding such application, and this Guaranty shall be
enforceable as to such Guarantied Obligations as fully as if such application
had never been made.
8. New Promise. Any acknowledgment or new promise, whether supported
-----------
by payment of principal or interest or otherwise and whether made by the Company
or
3
<PAGE>
others, with respect to any of the Guarantied Obligations shall, if the statute
of limitations in favor of the Guarantor against the Banks and the Agent shall
have commenced to run, toll the running of such statute of limitations and, if
the period of such statute of limitations shall have expired, prevent the
operation of such statute of limitations with respect to such promise.
9. Discharge. Until each and every one of the Guarantied Obligations
---------
are paid and performed in full, the obligations of the Guarantor hereunder shall
not be released, in whole or in part, by any action or thing that might, but for
this provision of this Guaranty, be deemed a legal or equitable discharge of a
surety or guarantor, other than payment and performance in full of the
Guarantied Obligations, or by reason of any waiver, extension, modification,
forbearance, or delay or other act or omission of the Banks or the Agent or its
failure to proceed promptly or otherwise, or by reason of any action taken or
omitted by the Banks or the Agent whether or not such action or failure to act
varies or increases the risk of, or affects the rights or remedies of the
Guarantor, nor shall any modification of any of the obligations of the Company
or the release of any security therefor by operation of law or by the action of
any third party affect in any way the obligations of the Guarantor hereunder,
and the Guarantor hereby expressly waives and surrenders any defense to its
liabilities hereunder based upon any of the foregoing acts, omissions, things,
agreements, or waivers of any of them, it being the purpose and intent of the
parties hereto that the Guarantied Obligations constitute the direct and primary
and joint and several obligations of the Guarantor and that the covenants,
agreements, and obligations of the Guarantor hereunder be absolute,
unconditional, and irrevocable.
10. Termination. Subject to Paragraphs 7 and 14 hereof, this
-----------
Guaranty shall terminate upon, and only upon, the expiration of the Commitments
and the payment and performance in full of all of the Guarantied Obligations and
the Guarantor's other obligations hereunder (including, without limitation, its
obligations under Paragraph 16(a) hereof), all in accordance with the provisions
of the Credit Agreement, the Warehousing Notes, the Pledge and Security
Agreement and the other Loan Documents, as the same may be amended, renewed, or
replaced from time to time. When this condition has been met, the Agent will
furnish the Guarantor written cancellation of this Guaranty; provided, however,
that the Guarantor acknowledges and agrees (i) that its contingent liability
under this Guaranty shall continue for a period of 395 days after the last day
on which the Agent or any Bank received a payment under the Credit Agreement,
the Warehousing Notes, the Pledge and Security Agreement or the other Loan
Documents in respect of antecedent debt; and (ii) that if any case in respect of
the Company under the United States Bankruptcy Code (or any successor statute)
is commenced prior to the end of such 395-day period, then the termination of
such Guarantor's contingent liability hereunder shall be automatically extended
until the earlier of (A) the date on which an order determining that the Banks
and the Agent have no liability under 11 U.S.C. (S) 550 becomes final and
nonappealable or (B) the date on which such case is closed or dismissed and
either all appeals of any order affecting the same have been exhausted or the
time in which to perfect such an appeal has expired with no appeal having been
perfected. The Banks and the Agent shall be entitled to retain an original
counterpart
4
<PAGE>
or counterparts of this Guaranty manually signed by the Guarantor.
11. Acceleration. In the event of (a) any default by the Company or
------------
the Guarantor in the payment of any principal of or interest on the Warehousing
Notes for which notice thereof is given by the Banks or the Agent to the
Guarantor and which default shall not have been cured within 5 days after
delivery of such notice to the Guarantor, or (b) any other default by the
Guarantor under this Guaranty, the Guarantor shall be obligated hereunder
without further act and without further notice or demand or any other action by
the Banks or the Agent, to pay and perform the Guarantied Obligations, as the
same may be accelerated by the Agent. Nothing in this Paragraph 11 shall affect
the liability of the Company under the Warehousing Notes or the other Loan
Documents, as the same be amended, restated, renewed, or replaced or the Banks'
or the Agent's rights and remedies thereunder.
12. Remedies. All remedies afforded to the Banks and the Agent by
--------
reason of this Guaranty are separate and cumulative remedies and it is agreed
that no one of such remedies, whether or not exercised by the Banks or the
Agent, shall be deemed to be in exclusion of any of the other remedies available
to the Banks and the Agent and shall in no way limit or prejudice any other
legal or equitable remedy that the Banks and the Agent may have hereunder and
with respect to the Guarantied Obligations. The Guarantor agrees that included
within the equitable remedies available to the Banks and the Agent hereunder is
the right of the Banks and the Agent to elect to have any and all of the
obligations and agreements of the Guarantor hereunder specifically performed.
13. Judicial Actions. The Guarantor hereby waives any and all right
----------------
to cause a marshalling of the assets of the Company or any other action by any
court or other governmental body with respect thereto or to cause the Banks or
the Agent to proceed against any security for the Guarantied Obligations or any
other recourse that the Banks or the Agent may have with respect thereto, and
the Guarantor further waives any and all requirements that the Banks or the
Agent institute any action or proceeding at law or in equity against the Company
or anyone else, or with respect to the Warehousing Notes, or any collateral
security therefor, as a condition precedent to making demand on or bringing an
action or obtaining and/or enforcing a judgment against, the Guarantor upon this
Guaranty. The Guarantor further waives any requirement that the Banks and the
Agent seek performance by the Company or any other person of any obligation
under the Warehousing Notes or any collateral security therefor as a condition
precedent to making a demand on, or bringing any action or obtaining and/or
enforcing a judgment against, the Guarantor upon this Guaranty. The Guarantor
further acknowledges that time is of the essence with respect to his obligations
under this Guaranty. Any remedy or right hereby granted that shall be found to
be unenforceable as to any person or under any circumstance, for any reason,
shall in no way limit or prevent the enforcement of such remedy or right as to
any other person or circumstance, nor shall such unenforceability limit or
prevent enforcement of any other remedy or right hereby granted.
5
<PAGE>
14. Bankruptcy of the Company. The Guarantor expressly agrees that
-------------------------
its liabilities and obligations under this Guaranty shall not in any way be
affected by the institution by or against the Company or any other person or
entity of any bankruptcy, reorganization, arrangement, insolvency, or
liquidation proceedings, or any other similar proceedings for relief under any
bankruptcy law or similar law for the relief of debtors and that any discharge
of any of the Guarantied Obligations pursuant to any such bankruptcy or similar
law or other law shall not discharge or otherwise affect in any way the
obligations of the Guarantor under this Guaranty, and that upon the institution
of any of the above actions, such obligations shall be enforceable against the
Guarantor.
15. Representations, Warranties and Covenants.
-----------------------------------------
(a) Any representations and warranties made by the Company in Section
3 of the Credit Agreement with respect to the Guarantor, its Subsidiaries or its
property are incorporated herein in their entirety and the Guarantor makes each
such representation as though set forth herein in its entirety. The Guarantor
hereby agrees that, without any further act on its part, each time the Company
makes or is deemed to make the representations in Section 3 of the Credit
Agreement and incorporated herein by reference, the Guarantor shall be deemed
also to make such representations.
(b) Without limiting the generality of the performance guaranties of
this Guaranty, the Guarantor covenants that it will cause the Company to comply
with each covenant set forth in Section 4 of the Credit Agreement with respect
to the Guarantor, its Subsidiaries or its property. With respect to each such
covenant requiring the Guarantor to act or refrain from acting, or to cause its
Subsidiaries to act or refrain from acting, the Guarantor hereby covenants that
it will so act, refrain from acting or cause its Subsidiaries to act or refrain
from acting.
16. General.
-------
(a) The Guarantor agrees to reimburse the Banks and the Agent, upon
demand for all reasonable out-of-pocket expenses (including reasonable
attorneys' fees and legal expenses) incurred by any Bank or the Agent
arising out of or in connection with the enforcement against the Guarantor
of the Guarantied Obligations or arising out of or in connection with any
failure of the Guarantor to fully and timely perform its obligations
hereunder.
(b) No delay on the part of the Banks or the Agent in the exercise of
any power or right shall operate as a waiver thereof, nor shall any single
or partial exercise of any power or right preclude other or further
exercise thereof or the exercise of any other power or right.
(c) No invalidity, irregularity, or unenforceability of all or any
part of the Guarantied Obligations or of any security therefor or other
recourse with respect
6
<PAGE>
thereto shall affect, impair, or be a defense to this Guaranty, and this
Guaranty is a primary obligation of the Guarantor.
(d) Any notice, demand, or consent authorized by this Guaranty to be
given to the Guarantor shall be deemed to be given four days after being
deposited in the U.S. mail, postage prepaid to the Guarantor, addressed to
the Guarantor at the address shown under its signature on the signature
page hereof, or at such other address as the Guarantor may, by written
notice received by the Banks and the Agent, designate as its address for
purposes of notice hereunder, or upon actual delivery to the Guarantor at
such address. Any notice or request authorized by this Guaranty to be given
to the Banks and the Agent by the Guarantor hereunder shall be deemed to be
given four days after being deposited in the U.S. mail, postage prepaid, or
upon delivery to, the Banks and the Agent, at their respective addresses
set forth in the Credit Agreement or at such other address as any Bank or
the Agent may, by written notice received by the Guarantor, designate as
its address for purposes of notice hereunder.
(e) This Guaranty is made under and shall be governed by the law of
the State of Minnesota, without giving effect to conflict of laws
principles thereof.
(f) Paragraph headings herein are for convenience only and shall not
be deemed part of this Guaranty. This Guaranty may be executed in any
number of counterparts, all of which taken together shall constitute one
and the same instrument.
(g) This Guaranty shall be binding upon the Guarantor, its successors
and assigns and shall inure to the benefit of the Bank and its successors
and assigns.
THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.
7
<PAGE>
IN WITNESS WHEREOF, the Guarantor has executed this Guaranty as of the
date first above written.
NEW CENTURY FINANCIAL CORPORATION
By____________________________________
____________
Its______________________________
____________
Address for Notices:
-------------------
4910 Birch Street
Suite 100
Newport Beach, California 92660
Attention: Brad A. Morrice
Telecopier Number: (714) 440-7033
8
<PAGE>
EXHIBIT D TO AMENDED AND
RESTATED CREDIT AGREEMENT
PLEDGE AND SECURITY AGREEMENT
THIS PLEDGE AND SECURITY AGREEMENT ("Agreement"), dated as of October 25,
1996, is by and between NEW CENTURY MORTGAGE CORPORATION, a California
corporation (the "Company"), and FIRST BANK NATIONAL ASSOCIATION, a national
banking association ("First Bank"), as collateral agent (in such capacity,
together with any successor agent under the Credit Agreement referred to below,
which shall also be a successor collateral agent hereunder, the "Agent") for the
Banks (as defined below) and FBS Business Finance Corporation (the "Lessor") as
lessor under any present or future leases of equipment by the Lessor, as lessor,
to the Company or New Century Financial Corporation ("NCFC"), as lessee, or as
lender under any present or future loan by the Lessor, as lender, to the Company
or NCFC, as borrower, secured by equipment.
RECITALS:
A. The Company, the banks party thereto (the "Banks") and the Agent have
entered into an Amended and Restated Credit Agreement dated as of October 25,
1996 (as the same may be amended or modified from time to time, the "Credit
Agreement").
B. The Company and First Bank are parties to a Pledge and Security
Agreement dated as of February 12, 1996 (the "Existing Pledge Agreement"), which
secures the obligations of the Company to First Bank under the Existing Credit
Agreement (as defined in the Credit Agreement).
C. The Lessor has, and may from time to time hereafter, lease equipment
to the Company or NCFC, or make loans to the Company or NCFC secured by
equipment.
D. It is a condition precedent to the effectiveness of the Credit
Agreement and the Banks' obligations to extend credit accommodations thereunder,
and to the willingness of the Lessor to enter into equipment leases with the
Company or NCFC that the Existing Pledge Agreement be amended and restated
pursuant to this Agreement, which condition precedent the Banks have not waived
and will not waive.
E. The Company finds it advantageous, desirable and in the Company's best
interest to comply with the requirement that the Existing Pledge Agreement be
amended and restated pursuant to this Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants herein contained and in order to induce the Agent and the Banks to
become parties to, and to extend credit under, the Credit Agreement, the parties
hereto agree as follows:
<PAGE>
Section 1. DEFINITIONS
-----------
Each capitalized term used herein which is not otherwise defined
herein shall have the meaning ascribed to such term in the Credit Agreement,
including Exhibit G thereto. In addition, the following terms shall have the
following respective meanings:
"Agreement to Pledge": an agreement to pledge substantially in the
-------------------
form of Attachment 1 hereto.
"Bailee Letter": a letter substantially in the form of Attachment 2
-------------
hereto.
"Closing Agent": with respect to any Mortgage Loan, the title company
-------------
or other Person performing the functions of a title company in connection
with the closing of such Mortgage Loan.
"Collateral": as defined in Section 2 hereof.
----------
"Collateral Identification Letter": a letter substantially in the
--------------------------------
form of Attachment 3 hereto.
"Collections": as defined in Section 2(h) hereof.
-----------
"FIRREA Qualifying Appraisal": with respect to any Pledged Mortgage
---------------------------
Loan, an appraisal of the real estate securing such Pledged Mortgage Loan
which meets the requirements of the applicable appraisal regulations under
Title XI of the Financial Institutions Reform, Recovery and Enforcement Act
of 1989, including, without limitation, the appraisal regulations
applicable to mortgage warehousing loans (but if said regulations do not
require an appraisal with respect to a Pledged Mortgage Loan, then no
appraisal shall be required with respect thereto hereunder).
"Lease Agreement": each and any agreement for the lease of equipment
---------------
or for the making of a loan secured by equipment now existing or at anytime
entered into between the Lessor, as lessor or lender, and the Company or
NCFC, as lessee or borrower.
"Lease Obligations": all of the obligations now or hereafter arising
-----------------
owed by the Company or NCFC to Lessor in connection with any lease of
equipment or loan secured by equipment.
"Loan Detail Listing": a loan detail listing substantially in the
-------------------
form of Attachment 4 hereto, which data may be electronically transmitted.
"Obligor": a person or other entity who now or hereafter is or
-------
becomes liable to the Company with respect to any of the Collateral.
2
<PAGE>
"Pledged Mortgage Loans": Mortgage Loans deemed to have been
----------------------
delivered to the Agent as provided in Section 4.01 hereof and Mortgage
Loans delivered to the Agent as provided in Section 4.02 hereof.
"Related Mortgage-backed Security": a Mortgage-backed Security,
--------------------------------
whether certificated or uncertificated, that represents an interest in, or
is secured by, any Mortgage Loans that were Pledged Mortgage Loans at the
time of formation of the related pool, unless the Lender's security
interest in such Pledged Mortgage Loan is released as provided herein prior
to or simultaneously with the issuance of such Mortgage-backed Security.
"Transmittal Letter": a transmittal letter substantially in the form
------------------
of Attachment 5 hereto.
"Trust Receipt": a trust receipt substantially in the form of
-------------
Attachment 6 hereto.
"Wet Funding Clearing Account": such accounts of the Company with the
----------------------------
Agent as may be designated from time to time by the Agent, which shall be
under the sole dominion and control of the Agent.
Section 2. PLEDGE
------
As collateral security for the due and punctual payment and performance of
all of the Obligations and Lease Obligations, the Company does hereby pledge,
hypothecate, assign, transfer and convey to the Agent, for the benefit of the
Banks and the Lessor, and grants to the Agent, for the benefit of the Banks and
the Lessor, a security interest in and to, the following described property (the
"Collateral"):
(a) all right, title and interest of the Company in and to the
Pledged Mortgage Loans and Related Mortgage-backed Securities and all
promissory notes, participation agreements, participation certificates, or
other instruments or agreements which evidence the Pledged Mortgage Loans
and Related Mortgage-backed Securities;
(b) all right, title and interest of the Company in and to all
Mortgage Notes, Mortgages and other notes, real estate mortgages, deeds of
trust, security agreements, chattel mortgages, assignments of rent and
other security instruments whether now or hereafter owned, acquired or held
by the Company which evidence or secure (or constitute collateral for any
note, instrument or agreement evidencing or securing) any of the Pledged
Mortgage Loans;
(c) all right, title and interest of the Company in and to all
financing statements perfecting any security interest securing any Pledged
Mortgage Loan or property securing any Pledged Mortgage Loan;
3
<PAGE>
(d) all right, title and interest of the Company in and to all
guaranties, mortgage insurance policies and other instruments by which the
persons or entities executing the same guarantee or insure, among other
things, the payment or performance of the Pledged Mortgage Loans;
(e) all right, title and interest of the Company in and to all title
insurance policies, title insurance binders, commitments or reports
insuring or relating to any Pledged Mortgage Loan or property securing any
Pledged Mortgage Loan;
(f) all right, title and interest of the Company in and to all
surveys, bonds, hazard and liability insurance policies, participation
agreements and any other agreement, instrument or document pertaining to,
affecting, obtained by the Company in connection with, or arising out of,
the Pledged Mortgage Loans;
(g) all right, title and interest of the Company in and to all Take-
Out Commitments and other agreements to purchase any Pledged Mortgage Loans
or Related Mortgage-backed Securities;
(h) all right, title and interest of the Company in and to all
collections on, and proceeds of or from, any and all of the foregoing
(hereinafter collectively called "Collections");
(i) all right, title and interest of the Company in and to any other
asset of the Company which has been or hereafter at any time is delivered
to the Agent or any Bank for the purpose of being pledged hereunder;
(j) all files, surveys, certificates, correspondence, appraisals,
computer programs, tapes, discs, cards, accounting records, and other
records, information, and data of the Company relating to the Pledged
Mortgage Loans and Related Mortgage-backed Securities (including all
information, data, programs, tapes, discs and cards necessary to administer
and service the Pledged Mortgage Loans and Related Mortgage-backed
Securities);
(k) all balances, credits and deposits of the Company contained in
the Collateral Account and in the Wet Funding Clearing Account; and
(l) any and all balances, credits, deposits, accounts or moneys of,
or in the name of, the Company representing or evidencing the foregoing or
any proceeds thereof, and any and all proceeds of any of the foregoing.
4
<PAGE>
Section 3. REPORTS CONCERNING EXISTING COLLATERAL AND HEREAFTER
----------------------------------------------------
ACQUIRED COLLATERAL
- -------------------
From time to time hereafter as reasonably requested by the Agent, the
Company will promptly give a written report to the Agent describing and listing
each document, instrument or other paper which evidences, secures, guarantees,
insures or pertains to any item of the Collateral whether now or hereafter
owned, acquired or held by the Company. Such written report shall contain
sufficient information to enable the Agent to identify each such document,
instrument or other paper. The Company (a) upon the request of the Agent, shall
promptly provide additional information concerning, or a more complete
description of, each such document, instrument or other paper and (b) at the
request of the Agent, shall promptly deliver the same to the Agent.
Section 4. DELIVERY OF COLLATERAL DOCUMENTS
--------------------------------
4.1 Delivery of Mortgage Loans. A Mortgage Loan shall be deemed to
--------------------------
have been delivered and pledged to the Agent under this Pledge and Security
Agreement when:
(a) the Agent has received, with respect to such Mortgage Loan, (i)
an Agreement to Pledge, duly completed and executed by the Company, (ii) a
Collateral Identification Letter duly completed and executed by the Company
and (iii) a Loan Detail Listing, duly completed; and
(b) either
(i) a wire transfer of funds from the Wet Funding Clearing
Account has been initiated for the purpose of funding the origination or
purchase of such Mortgage Loan;
(ii) a draft drawn upon the Agent for the purpose of funding
the origination or purchase of such Mortgage Loan has been received by the
Agent and has cleared the Agent's payment process; or
(iii) a draft drawn upon the Agent for the purpose of funding
the origination or purchase of such Mortgage Loan has been accepted by the
Agent, or the Agent has otherwise assured payment thereof.
The documents referred to in clause (a) of the preceding sentence shall be
transmitted to the Agent by telecopier or electronic data transmission not later
than 12:30 p.m. (Minneapolis time) on the applicable Warehousing Borrowing Date
selected for funding such Mortgage Loan, and the originally executed copies of
such documents shall be delivered to the Agent by courier on the following
Business Day.
5
<PAGE>
4.2 Delivery of Pledged Mortgage Loan Documentation. The Company
-----------------------------------------------
shall deliver to the Agent, with respect to each Pledged Mortgage Loan, the
following described instruments and documents within three Business Days after
the Warehousing Borrowing Date, in the case of Warehousing Borrowing Dates
occurring during the Month-End Period, and five Business Days after the
Warehousing Borrowing Date, in all other cases, on which the applicable
Warehousing Loan was made for the purpose of funding such Mortgage Loan:
(a) the original Mortgage Note evidencing such Pledged Mortgage
Loan, duly endorsed in blank as follows:
"Pay to the order of,
______________________________________,
without recourse
NEW CENTURY MORTGAGE CORPORATION
By____________________________________
Title_________________________________"
(b) a copy of the Mortgage securing such Pledged Mortgage Loan,
certified by the Closing Agent to be a true and exact copy of the original
Mortgage as submitted for recording;
(c) a duly executed appropriate assignment of said Mortgage in favor
of the Agent and in recordable form;
(d) if there are any intermediate assignments of said Mortgage, two
copies of each such assignment, certified by the Closing Agent or the
Company to be a true and exact copy of the original thereof as submitted
for recording;
(e) if any of the foregoing documents was executed on behalf of a
party thereto by another Person under a power of attorney, a copy of the
original executed copy of such power of attorney, certified by the Closing
Agent to be a true and exact copy of the original thereof;
(f) a copy of the Company's closing instructions to the Closing
Agent for such Pledged Mortgage Loan, containing the language set forth on
Exhibit G to the Credit Agreement, and a Transmittal Letter listing all
documents being delivered to the Agent;
(g) a copy of the Closing Agent's Settlement Statement for such
Mortgage Loan; and
6
<PAGE>
(h) a completed Company Worksheet Concerning Applicability of
Section 32 of Regulation Z (12 CFR Section 226.32) and, if Section 32
applies, copies of the disclosure and other related documentation delivered
to the mortgagor, or executed by the mortgagor, evidencing compliance with
Section 32.
4.3 Delivery of Additional Mortgage Loan Documents Upon Request.
-----------------------------------------------------------
Within five Business Days after receiving a written request from the Agent to
deliver the same with respect to any Pledged Mortgage Loan, the Company shall
deliver to the Agent the following:
(a) All original guaranties, assignments of rents and other
instruments and documents relating to security for and payment of such
Pledged Mortgage Loan, together with duly executed assignments thereof;
(b) A mortgagee's title insurance policy (or commitment therefor) in
the form of an American Land Title Association standard policy (revised
coverage, most recent form) from a substantial and reputable title
insurance company acceptable to the Agent in favor of the Company insuring
the lien of the Mortgage securing such Pledged Mortgage Loan (subject only
to such liens and encumbrances as are generally acceptable to reputable
lending institutions, mortgage investors and securities dealers) or, if
such a mortgagee's title policy (or commitment therefor) is generally not
available in the state in which the real property subject to such Mortgage
is located, an opinion of an attorney reasonably acceptable to the Agent to
the effect that the Mortgage securing such Pledged Mortgage Loan is a valid
first lien free and clear of all other liens, encumbrances and restrictions
except such as are generally acceptable to reputable lending institutions,
mortgage investors and securities dealers;
(c) Evidence satisfactory to the Agent that the premises covered by
the Mortgage securing such Pledged Mortgage Loan is insured against fire
and perils of extended coverage for an amount at least equal to the lesser
of (i) 80% of the outstanding principal balance of such Pledged Mortgage
Loan or (ii) the full replacement cost of such premises;
(d) With respect to each Pledged Mortgage Loan and each Related
Mortgage-backed Security, copies of the applicable Take-Out Commitment and
all documents and instruments called for thereunder, together with a
certificate signed by an officer of the Company that, as of the date of
delivery thereof, such Pledged Mortgage Loan and all documentation therefor
satisfies all requirements and conditions of the applicable Take-Out
Commitment;
(e) Originals, or photocopies, as the Agent may request, of surveys
(or plat maps, if surveys are not available) and all other instruments,
documents and other papers pertaining to each such Pledged Mortgage Loan
which are in the
7
<PAGE>
possession or control of the Company or which the Company has the right to
possess or control;
(f) The original of each Mortgage referred to Section 4.02(b) hereof,
together with satisfactory evidence of its recordation, or, if the original
recorded Mortgage has not been returned to the Company by the applicable
recording officer, a copy of the original recorded Mortgage certified as a
true and exact copy thereof by the applicable recording officer;
(g) Evidence satisfactory to the Agent that the Company has obtained
and maintains in its files, as agent for the Agent, a FIRREA Qualifying
Appraisal with respect to such Pledged Mortgage Loan, which evidence may
include, but is not limited to, a copy of such FIRREA Qualifying Appraisal
certified by the Company to be a true and exact copy of the original
thereof as maintained in the Company's files; and
(h) copies of all truth-in-lending disclosures showing compliance
with Regulation Z of the Board of Governors of the Federal Reserve System
and copies of all disclosures under the Real Estate Settlement Procedures
Act of 1974, as amended.
4.04 Form of Assignments. All assignments executed and delivered by
-------------------
the Company pursuant to this Section 4 shall be in form satisfactory for
recording in the real estate records of the applicable jurisdiction and in form
and substance acceptable to and approved by the Agent.
4.05 Effect of Transmittal Letters. Any Transmittal Letter delivered
-----------------------------
to the Agent hereunder, together with the documents accompanying such
Transmittal Letter, shall conclusively be presumed to have been delivered to the
Agent on behalf of the Company notwithstanding that such Transmittal Letter
shall not have been signed or submitted by a person who has been authorized in
writing to do so by the Company through its Board of Directors or otherwise.
4.06 Endorsement and Delivery of Checks, Etc. The Company will from
----------------------------------------
time to time whenever an Event of Default exists, upon the request of the Agent,
endorse and deliver to the Agent any draft, check, note or other writing which
evidences a right to the payment of money which constitutes Collateral.
4.07 Defects in Collateral Documentation; Loss of Collateral Value.
-------------------------------------------------------------
A Pledged Mortgage Loan which has been delivered to the Agent under this Pledge
and Security Agreement in accordance with Section 4.01 hereof shall be and
remain Collateral which is subject to the lien and security interest granted to
the Agent under Section 2 hereof until such Pledged Mortgage Loan is sold to an
Investor in accordance with Sections 10.02 and 10.03 hereof (in which case the
proceeds thereof, including, without limitation, any Related Mortgage-backed
Security, shall constitute Collateral) or
8
<PAGE>
released pursuant to Section 10.04 hereof or until this Pledge and Security
Agreement terminates in accordance with Section 19 hereof, notwithstanding (a)
any defect in any document delivered to the Agent pursuant to Section 4.01,
4.02, or 4.03 hereof, (b) the failure of such Pledged Mortgage Loan to have or
continue to have Warehousing Collateral Value, (c) the failure of the Company to
make timely delivery of any document required to be delivered to the Agent under
Section 4.02 hereof, (d) the failure of the Company to make timely delivery of
any document required to be delivered to the Agent under Section 4.03 hereof, or
(e) any other fact, circumstance, condition or event whatsoever. For purposes of
the preceding sentence, the funding of the origination or purchase of a Pledged
Mortgage Loan from the proceeds of a Warehousing Loan and/or the assignment of
Warehousing Collateral Value to such Pledged Mortgage Loan by the Agent shall be
deemed to be conclusive evidence of the delivery of such Pledged Mortgage Loan
under Section 4.01 hereof, notwithstanding any subsequent determination by the
Agent that the documentation delivered for such Pledged Mortgage Loan was
incomplete or defective in any respect or that such Pledged Mortgage Loan should
not have been assigned Warehousing Collateral Value.
Section 5. REPRESENTATIONS AND WARRANTIES
------------------------------
The Company hereby represents and warrants that: (a) all of the
representations and warranties set forth in the Credit Agreement are true and
correct; (b) the Company is or will be the legal and equitable owner of the
Collateral and its interests therein are or will be free and clear of all liens,
security interests, charges and encumbrances of every kind and nature (other
than as created hereunder or under Take-Out Commitments or under assignments to
purchasers under such Take-Out Commitments); (c) no financing statement or other
evidence of lien covering any of the Collateral is or will be on file in any
public office other than financing statements filed with respect to the Company
as debtor and the Agent as secured party; (d) the Company has good right, power
and lawful authority to pledge, assign and deliver the Collateral in the manner
hereby done or contemplated; (e) no consent or approval of any governmental
body, regulatory authority, person, trust, or entity is or will be (i) necessary
to the validity or enforceability of the rights created hereunder or (ii)
required prior to the assignment, transfer and delivery of any of the Collateral
to the Agent; (f) to the Company's knowledge, no material dispute, right of
setoff, counterclaim or defense exists with respect to all or any part of the
Collateral; (g) this Pledge and Security Agreement constitutes the legal, valid
and binding obligation of the Company enforceable against the Company and the
Collateral in accordance with its terms (subject to limitations as to
enforceability which might result from bankruptcy, reorganization, arrangement,
insolvency or other similar laws affecting creditors' rights generally); (h) in
making and closing each Pledged Mortgage Loan, the Company has or will have
fully complied in all material respects with, and all collateral documents
delivered with respect to such Pledged Mortgage Loan comply or will comply in
all material respects with, all applicable federal, state and local laws,
regulations and rules, including, but not limited to, (i) usury laws, (ii) the
Real Estate Settlement Procedures Act of 1974, (iii) the Equal Credit
Opportunity Act, (iv) the Federal Truth in Lending Act, (v) Regulation Z of the
9
<PAGE>
Board of Governors of the Federal Reserve System (including, without limitation,
Section 32 thereof, to the extent applicable) and (vi) all other consumer
protection and truth-in-lending laws which may apply, and in each case with the
regulations promulgated in connection therewith, as the same may be amended from
time to time; and the Company shall maintain sufficient documentary evidence in
its files with respect to such Pledged Mortgage Loans to substantiate such
compliance; (i) the Company has obtained or will obtain prior to the delivery of
any Mortgage Loan to the Agent in accordance with Section 4.01 hereof, and will
maintain in its files as agent for the Agent, a FIRREA Qualifying Appraisal with
respect to such Mortgage Loan; (j) immediately upon (i) the execution and
delivery of the Credit Agreement, the Warehousing Note and the other Loan
Documents, (ii) the acquisition by the Company of rights in a Mortgage Loan
funded by a Warehousing Loan, and (iii) the execution and delivery to the Agent
of an Agreement to Pledge and related Collateral Identification Letter and Loan
Detail Listing in connection with such Mortgage Loan, the Agent, for the benefit
of the Banks and the Lessor, will have a valid and perfected first priority
security interest in such Mortgage Loan and in the related Mortgage Note and
Mortgage evidencing and securing such Mortgage Loan (without the Agent taking
possession of said Mortgage Note) for a period of 21 days from the date such
Warehousing Loan is made for the purpose of funding such Mortgage Loan; (k) upon
the delivery of the Mortgage Note evidencing a Pledged Mortgage Loan to the
Agent as contemplated by Section 4.02 hereof, the Agent, for the benefit of the
Banks and the Lessor, shall have a valid and perfected first priority security
interest in such Pledged Mortgage Loan, without regard to the 21-day temporary
perfection period referred to in clause (j) of this sentence; (l) immediately
upon (i) the execution and delivery of the Credit Agreement, the Warehousing
Note and the other Loan Documents, (ii) the acquisition by the Company of rights
in such Collateral and (iii) the filing with the Secretary of State of
California of a financing statement showing the Company as debtor and the Agent
as secured party and describing the Collateral, the Agent, for the benefit of
the Banks and the Lessor, shall have a valid and perfected first priority
security interest in the Collateral which is other than as described in clauses
(j) and (k) of this Section 5, to the extent that a security interest in such
other Collateral can be perfected by filing a financing statement; (m) each
Pledged Mortgage Loan has been fully advanced and is a first lien on the
premises described therein; (n) each Pledged Mortgage Loan complies with all
requirements of this Agreement and the Credit Agreement applicable thereto; (o)
except as described in the reports provided by the Company to the Agent and the
Banks pursuant to Section 4.01 of the Credit Agreement, or as otherwise
disclosed to the Agent, there is no monetary default existing under any Pledged
Mortgage Loan that remains in effect on the date the Compliance/Borrowing Base
Certificate for the month in which such default occurred is required to be
delivered to the Agent and the Banks pursuant to Section 4.01(c)(ii) of the
Credit Agreement and, to the knowledge of the Company, there is no other default
existing under any Pledged Mortgage Loan; and (p) all Pledged Mortgage Loans
secured by properties located in special flood hazard areas designated by the
Secretary of Housing and Urban Development are and shall continue to be covered
by flood insurance under the National Flood Insurance Program.
10
<PAGE>
Section 6. POSSESSION OF COLLATERAL; STANDARD OF CARE
------------------------------------------
The Agent shall exercise reasonable care in the custody and
preservation of the Collateral, shall keep the documents delivered to it in
connection with Pledged Mortgage Loans at a facility protected against fire and
shall keep the Collateral separate from similar collateral furnished by third
parties. The Agent shall be deemed to have exercised reasonable care in the
custody and preservation of any of the Collateral in its possession if it takes
such action for that purpose as the Company requests in writing, but failure of
the Agent to comply with any such request shall not itself be deemed a failure
to exercise reasonable care, and no failure of the Agent to preserve or protect
any rights with respect to such Collateral not so requested by the Company shall
be deemed a failure to exercise reasonable care in the custody or preservation
of such Collateral. The Agent shall also be deemed to have exercised reasonable
care in the custody and preservation of any Collateral in its possession if such
Collateral is accorded treatment substantially equal to that which the Agent
accords its own property of like kind.
Section 6A. AGENT'S DUTIES
--------------
The powers conferred on the Agent hereunder are solely to protect its
interest in the Collateral, for the benefit of the Banks and the Lessor, and
shall not impose any duty upon it to exercise any such powers. The Agent shall
be deemed to have exercised reasonable care in the safekeeping of any Collateral
in its possession if such Collateral is accorded treatment substantially equal
to the safekeeping which the Agent accords its own property of like kind. Except
for the safekeeping of any Collateral in its possession and the accounting for
monies and for other properties actually received by it hereunder, the Agent
shall have no duty, as to any Collateral, as to ascertaining or taking action
with respect to calls, conversions, exchanges, maturities, tenders or other
matters relative to any Collateral, whether or not the Agent has or is deemed to
have knowledge of such matters, or as to the taking of any necessary steps to
preserve rights against any Persons or any other rights pertaining to any
Collateral.
Section 7. COLLECTIONS ON COLLATERAL BY THE COMPANY; ACCOUNTING
----------------------------------------------------
Until the Agent gives notice to the Company pursuant to the
penultimate sentence of this Section 7 or exercises its rights under Sections 8
or 13, the Company shall be entitled to receive all Collections and use the same
in the normal course of business. Upon notice from the Agent to the Company
given after the occurrence and during the continuation of an Event of Default or
an Unmatured Event of Default, the Company shall furnish to the Agent not later
than the tenth Business Day after the end of each month a report on all
Collections received during the preceding month and provide the same accounting
therefor as the Company customarily furnishes the permanent investors therein,
including with respect to Collections on each Pledged Mortgage Loan: (a) the
name of the Obligor(s), (b) the Company's loan number for such
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Pledged Mortgage Loan, (c) the current principal balance of such Pledged
Mortgage Loan, (d) the current escrow balance with respect to such Pledged
Mortgage Loan, (e) the number and amount of past due payments on such Pledged
Mortgage Loan and (f) the amount of the collections received during such month
with respect to such Pledged Mortgage Loan, itemized to show (i) principal
portion, (ii) interest portion and (iii) portion thereof representing amounts
paid in escrow for real estate taxes and insurance.
Upon notice from the Agent to the Company given after the occurrence
and during the continuation of an Event of Default or of an Unmatured Event of
Default, the Company shall hold all collections representing principal payments
and prepayments and escrows for real estate taxes and insurance in trust for the
Banks and the Lessor and shall promptly remit the same to the Agent. All
amounts representing the principal payments and prepayments delivered to the
Agent pursuant to the preceding sentence shall be deposited in the Collateral
Account and all amounts representing real estate taxes and insurance escrows
delivered to the Agent pursuant to the preceding sentence shall be deposited in
an escrow account with any bank satisfactory to the Company and the Agent, to be
held as Collateral for, or applied to, the Obligations and the Lease
Obligations.
Section 8. COLLECTIONS ON COLLATERAL BY THE AGENT
--------------------------------------
Upon the occurrence and during the continuation of an Event of Default
or an Unmatured Event of Default, the Agent may at any time and from time to
time, notify and direct any or all Obligors with respect to any of the
Collateral thereafter to make all payments on such Collateral directly to the
Agent, regardless of whether the Company was previously making collections
thereon. The Agent shall promptly account to the Company for all such payments
received by the Agent. Each Obligor making such payment to the Agent shall be
fully protected in relying on the written statement of the Agent that the Agent
then holds the security interests herein granted and assigned, which entitle the
Agent to receive such payment, and the receipt of the Agent for such payment
shall be full acquittance therefor to the Obligor making such payment.
Section 9. DEFAULTED LOANS; COLLECTION AND FORECLOSURE PROCEEDINGS
-------------------------------------------------------
If the Company wishes to institute collection or foreclosure
proceedings with respect to a Pledged Mortgage Loan, it shall substitute other
Collateral so that it is entitled pursuant to the terms of the Credit Agreement
to a release of such Pledged Mortgage Loan. If the Company does not own
sufficient other Collateral to obtain a release of such Pledged Mortgage Loan,
then so long as an Event of Default or an Unmatured Event of Default has not
occurred and is continuing, the Agent, upon written request of the Company, will
deliver, upon such terms and conditions as the Agent in its sole discretion may
establish, to an attorney at law, as the agent of the Agent, to the extent
necessary for the purpose of enabling said attorney to institute, in the name of
the Company or the Agent, or in their names or in the names of their nominees,
as the
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Agent may determine, collection and/or foreclosure proceedings on any Pledged
Mortgage Loan in default the following: (a) the promissory note or other
instrument evidencing such Pledged Mortgage Loan in default and (b) the mortgage
or deed of trust, if any, that secures such promissory note, or other Collateral
needed by said attorney in connection with such collection and/or foreclosure
proceedings in such manner and in such form as the Agent deems necessary or
desirable to preserve its security interests in such Collateral, provided such
Collateral and all proceeds of any such collection and/or foreclosure efforts
shall remain subject to this Agreement and the security interests granted herein
and all such proceeds shall be delivered to the Agent as and when and in the
form received to the extent required by the terms of the Credit Agreement. The
Company hereby covenants and agrees that, without first obtaining the prior
written consent of the Agent, it will not request or accept any discount on, or
any conveyance, endorsement, transfer or assignment of any right, title or
interest in and to any of the real, personal or mixed properties sold, pledged,
mortgaged, hypothecated, assigned, transferred, set over or conveyed to the
Agent as security for, any of the promissory notes or other instruments or
agreements which evidence Pledged Mortgage Loans in lieu of foreclosure
proceedings if, after giving effect to any such proposed transaction, the
Warehousing Borrowing Base would be less than the aggregate unpaid principal
amount of the outstanding Warehousing Loans. At such time as such delivery of
the Collateral is no longer required in connection with said collection and/or
foreclosure efforts, to the extent such Collateral has not been released
pursuant to this Agreement, the same shall be reassigned and redelivered to the
Agent.
Section 10. SALES AND RELEASES OF COLLATERAL
--------------------------------
10.01 Redelivery of Collateral for Correction. If no Event of
---------------------------------------
Default or Unmatured Event of Default exists, the Agent may redeliver to the
Company, for correction, any instrument or document which constitutes or relates
to any of the Collateral; provided, that any such redelivery shall be made
against a Trust Receipt duly completed and executed by the Company requiring,
within 21 days after the redelivery thereof to the Company, the return to the
Agent of each such instrument and document. The Company shall deliver to the
Agent each such instrument and document as soon as it has completed the
correction thereof and, in any event, within 21 days after its receipt thereof.
10.02 Delivery for Sale of Pledged Mortgage Loans. If no Event of
-------------------------------------------
Default or Unmatured Event of Default exists, the Company may direct the Agent
to, and the Agent will, transmit on behalf of the Company Pledged Mortgage
Loans, accompanied by a duly completed and executed Bailee Letter, to an
Investor who has issued a Take-Out Commitment or a custodian for such Investor
that is acceptable to the Agent. All sale proceeds transferred to the Agent
pursuant to such Bailee Letter and all Mortgage Notes and other documents
returned to the Agent pursuant such Bailee Letter shall remain a part of the
Collateral unless and until released pursuant to Section 10.04 of this Pledge
and Security Agreement. If required by the applicable Take-Out Commitment,
Pledged Mortgage Loans may be duly assigned of record to the issuer of
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such Take-Out Commitment subject to reassignment if not purchased and with
beneficial title to any such assigned Pledged Mortgage Loans being subject to
the above-stated escrow condition. All Pledged Mortgage Loans which are so
transmitted or otherwise delivered but not paid for shall constitute Collateral
and shall, subject to the limits contained herein, be included in determining
the Warehousing Borrowing Base. The proceeds received by the Agent from the sale
of any Pledged Mortgage Loans pursuant to this Section 10.02 shall be deposited
by the Agent in the Collateral Account and shall be promptly applied to the
payment of principal of the Warehousing Note; provided, however, that if an
Event of Default has occurred and is continuing, such proceeds shall be applied
in accordance with Section 17 hereof.
10.03 Formation of Pools. The Agent may, from time to time in its
------------------
sole discretion, at the request of the Company, transmit Pledged Mortgage Loans
to a custodian that is acceptable to the Agent in connection with the issuance
of Mortgage-backed Securities and the formation of pools of Mortgage Loans,
subject, however, to the provisions of Sections 6 and 20 hereof. The Agent and
its designated agent shall be entitled to rely on the written instructions of
the Company in this regard and shall have no obligation to act in the absence of
such written instructions.
10.04 Release of Particular Collateral.
--------------------------------
(a) If no Event of Default or Unmatured Event of Default has
occurred which is continuing, the Agent shall, at the written request of
the Company, release its security interest in any item of Collateral
specified by the Company in such written request, provided that, after
giving effect to such requested release, the Warehousing Borrowing Base
(including therein the Warehousing Collateral Value of any Collateral given
in substitution for the Collateral to be released) shall not be less than
the aggregate principal amount outstanding under the Warehousing Note. If
the Company requests and is entitled to a release of a Pledged Mortgage
Loan pursuant to the preceding sentence, the Agent shall promptly redeliver
to the Company or its designee (i) the Mortgage Note evidencing such
Pledged Mortgage Loan endorsed without recourse upon, or representation or
warranty by, the Agent and (ii) a reassignment, without recourse upon, or
representation or warranty by, the Agent, of any part of the Collateral
that secures such Mortgage Note.
(b) Whether or not the Company, by terms of this Section 10.04,
is entitled to a release of the Agent's security interest in the
Collateral, the Agent shall release such security interest in any Pledged
Mortgage Loan to the extent necessary to permit the Company to execute any
full or partial release of any mortgage, deed of trust, security agreement,
financing statement or other security instrument or deed which the Company
is contractually obligated to release upon payment thereof or of a minimum
release price, provided the Company arranges to have such payment remitted
directly by the Obligor or closing agent to the Agent for application upon
the unpaid principal amount outstanding under the
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Warehousing Note, unless an Event of Default has occurred which is
continuing, in which case such payment shall be applied as provided in
Section 17 hereof.
(c) Upon the Agent's receipt of the proceeds from the sale of a
Pledged Mortgage Loan delivered to an Investor pursuant to Section 10.02
hereof or to a pool custodian pursuant to Section 10.03 hereof, the
security interest of the Agent in such Pledged Mortgage Loan and in the
Mortgage Note and other documents related thereto shall terminate without
further action by the Agent.
(d) Upon the Agent's receipt of the proceeds from the sale of a
Related Mortgage-backed Security representing an interest in, or which is
secured by, Pledged Mortgage Loans delivered pursuant to Section 10.03
hereof, the security interest of the Agent in such Related Mortgage-backed
Security and in such Pledged Mortgage Loans shall terminate without further
action by the Agent.
Section 11. FURTHER ASSURANCES
------------------
The Company, upon the request of the Agent, will promptly correct any
patent defect, error or omission which may be discovered in the contents of this
Agreement or in the execution hereof and will do such further acts and things,
and execute, acknowledge, endorse and deliver such further instruments,
agreements, schedules and certificates, including, but not limited to, notes,
mortgages, deeds of trust, assignments, chattel mortgages, security agreements
and financing statements covering the title to any real, personal or mixed
property now owned or hereafter acquired by the Company and now or hereafter
constituting Collateral, schedules and certificates respecting all or any of the
Collateral at the time subject to the security interest hereunder, the items or
amounts received by the Company in full or partial payment, or otherwise as
proceeds of any of the Collateral and supplements to and amendments of this
Agreement, that the Agent may at any time and from time to time reasonably
request in connection with the administration or enforcement of this Agreement
or related to the Collateral or any part thereof or in order to assure and
confirm unto the Agent the rights, powers and remedies hereunder or to subject
all of the real, personal or mixed properties now owned or hereafter acquired by
the Company and now or hereafter constituting Collateral to, or to confirm or
clearly establish that all of said properties are subject to and encumbered by,
a lien to secure the due and punctual payment of the Obligations and any Lease
Obligations. Any such instrument, agreement, schedule or certificate shall be
executed by a duly authorized officer of the Company and shall be in such form
and detail as the Agent may reasonably specify. Promptly upon the request of
the Agent, the Company will mark, or permit the Agent to mark in a reasonable
manner, the Company's books, records and accounts showing or dealing with the
Collateral with a notation clearly setting forth that the Collateral has been
assigned to the Agent, for the benefit of the Banks and the Lessor, which
notation shall be in form and substance satisfactory to the Agent.
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The Company will do all acts and things, and will execute and file or
record all instruments (including mortgages, pledges, assignments, security
agreements, financing statements, amendments to financing statements,
continuation statements, etc.) required or reasonably requested by the Agent to
establish, perfect, maintain and continue the perfection and priority of the
security interest of the Agent, for the benefit of the Banks and the Lessor, in
the Collateral and will pay the costs and expenses of: all filings and
recordings, including taxes thereon; all searches necessary or reasonably deemed
necessary by the Agent to establish and determine the validity and the priority
of such security interest of the Agent; and also to satisfy all other liens
which in the reasonable opinion of the Agent prejudice, imperil or otherwise
affect the Collateral or the existence or priority of such security interest. A
carbon, photographic or other reproduction of this Agreement or of a financing
statement shall be sufficient as a financing statement and may be filed in lieu
of the original in any or all jurisdictions which accept such reproductions.
Section 12. COVENANTS OF THE COMPANY
------------------------
So long as this Agreement shall remain in effect, the Company will (a)
defend the right, title and interest of the Agent, for the benefit of the Banks
and the Lessor, in the Collateral against the claims and demands of all Persons;
(b) not amend, modify, or waive any of the terms and conditions of, or settle or
compromise any claim in respect of, any Collateral in a manner which would
materially adversely affect the interests of the Agent, for the benefit of the
Banks and the Lessor; (c) not sell, assign, transfer, or otherwise dispose of,
or grant any option with respect to, or pledge or otherwise encumber, or
release, any of the Collateral or any interest therein except in a manner
whereby the Agent alone would be entitled to receive the proceeds therefrom; (d)
notify the Agent monthly of any default that continues beyond any applicable
notice or grace period under any Pledged Mortgage Loan which has Warehousing
Collateral Value; (e) maintain, or cause to be maintained, in its chief
executive office or in the offices of a computer service bureau approved by the
Agent, for the processing of Mortgage Notes and Mortgage-backed Securities,
originals, or copies if the original has been delivered to the Agent, of its
Mortgage Notes and all files, surveys, certificates, correspondence, appraisals,
computer programs, tapes, discs, cards, accounting records and other records,
information and data, relating to the Collateral, and give the Agent written
notice of the place where such records, information and data will be maintained;
and (f) maintain sufficient documentary evidence in its files with respect to
each Pledged Mortgage Loan to substantiate compliance with all applicable
federal, state and local laws, regulations and rules, including but not limited
to those specified in Section 5(h) hereof.
Section 13. AGENT APPOINTED ATTORNEY-IN-FACT
--------------------------------
The Company hereby appoints the Agent the Company's attorney-in-fact,
with full power of substitution, to submit any Pledged Mortgage Loan or
Mortgage-backed Security which constitutes Collateral and related documents to a
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purchaser under a Take-Out Commitment and for the purpose of carrying out the
provisions of this Agreement and taking any action and executing in the name of
the Company without recourse to the Agent any instrument, including, but not
limited to, the instruments described in Section 2 hereof, which the Agent may
deem necessary or advisable to accomplish the purpose hereof, which appointment
is irrevocable and coupled with an interest. Without limiting the generality of
the foregoing, the Agent shall have the right and power to receive, endorse and
collect checks and other orders for the payment of money made payable to the
Company representing any payment or reimbursement made under, or pursuant or
with respect to, the Collateral or any part thereof and to give full discharge
for the same. The Agent agrees that it shall not, without further instructions
of the Company, exercise the foregoing power of attorney unless an Event of
Default or Unmatured Event of Default has occurred and is continuing. Whether
or not an Event of Default or an Unmatured Event of Default shall have occurred
or be continuing, the Company hereby authorizes the Agent in its discretion at
any time and from time to time to (i) complete or cause to be completed any
assignment of real estate mortgage or deed of trust which heretofore was, or
hereafter at any time may be, executed and delivered by the Company to the Agent
so that such assignment describes a real estate mortgage or deed of trust which
is security for any Pledged Mortgage Loan now or hereafter at any time
constituting Collateral and (ii) complete or cause to be completed any other
assignment or endorsement that was delivered in blank hereunder.
Section 14. EVENTS OF DEFAULT; REMEDIES
---------------------------
If one or more Events of Default shall occur and be continuing, then
the Agent, in addition to any and all other rights and remedies which it may
then have hereunder, under the Credit Agreement or any other Loan Document, or
under any other instrument, or which the Agent or the Banks or the Lessor may
have at law, in equity or otherwise, may, at its option, (a) in the name of the
Company, or otherwise, demand, collect, receive and receipt for, compound,
compromise, settle and give acquittance for, and prosecute and discontinue any
suits or proceedings in respect of any or all of the Collateral; (b) take any
action which the Agent may deem necessary or desirable in order to realize on
the Collateral, including, without limitation, the power to perform any
contract, endorse in the name of the Company without recourse to the Company any
checks, drafts, notes or other instruments or documents received in payment of
or on account of the Collateral; (c) enter upon the premises where any of the
Collateral not in the possession of the Agent is located and take possession
thereof and remove the same, with or without judicial process; (d) reduce the
claim of the Agent and the Banks and the Lessor to judgment or foreclosure or
otherwise enforce the security interests herein granted and assigned, in whole
or in part, by any available judicial procedure; (e) after notification, if any,
provided for herein (the Company agrees that, to the extent notice of sale shall
be required at law, at least ten days' prior notice to the Company of the time
and place of any public sale or the time after which any private sale is to be
made shall constitute reasonable notification), sell, lease, or otherwise
dispose of, at the office of the Agent, on the premises of the Company, or
elsewhere, all
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or any part of the Collateral, in its then condition or following any
commercially reasonable preparation or processing, and any such sale or other
disposition may be as a unit or in parcels, by public or private proceedings,
and by way of one or more contracts at any exchange, broker's board, or at any
of the Agent's offices or elsewhere, for cash, or credit, or for future
delivery, without assumption of any credit risk, and upon such other terms as
the Agent may deem commercially reasonable (it being agreed that the sale of any
part of Collateral shall not exhaust the power of sale granted hereby, but sales
may be made from time to time, and at any time, until all the Collateral has
been sold or until all Obligations and Lease Obligations have been fully paid
and performed, and it being further agreed that the Agent shall not be obligated
to make any sale of Collateral regardless of notice of sale having been given,
and that the Agent may adjourn any public or private sale from time to time by
announcement at the time and place fixed therefor, and such sale may, without
further notice, be made at the time and place to which it was adjourned), and at
any such sale it shall not be necessary to exhibit any of the Collateral; (f) at
its discretion, surrender any policies of insurance on the Collateral consisting
of real or personal property owned by the Company and receive the unearned
premiums, and in connection therewith the Company hereby appoints the Agent as
the agent and attorney-in-fact for the Company to collect such premiums; (g) at
its discretion, retain the Collateral in satisfaction of the Obligations and
Lease Obligations whenever the circumstances are such that the Agent and the
Banks and the Lessor is entitled to do so under the Code or otherwise; (h)
exercise any and all other rights, remedies and privileges which the Agent may
have under this Agreement, or any of the other promissory notes, assignments,
mortgages, deeds of trust, chattel mortgages, security agreements, transfers of
lien, and any other instruments, documents, and agreements executed and
delivered pursuant to the terms hereof or pursuant to the terms of the Credit
Agreement; and (i) exercise any other remedy available to it as a secured party
under the Uniform Commercial Code of the State of Minnesota or of any other
pertinent jurisdiction (the "Code").
The Company acknowledges and agrees that (x) a private sale of the
Collateral pursuant to any Take-Out Commitment or other arrangement entered into
by the Company shall be deemed to be a sale of the Collateral in a commercially
reasonable manner and (y) the Collateral is intended to be sold and that none of
the Collateral is a type or kind intended by the Company to be held for
investment or any purpose other than for sale.
Section 15. WAIVERS
-------
The Company, for itself and all who may claim under the Company, as
far as the Company now or hereafter lawfully may, also waives all right to have
all or any portion of the Collateral marshalled upon any foreclosure hereof and
agrees that any court having jurisdiction over this Agreement may order the sale
of all or any portion of the Collateral as an entirety. Any sale of, or the
grant of options to purchase (for the option period thereof or after exercise
thereof), or any other realization upon, all or any portion of the Collateral
under clause (e) of Section 14 hereof shall operate to divest all
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right, title, interest, claim and demand, either at law or in equity, of the
Company in and to the Collateral so sold, optioned or realized upon, and shall
be a perpetual bar both at law and in equity against the Company and against any
and all persons claiming or attempting to claim the Collateral so sold, optioned
or realized upon or any part thereof, from, through and under the Company. No
delay on the part of the Agent in exercising any power of sale, lien, option or
other right hereunder and no notice or demand which may be given to or made upon
the Company with respect to any power of sale, lien, option or right hereunder
shall constitute a waiver thereof, or limit or impair the right of the Agent,
any Bank or the Lessor to take any action or to exercise any power of sale,
lien, option or any other right under this Agreement or the Credit Agreement, or
any lease agreement, or otherwise, nor shall any single or partial exercise
thereof, or the exercise of any power, lien, option or other right under this
Agreement or otherwise, all without notice or demand (except as otherwise
provided by the terms of this Agreement), prejudice their rights against the
Company in any respect. Each and every remedy given the Agent, the Banks or the
Lessor shall, to the extent permitted by law, be cumulative and shall be in
addition to any other remedy given hereunder or now or hereafter existing at law
or in equity or by statute.
Section 16. NOTICES
-------
The Company acknowledges and agrees that Mortgage Loans and Mortgage-
backed Securities are property of a type customarily sold on a recognized
market, and that accordingly the Agent may (a) sell or otherwise dispose of the
Collateral without notification, advertisement, or other notice of any kind, and
(b) purchase the Collateral at a private sale thereof. To the extent notice of
sale or other disposition of any of the Collateral is required by law, it is
agreed that notice sent or given not less than ten (10) calendar days prior to
the taking of the action to which the notice relates is reasonable notification
and notice of the purposes of this Section 16. All notices and other
communications provided for in this Agreement shall be given to the parties at
their respective addresses set forth in the Credit Agreement or, as to each such
party, at such other address as shall be designated by such party in a written
notice to the other parties in accordance with the Credit Agreement. All such
notices and other communications shall be given by one or more of the means
specified in Section 8.02 of the Credit Agreement and, upon being so given,
shall be deemed to have been given as of the earliest time specified in said
Section 8.02 for the means so used.
Section 17. APPLICATION OF PROCEEDS
-----------------------
Until Company has paid all Obligations and Lease Obligations in full,
any and all proceeds ever received by the Agent from any sale or other
disposition of the Collateral, or any part thereof, or the exercise of any other
remedy pursuant to Section 8 hereof or by virtue of Section 14 hereof, shall be
applied by the Agent as follows:
First: ratably to the payment of the costs and expenses of the Agent
and the Banks in connection with the enforcement of this Agreement (including,
without
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limitation, the sale or other disposition of the Collateral) and the reasonable
fees and out of pocket expenses of counsel employed in connection therewith, to
the payment of all costs and expenses incurred by the Agent in connection with
the administration of this Agreement and to the payment of all advances made by
the Agent and the Banks for the account of the Company hereunder, to the extent
that such costs, expenses and advances have not been reimbursed to the Agent and
the Banks, as the case may be;
Second: to the payment in full of the other Obligations, as provided
in the Credit Agreement or, otherwise, as the Agent or the Banks may determine;
and
Third: to the payment in full of the Lease Obligations, as provided
in the Leases or, otherwise, as the Lessor may determine; and
Fourth: the balance (if any) of such proceeds shall be paid to the
Company, its successors or assigns, or as a court of competent jurisdiction may
direct; provided, that if such proceeds are not sufficient to satisfy the
Obligations and the Lease Obligations in full, the Company shall remain liable
to the Agent, the Banks and the Lessor, as applicable, for any deficiency.
Section 18. INDEMNIFICATION AND COSTS AND EXPENSES
--------------------------------------
The Company will (a) pay all reasonable out-of-pocket expenses,
including, without limitation, any recording or filing fees, fees of title
insurance companies in connection with records or filings, costs of mortgage
insurance policies and endorsements thereof and mortgage registration taxes (or
any similar fees or taxes), incurred by the Agent, the Banks or the Lessor in
connection with (i) the enforcement and administration of this Agreement
(whether or not the transactions hereby contemplated shall be consummated), the
Credit Agreement, the Lease Agreement and the other Loan Documents, (ii) the
enforcement of the rights of the Agent, the Banks and the Lessor in connection
with this Agreement, the Credit Agreement, the other Loan Documents, all the
Lease Agreements, and including, without limitation, the reasonable fees and
disbursements of counsel for the Agent, the Banks and the Lessor; (b) pay, and
hold the Agent, the Banks and the Lessor harmless from and against, any and all
present and future stamp and other similar taxes with respect to the foregoing
matters and save the Agent, the Banks and the Lessor harmless from and against
any and all liabilities with respect to or resulting from any delay in paying or
omission to pay such taxes; and (c) pay, and indemnify and hold harmless the
Agent, the Banks and the Lessor from and against, any and all liabilities,
obligations, losses, damages, penalties, judgments, suits, costs, expenses and
disbursements of any kind whatsoever (the "Indemnified Liabilities") which may
be imposed on, incurred by or asserted against it in any way relating to or
arising out of this Agreement, the Credit Agreement, the other Loan Documents,
all Lease Agreements, or any of the transactions contemplated hereby or thereby,
WHETHER OR NOT THE SAME ARE CAUSED BY THE SIMPLE NEGLIGENCE OF THE AGENT, unless
the same are caused by the gross negligence or willful misconduct of the Agent,
any Bank or the Lessor as the case may be. The undertakings
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of the Company set forth in this Section 18 shall survive the payment in full of
the Obligations and the Lease Obligations and the termination of this Agreement,
the Credit Agreement, the other Loan Documents, and all Lease Agreements.
Section 19. TERMINATION
-----------
This Agreement shall terminate when all the Obligations and Lease
Obligations have been fully paid and performed and the Commitment and all Lease
Agreements have expired, at which time the Agent shall reassign and redeliver,
without recourse upon, or representation or warranty by, the Agent, the Banks or
the Lessor and at the expense of the Company, to the Company, or to such other
person or persons as the Company shall designate, against receipt, such of the
Collateral (if any) as shall not have been sold or otherwise disposed of by the
Agent pursuant to the terms hereof, of the Credit Agreement, the other Loan
Documents, or any Lease Agreement, and shall still be held by the Agent,
together with appropriate instruments of reassignment and release; provided,
however, that this Agreement shall continue to be effective or be reinstated, as
the case may be, if at any time any payment of any of the Obligations or the
Lease Obligations is rescinded or must otherwise be returned by the Agent, the
Banks, the Lessor or any other Person upon the insolvency, bankruptcy or
reorganization of the Company or otherwise, all as though such payment had not
been made.
Section 20. NON-ASSUMPTION OF LIABILITY; NO FIDUCIARY RESPONSIBILITY
--------------------------------------------------------
Nothing herein contained shall relieve the Company from performing any
covenant, agreement or obligation on the part of the Company to be performed
under or in respect of any of the Collateral or from any liability to any party
or parties having an interest therein or impose any liability on the Agent, the
Banks and the Lessor for the acts or omissions of the Company in connection with
any of the Collateral. The Agent, the Banks and the Lessor shall not assume or
become liable for, nor shall any of them be deemed or construed to have assumed
or become liable for, any obligation of the Company with respect to any of the
Collateral, or otherwise, by reason of the grant to the Agent, for the benefit
of the Banks and the Lessor, of security interests in the Collateral. While the
Agent shall use reasonable care in the custody and preservation of the
Collateral as provided in Section 6 hereof, the Agent shall not have any
fiduciary responsibility to the Company with respect to the holding, maintenance
or transmittal of the Collateral delivered hereunder.
Section 21. WAIVERS, ETC.
-------------
No failure on the part of the Agent to exercise and no delay in
exercising, any power or right hereunder, shall operate as a waiver thereof; nor
shall any single or partial exercise of any power or right preclude any other or
further exercise thereof or the exercise of any other power or right. The
remedies herein provided are cumulative
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and not exclusive of any remedies provided by law. This Agreement may not be
amended or waived except in accordance with Section 8.05(a) of the Credit
Agreement.
Section 22. GOVERNING LAW; CONSENT TO JURISDICTION; WAIVER OF JURY TRIAL
------------------------------------------------------------
THIS AGREEMENT SHALL BE A CONTRACT MADE UNDER AND GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAW, BUT NOT THE LAW OF CONFLICTS, OF
THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES
THEREOF, BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. THE
COMPANY HEREBY IRREVOCABLY SUBMITS TO THE NON-EXCLUSIVE JURISDICTION AND VENUE
OF ANY MINNESOTA STATE OR FEDERAL COURT SITTING IN HENNEPIN OR RAMSEY COUNTIES,
STATE OF MINNESOTA, FOR ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO
THIS AGREEMENT, THE NOTES AND THE OTHER LOAN DOCUMENTS, AND THE COMPANY HEREBY
IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING
MAY BE HEARD AND DETERMINED IN SUCH MINNESOTA STATE COURT OR, TO THE EXTENT
PERMITTED BY LAW, IN SUCH FEDERAL COURT. THE COMPANY HEREBY IRREVOCABLY WAIVES,
TO THE FULLEST EXTENT IT MAY EFFECTIVELY DO SO, THE DEFENSE OF AN INCONVENIENT
FORUM TO THE MAINTENANCE OF ANY SUCH ACTION OR PROCEEDING. THE COMPANY HEREBY
WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS THAT SERVICE OF PROCESS UPON IT
MAY BE MADE BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT REQUESTED, AT ITS
ADDRESS SPECIFIED OR DETERMINED IN ACCORDANCE WITH THE PROVISIONS OF SECTION
8.02 OF THE CREDIT AGREEMENT, AND SERVICE SO MADE SHALL BE DEEMED COMPLETED ON
THE THIRD BUSINESS DAY AFTER SUCH SERVICE IS DEPOSITED IN THE MAIL. NOTHING
HEREIN SHALL AFFECT THE RIGHT OF THE AGENT, ANY BANK, THE LESSOR OR ANY OTHER
INDEMNIFIED PERSON TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW. THE
COMPANY AND THE AGENT HEREBY IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY
ACTION, PROCEEDING, OR COUNTERCLAIM (WHETHER BASED UPON CONTRACT, TORT OR
OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY.
Section 23. MISCELLANEOUS
-------------
(a) Benefit of Agreement. This Agreement shall be binding upon and
--------------------
inure to the benefit of the Company and the Agent and their respective
successors and assigns, and shall inure to the benefit of the Banks and the
Lessor and their respective successors and assigns, except that the Company may
not assign or
22
<PAGE>
transfer any of its rights or obligations under this Agreement without the prior
written consent of the Agent.
(b) No Commitment by Lessor. Nothing in this agreement shall be
-----------------------
construed as a commitment on the part of the Lessor to lease any equipment or
make any loan, under any existing agreement or otherwise, to the Company or
NCFC.
(c) Survival of Representations, Warranties and Covenants. All
-----------------------------------------------------
representations, warranties and covenants made by the Company to the Agent, the
Banks or the Lessor in connection with this Agreement shall survive the
execution and delivery of this Agreement. All statements contained in any
certificate or other instrument delivered to the Agent, the Banks or the Lessor
pursuant to this Agreement shall be deemed representations, warranties and
covenants hereunder of the Company.
(d) Headings. Section headings in this Agreement are for convenience
--------
of reference only, and shall not govern the interpretation of any of the
provisions of this Agreement.
(e) Execution in Counterparts. This Agreement may be executed in any
-------------------------
number of counterparts, all of which taken together shall constitute one and the
same instrument and either of the parties hereto may execute this Agreement by
signing any such counterpart.
23
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first above written.
NEW CENTURY MORTGAGE CORPORATION
By__________________________________
Its_______________________________
FIRST BANK NATIONAL ASSOCIATION,
as Agent
By__________________________________
Its_______________________________
24
<PAGE>
ATTACHMENTS
-----------
Attachment 1 Form of Agreement to Pledge
Attachment 2 Form of Bailee Letter
Attachment 3 Form of Collateral Identification Letter
Attachment 4 Form of Loan Detail Listing
Attachment 5 Form of Transmittal Letter
Attachment 6 Form of Trust Receipt
<PAGE>
Attachment 1 to
Pledger and Security Agreement
AGREEMENT TO PLEDGE
(Security Agreement as provided for
by the Uniform Commercial Code of Minnesota)
For new value this day received, and as collateral security for the
payment of any and all indebtedness and liability of the undersigned under that
certain Credit Agreement dated as of October 25, 1996 (as the same may be
amended, restated, modified or supplemented and in effect from time to time, the
"Credit Agreement") between New Century Mortgage Corporation, a California
corporation (the "Company"), and First Bank National Association, a national
banking association ("First Bank"), as collateral agent for the Banks (as
defined in the Credit Agreement) and FBS Business Finance Corporation (the
"Lessor") (together with any successor collateral agent under the Pledge and
Security Agreement referred to below, the "Agent"), and consistent with the
terms of that certain Pledge and Security Agreement dated as of October 25, 1996
(as the same may be amended, restated, modified or supplemented and in effect
from time to time, the "Pledge and Security Agreement") between the Company and
the Agent, the Company hereby creates and grants in favor of the Agent, for the
benefit of the Banks and the Lessor, a security interest in and to the documents
described in each Collateral Identification Letter and Loan Detail Listing
attached to this Agreement to Pledge and all proceeds thereof.
Capitalized terms used herein which are defined in the Credit
Agreement or the Pledge and Security Agreement and not otherwise defined herein
shall have the meanings ascribed to such terms in the Credit Agreement or the
Pledge and Security Agreement.
The Company agrees to deliver the instruments and documents described
in Section 4.02 of the Pledge and Security Agreement to the Agent within three
or five Business Days following the date hereof, as provided in said Section
4.02. The Company further agrees to deliver the instruments and documents
described in Section 4.03 of the Pledge and Security Agreement to the Agent
within five Business Days after the Company's receipt of the Agent's written
request therefor.
The Company further agrees that the Agent does not assume any duty or
responsibility in respect of any of the documents described in each attached
Collateral Identification Letter, and that the Agent does not waive any right of
possession to any of such documents for the failure to demand or receive such
possession.
The Company further agrees that this Agreement to Pledge shall be
binding upon and inure to the benefit of the legal representatives, successors
or assigns of the Company.
<PAGE>
The Company further agrees that all rights, interests, duties and
liabilities arising hereunder shall be determined according to the laws of the
State of Minnesota, without giving effect to conflict of laws principles
thereof.
Dated as of __________________, 199_.
NEW CENTURY MORTGAGE
CORPORATION
By______________________________
Its____________________________
2
<PAGE>
Attachment 2
FORM OF BAILEE LETTER
[Letterhead of First Bank National Association]
[Date]
[NAME OF CUSTODIAN], AS CUSTODIAN {INCLUDE IF APPLICABLE
FOR [NAME OF INVESTOR] ---------------------
[ADDRESS OF CUSTODIAN]
[NAME AND ADDRESS OF INVESTOR] {INCLUDE IF NO CUSTODIAN
-----------------------
Re: Mortgage Loan No(s).________
Seller: New Century Mortgage Corporation
Ladies/Gentlemen:
Pursuant to the terms and conditions set forth below, we hereby deliver to
[____________________, AS CUSTODIAN (IN SUCH CAPACITY, THE "CUSTODIAN") FOR]
_____________________ (the "Investor"), with this letter, the original executed
promissory note(s) (the "Note(s)") evidencing the mortgage loan(s) described on
the schedule attached hereto (the "Loan(s)"). First Bank National Association,
as collateral agent for certain lenders and a certain lessor (in such capacity,
the "Agent") has a perfected first lien security interest in the Loan(s) for the
benefit of such lenders and such lessor pursuant to a Pledge and Security
Agreement between the Agent and the Seller. The Agent expressly retains and
reserves all of its rights in the Loan(s), the Note(s) and all related security
instruments, files, and documents (the "Loan Documents") until the Investor has
paid the Agent the Warehouse Purchase Amount (as hereinafter defined) for the
Loan(s) in accordance with this letter ("this Bailee Letter").
By taking physical possession of this Bailee Letter, the Note(s) and the
other Loan Documents, [THE INVESTOR] [THE CUSTODIAN] hereby agrees:
(i) to hold in trust, as bailee for the Agent, the Note(s) and all
other Loan Documents which it receives related to the Loan(s), until its status
as bailee is terminated as set forth herein;
(ii) not to release or deliver, or authorize the release or delivery
of, the Note(s) or any other Loan Document to the Seller or any other entity or
person or take any other action with respect to the Note(s) or any other Loan
Document which release, delivery or other action could cause the security
interest of the Agent to become
<PAGE>
unperfected or which could otherwise jeopardize the perfected security interest
of the Agent in the Loan(s);
(iii) in the case of any Note(s) that are endorsed in blank, not to
complete such blank endorsements unless and until (A) the Loan(s) evidenced by
such Note(s) have been accepted for purchase by the Investor and (B) the
Warehouse Purchase Amount has been irrevocably paid to the Agent in accordance
with the terms hereof;
(iv) to return the Note(s) and any related Loan Documents immediately
to the Agent (A) upon receipt of a written request by the Agent or (B) in the
event that the Note(s) require completion and/or correction;
(v) not to honor any requests or instructions from the Seller
relating to any Note (other than for correction), or any other documents
relating thereto (other than for correction or replacement thereof or to
supplement such documents);
(vi) promptly upon the Investor's acceptance or rejection of the
Loan(s) for purchase, and in any event within forty-five (45) days after the
date of delivery of this Bailee Letter, to either (A) remit the Warehouse
Purchase Amount to the Agent or (b) return the Notes and any related Loan
Documents to the Agent;
(vii) to deliver, or to cause to be delivered, the Warehouse Purchase
Amount or the Notes and related Loan Documents, as the case may be, only to the
Agent pursuant to the terms set forth below and to honor a change in such terms
only upon receipt of written instructions from the Agent; and
(viii) that any interest it may have in the Loan(s), the Note(s) and/or
the Loan Documents, including without limitation any claim of setoff it may at
any time have, is subject to and subordinate to the security interest of the
Agent in the Loan(s), the Note(s) and the other Loan Document(s) and that it
will not exercise any right with respect to the Loan(s), the Note(s) or the
other Loan Documents without the prior written consent of the Agent.
Please note that should the Investor remit the Warehouse Purchase Amount to
any other entity or person, the Agent will not consider the Warehouse Purchase
Amount to have been paid and will not release its security interest or terminate
the responsibilities of the [INVESTOR] [CUSTODIAN] as bailee for the Agent until
the Warehouse Purchase Amount has been properly remitted to the Agent as set
forth herein.
The Agent agrees that its security interest in the Loan(s) shall be fully
released and the responsibilities of the [INVESTOR] [CUSTODIAN] as bailee shall
terminate upon the Investor's irrevocable payment to the Agent of an amount (the
"Warehouse Purchase Amount") equal to the greater of (1) the purchase price for
-------
the Loan(s) agreed to by the Investor and the Seller and (2) $_________, which
is the aggregate collateral value assigned
2
<PAGE>
by the Agent to the Loan(s). All payments by the Investor shall be remitted via
federal funds pursuant to the following wire transfer instructions:
Receiving Bank: First Bank National Association
Address: Minneapolis, Minnesota
ABA Number: 0910-0002-2
Account Name: New Century Mortgage Corporation Collateral Account
Account Number: 1731-0097-1378
Note(s) and other Loan Documents which are to be returned to the Agent
should be delivered, by overnight air courier, to:
First Bank National Association
Mortgage Banking Services Division
First Bank Place -MPFP0801
601 Second Avenue South
Minneapolis, Minnesota 55402-4302
If you have any questions, please address your inquiries to Jeannine L.
Coyne, Mortgage Banking Officer of the Agent, whose phone number is (612) 973-
0571 or Edwin D. Jenkins, Vice President, whose phone number is (612) 973-0588.
We request that you acknowledge receipt of this Bailee Letter by signing in
the space provided at the foot of the enclosed counterpart hereof and returning
it to the Agent at the address set forth above (but your failure to do so in no
way nullifies your agreements resulting from your acceptance of the enclosed
Note(s), as set forth in this Bailee Letter).
In the event of any inconsistency between the provisions of this Bailee
Letter and the provisions of any other instrument or document delivered by the
Agent to the Investor [OR THE CUSTODIAN] with this letter or in connection with
the Loan(s), including, without limitation, any "release" or similar document,
the provisions of this Bailee Letter shall control.
FIRST BANK NATIONAL ASSOCIATION,
as Agent
By______________________________
Its_____________________________
3
<PAGE>
Receipt acknowledged:
[__________________________________ {INCLUDE IF NO CUSTODIAN
as Investor -----------------------
By ________________________________
Title _____________________________
Date ______________________________]
[__________________________________ {INCLUDE IF APPLICABLE
as Custodian ---------------------
By ________________________________
Title _____________________________
Date ______________________________]
Enclosures
cc: [NAME AND ADDRESS OF {INCLUDE IF LETTER IS ADDRESSED TO CUSTODIAN
--------------------------------------------
INVESTOR]
<PAGE>
Attachment 3 to
Pledge and Security Agreement
COLLATERAL IDENTIFICATION LETTER
Date: _______________
First Bank National Association
First Bank Place
601 Second Avenue South
Minneapolis, Minnesota 55402
Attention: Mortgage Banking Services Division
MPFP0801
Ladies and Gentlemen:
1. This Collateral Identification Letter is delivered in connection with
the Pledge and Security Agreement dated as of October 25, 1996 between New
Century Mortgage Corporation (the "Pledgor"), and First Bank National
Association, as collateral agent for the Banks (as defined in the Credit
Agreement) and FBS Business Finance Corporation (the "Lessor") (together with
any successor collateral agent under the Pledge and Security Agreement, the
"Agent") (as the said Agreement may be amended, restated, modified or
supplemented and in effect from time to time, the "Pledge and Security
Agreement"). Unless otherwise defined herein, capitalized terms used herein are
as defined in the Credit Agreement dated as of October 25, 1996 between the
Pledgor and the Agent.
2. By this letter the Pledgor hereby (x) pledges to the Agent, for the
benefit of the Banks and the Lessor, and grants to the Agent, for the benefit of
the Banks and the Lessor, a security interest in the Mortgage Loan(s) described
in the Loan Detail Listing attached hereto, (y) delivers to the Agent an
Agreement to Pledge such Mortgage Loan(s), and (z) agrees to deliver to the
Agent, within five Business Days following the date hereof, the instruments and
documents described in Section 4.02 of the Pledge and Security Agreement.
3. In connection with each such Mortgage Loan, the Pledgor hereby
certifies that the Pledgor has not pledged or delivered, and will not, pledge or
deliver, such Mortgage Loan, any assignment thereof, or other instrument,
document or paper related thereto to any party other than the Agent, unless
released to the Pledgor and then only pursuant to the terms of such release.
NEW CENTURY MORTGAGE
CORPORATION
By_____________________________
Authorized Signature
<PAGE>
Attachment 4 to
Pledge and Security Agreement
COLLATERAL IDENTIFICATION LETTER
LOAN DETAIL LISTING
DATE: _______________________________
<TABLE>
<CAPTION>
Mortgagor Principal
Loan Type Sub-Type/Term Interest Rate Loan# Name Note Date Amount
- --------- ------------- ------------- ----- ---- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
A- Fixed Rate/15 yr. (Face Amount
Amount of
B Fixed Rate/30 yr. Note)
C ARM/1 yr.
C- Balloon/5 yr
Non-Conf.-
Conv.
<CAPTION>
Origination Collateral Draft # or Draft of Wire
Loan Type Price Value Wire Transfer Dollar Amount
- --------- ------------- ------------- --------------- ----------------
<S> <S> <C> <C> <C>
A- (Principal amt. (Lower of cost
less discount market less 3%
B
C
C-
Non-Conf.-
Conv.
</TABLE>
Sort Orders: Primary sort by Wire or Draft
Within Wire or Draft sort by Loan Type
Within each like Loan Type sort by Sub-Type/Term of Loan
(i.e. Fixed Rate 15 yr., Fixed Rate 25 yr.,
Fixed Rate 30 yr.)
Within each like Sub-Type/Term of Loan sort by interest
rate
(i.e. 8.0%, 8.75%, 9.25%, 10.0%)
<PAGE>
Attachment 5 to
Pledge and Security Agreement
To: First Bank National Association
Mortgage Banking Services
601 Second Avenue South
First Bank Place East - MPFP0801
Minneapolis, Minnesota 55402-4302
From: New Century Mortgage Corporation
<TABLE>
<S> <C> <C> <C>
Loan Type: ________ A- ________ Level Party (100) ________ Six Months
________ B ________ ARM's (200) ________ 1 year
________ C ________ GEM's/ECM (300) ________ 3 years
________ C- ________ GPM's (400) ________ 5 years
________ Jumbo ________ (500) ________ 15 years
Other ________ 20 years
________ 20 years
________ 25 years
________ 30 years
</TABLE>
The present status of this mortgage is certified to be:
LOAN NUMBER ________________________
MORTGAGOR NAME: ________________________
(LAST NAME, first)
PROPERTY ADDRESS: ________________________
________________________
Note Principal Origination Collateral
Date Amount Amount % Value %
__________ ______________ ____________ _______ ____________ _______
__________ ______________ ____________ _______ ____________ _______
______________________________________________________________________________
In connection with the pledging of the above mortgage which is to be held by you
as collateral, we submit the following instruments and facts:
_____ 1. Original Mortgage Note Endorsed in Blank
_____ 2. Certified Copy of Mortgage Deed or Deed or Trust
_____ 3. Assignment of Mortgage to First Bank National Association
_____ 4. Two Certified Copies of each Intervening Assignment
_____ 5. Certified Copy of the Power of Attorney (if applicable)
_____ 6. Takeout Commitment Information
_________ Specific $________ from __________
Dated _____________ which is priced at ___________%
_________ Blanket: Loan conforms to ______________
Which has a weighted average price of _______ %
_____ 7. Takeout Commitment (if not previously delivered to the Bank)
_____ 8. Closing Instructions and Settlement Statement
_____ 9. Section 32 Compliance Documentation
<PAGE>
We hereby certify that this loan is pledged to the Bank in accordance with the
Credit Agreement between us and First Bank National Association. Capitalized
terms used herein have the meanings ascribed thereto in said Credit Agreement.
We also certify that this loan is subject to a Take-Out Commitment, and that
sufficient fire and extended insurance coverage is in effect and will be
maintained on the property. All other documents pertaining to this loan will be
held and maintained by us for the Bank.
All items delivered to a permanent investor will be delivered with a Bailee
Letter to the permanent investor which requires remittance of payment to the
Bank or return of the collateral to the Bank.
Date:__________________ NEW CENTURY MORTGAGE CORPORATION
By________________________________________
Title_____________________________________
2
<PAGE>
Attachment 6 to
Pledge and Security Agreement
TRUST RECEIPT
-------------
Temporary Release of Collateral
The undersigned hereby acknowledges receipt this _________ day of
_____________________________, 199__, from First Bank National Association (the
"Bank") of the following described property (hereinafter called "Collateral"):
Loan #___________ Mortgagor Name:______________________________________
The undersigned represents, warrants and agrees that:
1. The undersigned has requested and obtained possession of the
Collateral from the Bank for one of the purposes set forth below and for no
other purpose:
Correction of:___________________________________
2. The Collateral and the proceeds thereof are and will remain subject to
the security interest held by the Bank and the undersigned will keep the
Collateral and any such proceeds segregated and identifiable and free and clear
of all liens, charges and encumbrances.
3. The Collateral will be redelivered to the Bank or its designee as soon
as the purpose for which possession was taken has been accomplished, and in any
event within twenty-one (21) days from the date of taking possession.
4. In the event of any default in the performance of any term or
condition of this Trust Receipt, all or any part of the indebtedness secured by
the Collateral may be declared immediately due and payable without notice or
demand.
5. Additional limitations, if any:
The undersigned will transmit a Bailee Letter (as such term is defined in
the Pledge and Security Agreement dated as of February 2, 1996 between the
undersigned and the Bank) to the appropriate persons as required under said
Pledge and Security Agreement.
NEW CENTURY MORTGAGE CORPORATION
By______________________________________
Its____________________________________
<PAGE>
EXHIBIT E
TO AMENDED AND RESTATED
TO CREDIT AGREEMENT
FORMULA FOR DETERMINING
WAREHOUSING COLLATERAL VALUE
----------------------------
"Warehousing Collateral Value": at the time of any determination as
----------------------------
it pertains to the following described types or kinds of assets which constitute
Warehousing Collateral:
(1) A Mortgage Loan the entire interest in which is owned by the
Company and which is an Eligible Mortgage Loan covering a completed residential
property, provided that such Mortgage Loan has been pre-approved for purchase
--------
under a Take-Out Commitment and the aggregate available amount of such Take-Out
Commitment is not less than the aggregate outstanding principal amount of
Mortgage Loans pre-approved for delivery thereunder, and provided that at the
time such Mortgage Loan was pledged under the Pledge and Security Agreement not
more than 180 days had elapsed from the date such Mortgage Loan was closed: the
lesser of: (i) ninety-seven percent (97%) of the purchase price under the Take-
Out Commitment to which such Mortgage Loan has been assigned or, if such
Mortgage Loan has not been so assigned, the weighted average purchase price for
Mortgage Loans under Take-Out Commitments under which such Mortgage Loan has
been pre-approved for delivery, (ii) ninety-seven percent (97%) of the unpaid
principal amount of such Mortgage Loan, or (iii) at the election of the Agent,
ninety-seven percent (97%) of the Fair Market Value of such Mortgage Loan.
(2) Such other assets of the Company as the Company shall offer to
the Agent and as the Agent shall accept in its sole discretion as Warehousing
Collateral: the amount of Warehousing Collateral Value which the Agent in its
sole discretion assigns thereto.
Notwithstanding the foregoing:
(i) the maximum aggregate Warehousing Collateral Value of all
Mortgage Loans which have been closed and funded under Agreements to Pledge, and
with respect to which the Bank has not received the instruments and documents
described in paragraph 2 of the related Collateral Identification Letters, shall
be not more than (a) during each Month-End Period, thirty percent of the
Warehousing Commitment Amount and (b) at all other times, twenty percent of the
Warehousing Commitment Amount;
(ii) the maximum aggregate Warehousing Collateral Value of all
Mortgage Loans with an original principal balance in excess of $207,000 shall
not exceed fifty percent of the Warehousing Commitment Amount;
(iii) the maximum aggregate Warehousing Collateral Value of all
Mortgage
E-1
<PAGE>
Loans with a Risk Rating of C- or C shall not exceed thirty-five percent of the
Warehousing Commitment Amount; and
(iv) the maximum aggregate Warehousing Collateral Value of all
Mortgage Loans with a Risk Rating of C- shall not exceed fifteen percent of the
Warehousing Commitment Amount.
A Mortgage Loan, or Mortgage-backed Security issued in consideration
of a Mortgage Loan, will be considered as having no Warehousing Collateral Value
if, as to any such Mortgage Loan, any of the following events occur:
(a) more than 120 days elapse from the date on which the Mortgage
Note and other documents relating to such Mortgage Loan were delivered to the
Bank in accordance with Section 4.01 or Section 4.02 of the Pledge and Security
Agreement;
(b) 21 or more days elapse from the date a document relating to such
Mortgage Loan was delivered to the Company for correction in accordance with
Section 10.01 of the Pledge and Security Agreement and such document has not
been returned to the Agent;
(c) 45 or more days elapse from the date such Mortgage Loan was
delivered to an Investor pursuant to Section 10.02 of the Pledge and Security
Agreement for examination and purchase under a Take-Out Commitment and such
Mortgage Loan has not been returned to the Agent;
(d) more than one payment on such Mortgage Loan is delinquent, as
reported on any Compliance/Borrowing Base Certificate delivered to the Bank
pursuant to Section 4.01(c)(ii) of the Credit Agreement, such Mortgage Loan has
been rescinded, cancelled or avoided, or such Mortgage Loan is subject to any
rights of rescission, cancellation or avoidance or to any counterclaims, offsets
or defenses, whether by operation of law or otherwise;
(e) the Company fails to deliver any document relating to such
Mortgage Loan within five Business Days after being requested to do so by the
Bank pursuant to Section 4.03 of the Pledge and Security Agreement;
(f) such Mortgage Loan was listed on a Loan Detail Listing delivered
to the Bank with an Agreement to Pledge and a Collateral Identification Letter,
and such Mortgage Loan shall not have closed on or before the close of business
on the Business Day on which such Loan Detail Listing was delivered;
(g) such Mortgage Loan was closed and funded with the proceeds of a
Warehousing Loan under an Agreement to Pledge and the Company fails to deliver
to the Bank, with respect to such Mortgage Loan, within five Business Days after
the date of such
E-2
<PAGE>
Agreement to Pledge, the documents referred to in Section 4.02 of the Pledge and
Security Agreement;
(h) the Agent does not have a perfected, first priority security
interest in such Mortgage Loan; or
(i) the Agent notifies the Company that in its reasonable opinion
such Mortgage Loan is not marketable and will not be given Warehousing
Collateral Value.
As used in the foregoing definition of Warehousing Collateral Value
and all defined terms used therein and in the following defined terms, all terms
defined in the Credit Agreement are used as therein defined and, in addition,
the following terms shall have the following respective meanings:
"Agreement to Pledge": as such term is defined in the Pledge and
-------------------
Security Agreement.
"Appraised Value": with respect to an interest in real estate, the
---------------
then current fair market value thereof as of a recent date, as determined in
accordance with accepted methods of appraising by a qualified appraiser who is a
member of the American Institute of Real Estate Appraisers or other group of
professional appraisers.
"Collateral Identification Letter": as such term is defined in the
--------------------------------
Pledge and Security Agreement.
"Eligible Mortgage Loan: a closed-end Mortgage Loan secured by a
----------------------
First Mortgage or a Second Mortgage on improved real estate in an original
principal amount not in excess of (a) in the case of Mortgage Loans secured by
First Mortgages, 80% of the Appraised Value of such real estate, and (b) in the
case of Mortgage Loans secured by Second Mortgages, 80% of the Appraised Value
of such real estate minus the amount of the Mortgage Loan secured by the First
Mortgage thereon, unless either (i) the amount of such Mortgage Loan in excess
of the maximum set forth above is insured, or is subject to a commitment to be
insured, by an insurer approved by the Agent, or (ii) the Agent, in its sole
discretion, waives the requirement of mortgage insurance for a particular
Mortgage Loan, provided such Mortgage Loan (A) satisfies the underwriting
guidelines or other applicable standards of the Investor referenced in clause
(C) below for a Risk Rating of at least "C-", (B) has an original principal
amount of not more than $600,000, (C) has been pre-approved by an Investor for
purchase under a Take-Out Commitment, and (D) in the case of a Mortgage Loan
secured by a Second Mortgage, is originated or acquired pursuant to a program,
and contains terms, satisfactory to the Agent in its sole discretion.
"Fair Market Value": at any date with respect to any Mortgage Loan,
-----------------
the bid price quoted in writing to the Agent as of the computation date by two
nationally recognized dealers selected by the Agent who at the time are making a
market in similar Mortgage
E-3
<PAGE>
Loans, multiplied, in any case, by the outstanding principal amount thereof.
"First Mortgage": a Mortgage which is subject to no prior or superior
--------------
mortgage.
"Month-End Period": the period beginning on the fifth to the last
----------------
Business Day of each month and ending on the fifth Business Day of the following
month.
"Risk Rating": the risk rating of a Mortgage Loan, determined using
-----------
the Underwriting Guidelines or other applicable standards of the Investor to
which such Mortgage Loan is to be sold by the Company under a Take-Out
Commitment previously issued to the Company by such Investor, provided such
underwriting guidelines or other applicable standards comply with industry
standards in the sole judgment of the Agent.
"Second Mortgage": a Mortgage which is subject to one prior or
---------------
superior Mortgage.
"Take-Out Commitment": a current, written commitment issued to the
-------------------
Company by an Investor to purchase Mortgage Loans, at a definite price or yield,
within a specified time period.
E-4
<PAGE>
EXHIBIT F TO AMENDED AND
RESTATED CREDIT AGREEMENT
FORM OF PROMISSORY NOTE
-----------------------
(Warehousing Note)
October ____, 1996
$[_______] Minneapolis, Minnesota
FOR VALUE RECEIVED, NEW CENTURY MORTGAGE CORPORATION, a California
corporation, hereby promises to pay to the order of [___________________] (the
"Bank") at the main office of the Agent in Minneapolis, Minnesota, in lawful
money of the United States of America in Immediately Available Funds (as such
term and each other capitalized term used herein are defined in the Credit
Agreement hereinafter referred to), the principal sum of [___] MILLION AND
NO/100 DOLLARS ($[_______]) or the aggregate unpaid principal amount of all
Warehousing Loans made by the Bank pursuant to the Credit Agreement described
below, whichever is less, and to pay interest in like funds from the date hereof
on the unpaid balance thereof at the rates per annum and at such times as are
specified in the Credit Agreement. Interest (computed on the basis of actual
days elapsed and a year of 360 days) shall be payable at said office at the
times specified in the Credit Agreement.
Principal hereof shall be payable in the amounts and at the times set
forth in the Credit Agreement.
This note is one of the Warehousing Notes referred to in the Amended
and Restated Credit Agreement dated as of October 25, 1996, between the
undersigned the Bank, the other banks party thereto and First Bank National
Association, as Agent (as the same may be amended, modified or restated from
time to time, the "Credit Agreement"). Unless otherwise defined herein,
capitalized terms used herein shall have the meanings given to such terms in the
Credit Agreement. This note is subject to certain mandatory and voluntary
prepayments and its maturity is subject to acceleration, in each case upon the
terms provided in the Credit Agreement.
The undersigned hereby waives diligence, presentment, demand, protest,
and notice (except such notice as is required under the Loan Documents) of any
kind whatsoever. The nonexercise by the Bank of any of its rights hereunder or
under the other Loan Documents in any particular instance shall not constitute a
waiver thereof in any subsequent instance.
This note is entitled to the benefit of the Guaranty, the Pledge and
Security Agreement and the other Loan Documents.
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE
OF MINNESOTA, WITHOUT GIVING EFFECT TO
<PAGE>
CONFLICT OF LAWS PRINCIPLES THEREOF BUT GIVING EFFECT TO FEDERAL LAWS APPLICABLE
TO NATIONAL BANKS. In the event of default hereunder, the undersigned agrees to
pay all costs and expenses of collection, including but not limited to
reasonable attorneys' fees.
[Notwithstanding the foregoing paragraphs and all other provisions of
this note and the Credit Agreement, none of the terms and provisions of this
note or the Credit Agreement shall ever be construed to create a contract to pay
to the Bank, for the use, forbearance or detention of money, interest in excess
of the maximum amount of interest permitted to be charged by the Bank to the
undersigned under applicable state or federal law from time to time in effect,
and the undersigned shall never be required to pay interest in excess of such
maximum amount. If, for any reason, interest is paid hereon in excess of such
maximum amount (whether as a result of the payment of this note prior to its
maturity or otherwise), then promptly upon any determination that such excess
has been paid the Bank will, at its option, either refund such excess to the
undersigned or apply such excess to the principal owing hereunder. All interest
paid shall, to the extent permitted by applicable law, be amortized, prorated,
allocated and spread throughout the full period of the Company's credit
relationship with the Bank until payment in full of the principal (including the
period of any renewal or extension) so that the interest for such full period
shall not exceed the maximum rate of interest permitted by applicable law.]
NEW CENTURY MORTGAGE CORPORATION
By________________________________________________
Its___________________________________________
2
<PAGE>
EXHIBIT G TO AMENDED AND
RESTATED CREDIT AGREEMENT
Statement to be Included in Closing Instructions
------------------------------------------------
to Closing Agents for Wet Funded Loans
--------------------------------------
"You are hereby notified that First Bank National Association, as
agent for certain lenders and a certain lessor (in such capacity, the "Agent")
has a security interest in the deed of trust or mortgage note, the deed
of trust or mortgage and all other supporting documents for the above-referenced
loan. Unless the Agent otherwise instructs you, (i) if the mortgage loan is not
funded within one (1) business day after your receipt of funds from the Agent,
said funds are to be resumed by you to: First Bank National Association,
Minneapolis, Minnesota, ABA No. 0910-0002-2 for credit to our Collateral Account
No. 1731-0097-1378, and (ii) all loan documents are to be resumed to us by the
second business day after settlement."
<PAGE>
EXHIBIT H TO AMENDED AND
RESTATED CREDIT AGREEMENT
MATTERS TO BE
COVERED BY THE OPINION OF COUNSEL
TO THE COMPANY AND NCFC
The opinions of Brad A. Morrice, counsel to NCFC and the Company, which are
called for by Section 5.01(a)(x) of the Credit Agreement, shall be satisfactory
in form and substance to the Agent and shall cover the matters set forth below,
subject to such assumptions, exceptions and qualifications as may be acceptable
to the Agent and counsel to the Agent:
1. Each of NCFC and the Company (collectively, the "Transaction Parties"
and each, individually, a "Transaction Party") has been duly incorporated, is a
validly existing corporation and in good standing under the laws of its
respective jurisdiction of incorporation, and has the requisite corporate power
to own its respective properties and to conduct its respective businesses as
currently conducted by it. The Company is duly qualified to do business and is
in good standing as a foreign corporation in each jurisdiction in which the
character of the business conducted by it or the location of the properties
owned or leased by it make such qualification necessary, except in jurisdictions
in which failure to be in good standing will not preclude it from enforcing its
rights with respect to any material asset or expose it to any material
liability.
2. The execution, delivery and performance by each Transaction Party of
each Loan Document to which it is a party and the consummation of the
transactions contemplated thereby are within the corporate powers of such
Transaction Party, have been duly authorized by all necessary corporate action
and do not, and the consummation of the transactions contemplated thereby and
compliance by each Transaction Party with the applicable provisions thereof will
not, conflict with, constitute a default under or violate (a) any of the terms,
conditions or provisions of its Articles or Certificate of Incorporation or
bylaws, (b) any of the terms, conditions or provisions of any document,
agreement or other instrument which is known to me to which it is a party or by
which it is bound, (c) any judgment, writ, injunction, decree, order or ruling
of any court or governmental authority binding on it and known to me, or (d) any
statute, rule or regulation of any governmental authority binding on it.
3. Each Loan Document to which either Transaction Party is a party has
been duly executed and delivered by such Transaction Party and is the legal,
valid and binding obligation of such Transaction Party enforceable against such
Transaction Party in accordance with its terms, subject to limitations as to
enforceability which might result from general equitable principles or
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other
similar laws affecting creditors' rights generally.
4. No consent, approval, waiver, license or authorization or other action
by or filing with any governmental authority is required in connection with the
execution,
<PAGE>
delivery and performance by either Transaction Party of any Loan Document to
which it is a party, the validity or enforceability of any Loan Document or the
consummation of the transactions contemplated thereby except for those which
have already been obtained and are in full force and effect.
5. The Pledge and Security Agreement creates a valid security interest in
the Collateral described in Section 2 thereof, which security interest will
secure the Obligations and the Lease Obligation. The financing statements to be
filed under the Pledge and Security Agreement are in appropriate form for filing
with the offices identified thereon. Assuming that such financing statements
have been duly filed with said offices and that each Transaction Party which has
executed and delivered said financing statements has rights in the collateral
described therein, such financing statements shall perfect the security
interests granted to the Agent, for the benefit of the Banks and FBS Business
Finance Corporation, pursuant to the Pledge and Security Agreement to the extent
such security interests may be perfected by filing financing statements under
the Uniform Commercial Code.
6. There has been created under the Pledge and Security Agreement a valid
security interest in the Pledged Mortgage Loans (as defined therein). Assuming
delivery to, and the continued possession by, the Agent of the Mortgage Notes
relating to the Pledged Mortgage Loans, said security interests shall be
perfected. The laws of certain jurisdictions may require the recordation of an
assignment of each Mortgage in order to perfect a security interest in the
Mortgage (as opposed to the Mortgage Note secured thereby). If the Agent does
not record its assignment of the Mortgages in such jurisdictions, I express no
opinion as to the Agent's perfected security interest in such Mortgages (as
opposed to the Mortgage Notes secured thereby).
7. To the best knowledge of such counsel, there are no actions, suits or
proceedings pending or threatened against or affecting either Transaction Party
or any of its properties before any court or arbitrator, or any governmental
department, board, agency or other instrumentality which (i) challenge the
legality, validity or enforceability of any Loan Document, or (ii) if determined
adversely to such Transaction Party, would have a material adverse effect on the
business, operations, property or condition (financial or otherwise) of either
Transaction Party or on the ability of either Transaction Party to perform its
obligations under the Loan Documents.
2
<PAGE>
EXHIBIT 1 TO AMENDED AND
RESTATED CREDIT AGREEMENT
FORM OF CERTIFICATE CONCERNING
BORROWER'S AUTHORIZED EMPLOYEES
I, ______________________________, am the duly elected Secretary of New
Century Mortgage Corporation, a California corporation, and do hereby certify
that the following officers and employees of said corporation are authorized to
take the following action on behalf of said corporation:
PERSONNEL AUTHORIZED TO SIGN (a) INSTRUMENTS OR
(b) COLLATERAL CERTIFICATES, REPORTS AND DIRECTIONS AS TO
SHIPMENT OF COLLATERAL TO INVESTORS UNDER
CREDIT AGREEMENT AND PLEDGE AND SECURITY AGREEMENT
Telephone
Number
(Area Code
Name Title Signature and Number)
---- ----- --------- -----------
_______________ ________________ _________________ _____________________
_______________ ________________ _________________ _____________________
_______________ ________________ _________________ _____________________
_______________ ________________ _________________ _____________________
<PAGE>
PERSONNEL AUTHORIZED TO TELEPHONE INSTRUCTIONS
TO AGENT UNDER CREDIT AGREEMENT AND
PLEDGE AND SECURITY AGREEMENT
Telephone
Number
(Area Code
Name Title Signature and Number)
---- ----- --------- -----------
_______________ ________________ _________________ _____________________
_______________ ________________ _________________ _____________________
_______________ ________________ _________________ _____________________
_______________ ________________ _________________ _____________________
2
<PAGE>
PERSONNEL AUTHORIZED TO AMEND SCHEDULES ANNEXED
TO ANY OF THE ITEMS SET FORTH IN (b) ABOVE
Telephone
Number
(Area Code
Name Title Signature and Number)
---- ----- --------- -----------
_______________ ________________ _______________ ________________
_______________ ________________ _______________ ________________
_______________ ________________ _______________ ________________
_______________ ________________ _______________ ________________
SEND ADVICES AND MAIL TO:
ATTN:____________________________
IN WITNESS WHEREOF I have hereunder set my hand and the seal of the
Corporation this ________ day of ___________199_.
_________________________________________
Title:
3
<PAGE>
FIRST AMENDMENT TO AMENDED AND
RESTATED CREDIT AGREEMENT
THIS FIRST AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (the
"Agreement") dated as of December 31, 1996 by and among NEW CENTURY MORTGAGE
CORPORATION, a California corporation (the "Company"), FIRST BANK NATIONAL
ASSOCIATION, a national banking association, GUARANTY FEDERAL BANK, FSB ("GFB"),
a federal savings bank, (First Bank, GFB and any other financial institutions
which may hereafter become parties hereto being hereinafter referred to
collectively as the "Banks" and individually as a "Bank"), and FIRST BANK
NATIONAL ASSOCIATION, a national banking association, in its capacity as agent
for the Banks (in such capacity, together with any successor agents appointed
hereunder, the "Agent").
WITNESSETH THAT:
WHEREAS, the Company, the Banks and the Agent are parties to an
Amended and Restated Credit Agreement dated as of October 25, 1996 (the "Credit
Agreement"), pursuant to which the Banks provided the Company with a revolving
mortgage warehousing credit facility; and
WHEREAS, the Company, the Banks and the Agent have agreed to amend the
Credit Agreement upon the terms and conditions herein set forth.
NOW, THEREFORE, the parties hereto agree as follows:
1. Certain Defined Terms. Each capitalized term used herein without
---------------------
being defined herein that is defined in the Credit Agreement shall have the
meaning given to it therein.
2. Amendment to Credit Agreement. The Credit Agreement is amended
-----------------------------
as follows:
(a) Schedule 1.01(b) is amended in its entirety in the form of Schedule
1.01(b) hereto, which is made a part of the Credit Agreement as Schedule 1.01(b)
thereto.
(b) Exhibit E is amended in its entirety in the form of Exhibit E hereto,
which is made a part of the Credit Agreement as Exhibit E thereto.
(c) All references in the Credit Agreement and the other Loan Documents to
GFB's "Warehousing Note" shall be deemed to be references to, and all references
in the Credit Agreement and the other Loan Documents including GFB's Warehousing
Notes shall be deemed to include, the restated Warehousing Note delivered by the
Company to GFB
-1-
<PAGE>
pursuant to Section 3(d)(i) of this Amendment.
3. Conditions to Effectiveness of this Amendment. This Amendment
---------------------------------------------
shall become effective when the Banks shall have received at least four (4)
counterparts of this Amendment, duly executed by the Company and the Banks and
acknowledged by New Century Financial Corporation ("NCFC"), provided the
following conditions are satisfied:
(a) Before and after giving effect to this Amendment, the
representations and warranties of the Company in Section 3 of the Credit
Agreement and Section 5 of the Pledge and Security Agreement shall be true
and correct as though made on the date hereof, except for changes that are
permitted by the terms of the Credit Agreement.
(b) Before and after giving effect to this Amendment, no Event of
Default and no Unmatured Event of Default shall have occurred and be
continuing under the Credit Agreement.
(c) No material adverse change in the business, assets, financial
condition or prospects of the Company shall have occurred since the
Effective Date.
(d) The following shall have been delivered to the Agent, each duly
executed or certified, as the case may be, and dated as of the date of
delivery thereof:
(i) a restated Warehousing Note payable to GFB in the
principal amount of GFB's Warehousing Commitment Amount, as increased
by this Amendment, in the form of Exhibit F hereto, duly executed by
the Company;
(ii) certified copies of resolutions of the Board of Directors
of the Company authorizing or ratifying the execution, delivery and
performance of this Amendment;
(iii) a certified copy of any amendment or restatement of the
Articles of Incorporation or the By-laws of the Company made or
entered following the date of the most recent certified copies thereof
furnished to the Banks;
(iv) certified copies of all documents evidencing any necessary
corporate action, consent or governmental or regulatory approval (if
any) with respect to this Amendment;
(v) a favorable opinion of Brad A. Morrice, counsel to the
Company and NCFC, addressed to the Banks, as to the matters and to the
effect set forth on Exhibit H hereto; and
(vi) such other documents, instruments, opinions and approvals
as the Banks may reasonably request.
-2-
<PAGE>
4. Acknowledgments. The Company and the Banks each acknowledges
---------------
that, as amended hereby, the Credit Agreement remains in full force and effect
with respect to the Company and the Banks, and that each reference to the Credit
Agreement in the Loan Documents shall refer to the Credit Agreement, as amended
hereby. The Company confirms and acknowledges that it will continue to comply
with the covenants set out in the Credit Agreement and the other Loan Documents,
as amended hereby, and that its representations and warranties set out in the
Credit Agreement and the other Loan Documents, as amended hereby, are true and
correct as of the date of this Amendment. The Company further represents and
warrants that (i) the execution, delivery and performance of this Amendment by
the Company is within its corporate powers and has been duly authorized by all
necessary corporate action; (ii) this Amendment has been duly executed and
delivered by the Company and constitutes the legal, valid and binding obligation
of the Company enforceable against the Company in accordance with its terms
(subject to limitations as to enforceability which might result from bankruptcy,
insolvency, or other similar laws affecting creditors' rights generally) and
(iii) no Events of Default or Unmatured Events of Default exist.
5. General.
-------
(a) The Company agrees to reimburse the Banks upon demand for all
reasonable expenses (including reasonable attorneys fees and legal
expenses) incurred by the Banks in the preparation, negotiation and
execution of this Amendment and any other document required to be furnished
herewith, and to pay and save the Banks harmless from all liability for any
stamp or other taxes which may be payable with respect to the execution or
delivery of this Amendment, which obligations of the Company shall survive
any termination of the Credit Agreement.
(b) This Amendment may be executed in as many counterparts as may be
deemed necessary or convenient, and by the different parties hereto on
separate counterparts, each of which, when so executed, shall be deemed an
original but all such counterparts shall constitute but one and the same
instrument.
(c) Any provision of this Amendment which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining portions hereof or affecting the validity or
enforceability of such provisions in any other jurisdiction.
(d) This Amendment shall be governed by, and construed in accordance
with, the internal law, and not the law of conflicts, of the State of
Minnesota, but giving effect to federal laws applicable to national banks.
(e) This Amendment shall be binding upon the Company, the Banks and
their respective successors and assigns, and shall inure to the benefit of
the Company, the Banks and the successors and assigns of the Banks.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this First
Amendment to Amended and Restated Credit Agreement to be executed as of the day
and year first above written.
NEW CENTURY MORTGAGE CORPORATION
By /s/ Brad A. Morrice
-----------------------------------
Its CEO
-----------------------------
FIRST BANK NATIONAL ASSOCIATION
By /s/ Edwin D. Jenkins
-----------------------------------
Its Vice President
-----------------------------
GUARANTY FEDERAL BANK, FSB
By /s/
-----------------------------------
Its Assistant Vice President
----------------------------
-4-
<PAGE>
THE UNDERSIGNED, NEW CENTURY FINANCIAL CORPORATION., HEREBY (1) AGREES
THAT EACH REFERENCE TO THE CREDIT AGREEMENT, OR WORDS OF SIMILAR IMPORT,
CONTAINED IN THE AMENDED AND RESTATED GUARANTY DATED AS OF OCTOBER 25, 1996 (THE
"GUARANTY") BY THE UNDERSIGNED TO FIRST BANK NATIONAL ASSOCIATION AND GUARANTY
FEDERAL BANK, F.S.B., SHALL BE A REFERENCE TO THE CREDIT AGREEMENT AS AMENDED BY
THE FOREGOING AMENDMENT, (2) CONFIRMS THAT THE GUARANTY SHALL REMAIN IN FULL
FORCE AND EFFECT AFTER GIVING EFFECT TO THE FOREGOING AMENDMENT, AND (3)
CONFIRMS AND ACKNOWLEDGES THAT ITS REPRESENTATIONS AND WARRANTIES SET FORTH IN
SECTION 15 OF THE GUARANTY ARE TRUE AND CORRECT AS OF THE DATE OF THE FOREGOING
AMENDMENT.
NEW CENTURY FINANCIAL CORPORATION
By
Its
-5-
<PAGE>
EXHIBITS
E Formula for Determining Warehousing Collateral Value
F Form of Warehousing Note
H Matters to be Covered by Opinion of Counsel to the Company and NCFC
-6-
<PAGE>
SCHEDULES
1.01(b) Warehousing Commitment Amounts
-7-
<PAGE>
SCHEDULE 1.01(b)
BANK COMMITMENTS
----------------
<TABLE>
<CAPTION>
Warehousing
Bank Commitment
- ---- ----------------
<S> <C>
First Bank
National Association $30,000,000
Guaranty Federal Bank,
F.S.B. $25,000,000
</TABLE>
-8-
<PAGE>
EXHIBIT E
TO FIRST AMENDMENT TO AMENDED
AND RESTATED CREDIT AGREEMENT
FORMULA FOR DETERMINING
WAREHOUSING COLLATERAL VALUE
----------------------------
"Warehousing Collateral Value": at the time of any determination as it
----------------------------
pertains to the following described types or kinds of assets which constitute
Warehousing Collateral:
(1) A Mortgage Loan the entire interest in which is owned by the
Company and which is an Eligible Mortgage Loan covering a completed residential
property, provided that such Mortgage Loan has been pre-approved for purchase
--------
under a Take-Out Commitment and the aggregate available amount of such TakeOut
Commitment is not less than the aggregate outstanding principal amount of
Mortgage Loans pre-approved for delivery thereunder, and provided that at the
time such Mortgage Loan was pledged under the Pledge and Security Agreement not
more than 180 days had elapsed from the date such Mortgage Loan was closed: the
lesser of: (i) ninety-seven percent (97%) of the purchase price under the Take-
Out Commitment to which such Mortgage Loan has been assigned or, if such
Mortgage Loan has not been so assigned, the weighted average purchase price for
Mortgage Loans under Take-Out Commitments under which such Mortgage Loan has
been pre-approved for delivery, (ii) ninety-seven percent (97%) of the unpaid
principal amount of such Mortgage Loan, or (iii) at the election of the Agent,
ninety-seven percent (97%) of the Fair Market Value of such Mortgage Loan.
(2) Such other assets of the Company as the Company shall offer to
the Agent and as the Agent shall accept in its sole discretion as Warehousing
Collateral: the amount of Warehousing Collateral Value which the Agent in its
sole discretion assigns thereto.
Notwithstanding the foregoing:
(i) the maximum aggregate Warehousing Collateral Value of all
Mortgage Loans which have been closed and funded under Agreements to Pledge, and
with respect to which the Agent has not received the instruments and documents
described in paragraph 2 of the related Collateral Identification Letters, shall
be not more than (a) during each Month-End Period, fifty percent of the
Warehousing Commitment Amount and (b) at all other times, twenty-five percent of
the Warehousing Commitment Amount;
(ii) the maximum aggregate Warehousing Collateral Value of all
Mortgage Loans with an original principal balance in excess of $207,000 shall
not exceed fifty percent of the Warehousing Commitment Amount;
(iii) the maximum aggregate Warehousing Collateral Value of all
Mortgage Loans with a Risk Rating of C- or C shall not exceed thirty-five
percent of the Warehousing
<PAGE>
Commitment Amount; and
(iv) the maximum aggregate Warehousing Collateral Value of all
Mortgage Loans with a Risk Rating of C- shall not exceed fifteen percent of the
Warehousing Commitment Amount.
A Mortgage Loan, or Mortgage-backed Security issued in consideration
of a Mortgage Loan, will be considered as having no Warehousing Collateral Value
if, as to any such Mortgage Loan, any of the following events occur:
(a) more than 90 days elapse from the date on which the Mortgage Note
and other documents relating to such Mortgage Loan were delivered to the Bank in
accordance with Sections 4.01 and 4.02 of the Pledge and Security Agreement;
(b) 21 or more days elapse from the date a document relating to such
Mortgage Loan was delivered to the Company for correction in accordance with
Section 10.01 of the Pledge and Security Agreement and such document has not
been returned to the Agent;
(c) 45 or more days elapse from the date such Mortgage Loan was
delivered to an Investor pursuant to Section 10.02 of the Pledge and Security
Agreement for examination and purchase under a Take-Out Commitment and such
Mortgage Loan has not been returned to the Agent;
(d) more than one payment on such Mortgage Loan is delinquent, as
reported on any Compliance/Borrowing Base Certificate delivered to each Bank
pursuant to Section 4.01(c)(ii) of the Credit Agreement, such Mortgage Loan has
been rescinded, cancelled or avoided, or such Mortgage Loan is subject to any
rights of rescission, cancellation or avoidance or to any counterclaims, offsets
or defenses, whether by operation of law or otherwise;
(e) the Company fails to deliver any document relating to such
Mortgage Loan within five Business Days after being requested to do so by the
Agent pursuant to Section 4.03 of the Pledge and Security Agreement;
(f) such Mortgage Loan was listed on a Loan Detail Listing delivered
to the Agent with an Agreement to Pledge and a Collateral Identification Letter,
and such Mortgage Loan shall not have closed on or before the close of business
on the Business Day on which such Loan Detail Listing was delivered;
(g) such Mortgage Loan was closed and funded with the proceeds of a
Warehousing Loan under an Agreement to Pledge and the Company fails to deliver
to the Agent, with respect to such Mortgage Loan, within five Business Days
after the date of such Agreement to Pledge, the documents referred to in Section
4.02 of the Pledge and Security Agreement;
(h) the Agent, for the benefit of the Banks, does not have a
perfected, first
<PAGE>
priority security interest in such Mortgage Loan; or
(i) the Agent notifies the Company that in its reasonable opinion
such Mortgage Loan is not marketable and will not be given Warehousing
Collateral Value.
As used in the foregoing definition of Warehousing Collateral Value
and all defined terms used therein and in the following defined terms, all terms
defined in the Credit Agreement are used as therein defined and, in addition,
the following terms shall have the following respective meanings:
"Acquisition Cost": means, with respect to any Mortgage Loan, the cash
----------------
purchase price paid by the Company to any unaffiliated Person to acquire such
Mortgage Loan.
"Agreement to Pledge": as such term is defined in the Pledge and
-------------------
Security Agreement.
"Appraised Value": with respect to an interest in real estate, the
---------------
then current fair market value thereof as of a recent date, as determined in
accordance with accepted methods of appraising by a qualified appraiser who is a
member of the American Institute of Real Estate Appraisers or other group of
professional appraisers.
"Collateral Identification Letter": as such term is defined in the
--------------------------------
Pledge and Security Agreement.
"Eligible Mortgage Loan: a closed-end Mortgage Loan secured by a First
-----------------------
Mortgage or a Second Mortgage on improved real estate in an original principal
amount not in excess of (a) in the case of Mortgage Loans secured by First
Mortgages, 80% of the Appraised Value of such real estate, and (b) in the case
of Mortgage Loans secured by Second Mortgages, 80% of the Appraised Value of
such real estate minus the amount of the Mortgage Loan secured by the First
Mortgage thereon, unless either (i) the amount of such Mortgage Loan in excess
of the maximum set forth above is insured, or is subject to a commitment to be
insured, by an insurer approved by the Agent, or (ii) the Agent, in its sole
discretion, waives the requirement of mortgage insurance for a particular
Mortgage Loan, provided such Mortgage Loan (A) satisfies the underwriting
guidelines or other applicable standards of the Investor referenced in clause
(C) below for a Risk Rating of at least "C-", (B) has an original principal
amount of not more than $600,000, (C) has been pre-approved by an Investor for
purchase under a Take-Out Commitment, and (D) in the case of a Mortgage Loan
secured by a Second Mortgage, is originated or acquired pursuant to a program
and contains terms, satisfactory to the Agent in its sole discretion.
"Fair Market Value": at any date with respect to any Mortgage Loan,
-----------------
the bid price quoted in writing to the Agent as of the computation date by two
nationally recognized dealers selected by the Agent who at the time are making a
market in similar Mortgage Loans, multiplied, in any case, by the outstanding
principal amount thereof.
<PAGE>
"First Mortgage": a Mortgage which is subject to no prior or superior
--------------
mortgage.
"Month-End Period": the period beginning on the third to the last
----------------
Business Day of each month and ending on the third Business Day of the following
month.
"Risk Rating": the risk rating of a Mortgage Loan, determined using
-----------
the Underwriting Guidelines or other applicable standards of the Investor to
which such Mortgage Loan is to be sold by the Company under a Take-Out
Commitment previously issued to the Company by such Investor, provided such
underwriting guidelines or other applicable standards comply with industry
standards in the sole judgment of the Agent.
"Second Mortgage": a Mortgage which is subject to one prior or
---------------
superior Mortgage.
"Take-Out Commitment": a current, written commitment issued to the
-------------------
Company by an Investor to purchase Mortgage Loans, at a definite price or yield,
within a specified time period.
<PAGE>
EXHIBIT F
TO FIRST AMENDMENT TO AMENDED
AND RESTATED CREDIT AGREEMENT
FORM OF PROMISSORY NOTE
-----------------------
(Warehousing Note)
December ____,1996
$____________ Minneapolis, Minnesota
FOR VALUE RECEIVED, NEW CENTURY MORTGAGE CORPORATION, a California
corporation, hereby promises to pay to the order of ___________________ (the
"Bank") at the main office of the Agent in Minneapolis, Minnesota, in lawful
money of the United States of America in Immediately Available Funds (as such
term and each other capitalized term used herein are defined in the Credit
Agreement hereinafter referred to), the principal sum of ___ MILLION AND NO/100
DOLLARS ($_______) or the aggregate unpaid principal amount of all Warehousing
Loans made by the Bank pursuant to the Credit Agreement described below,
whichever is less, and to pay interest in like funds from the date hereof on the
unpaid balance thereof at the rates per annum and at such times as are specified
in the Credit Agreement. Interest (computed on the basis of actual days elapsed
and a year of 360 days) shall be payable at said office at the times specified
in the Credit Agreement.
Principal hereof shall be payable in the amounts and at the times set
forth in the Credit Agreement.
This note is one of the Warehousing Notes referred to in the Amended
and Restated Credit Agreement dated as of October 25, 1996, between the
undersigned the Bank, the other banks party thereto and First Bank National
Association, as Agent (as the same may be amended, modified or restated from
time to time, the "Credit Agreement"). Unless otherwise defined herein,
capitalized terms used herein shall have the meanings given to such terms in the
Credit Agreement. This note is subject to certain mandatory and voluntary
prepayments and its maturity is subject to acceleration, in each case upon the
terms provided in the Credit Agreement.
The undersigned hereby waives diligence, presentment, demand, protest,
and notice (except such notice as is required under the Loan Documents) of any
kind whatsoever. The nonexercise by the Bank of any of its rights hereunder or
under the other Loan Documents in any particular instance shall not constitute a
waiver thereof in any subsequent instance.
1
<PAGE>
This note is entitled to the benefit of the Guaranty, the Pledge and
Security Agreement and the other Loan Documents.
THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE
OF MINNESOTA, WITHOUT GIVING EFFECT TO CONFLICT OF LAWS PRINCIPLES THEREOF BUT
GIVING EFFECT TO FEDERAL LAWS APPLICABLE TO NATIONAL BANKS. In the event of
default hereunder, the undersigned agrees to pay all costs and expenses of
collection, including but not limited to reasonable attorneys' fees.
Notwithstanding the foregoing paragraphs and all other provisions of
this note and the Credit Agreement, none of the terms and provisions of this
note or the Credit Agreement shall ever be construed to create a contract to pay
to the Bank, for the use, forbearance or detention of money, interest in excess
of the maximum amount of interest permitted to be charged by the Bank to the
undersigned under applicable state or federal law from time to time in effect,
and the undersigned shall never be required to pay interest in excess of such
maximum amount. If, for any reason, interest is paid hereon in excess of such
maximum amount (whether as a result of the payment of this note prior to its
maturity or otherwise), then promptly upon any determination that such excess
has been paid the Bank will, at its option, either refund such excess to the
undersigned or apply such excess to the principal owing hereunder. All interest
paid shall, to the extent permitted by applicable law, be amortized, prorated,
allocated and spread throughout the full period of the Company's credit
relationship with the Bank until payment in full of the principal (including the
period of any renewal or extension) so that the interest for such full period
shall not exceed the maximum rate of interest permitted by applicable law.
This note amends and restates in its entirety an existing promissory
note dated October 25, 1996 in the original principal amount of $______ issued
by New Century Mortgage Corporation to the order of the Bank (the "Prior Note").
It is expressly intended, understood and agreed that all amounts outstanding
under said Prior Note as of the date hereof shall be considered outstanding
hereunder from and after the date hereof and shall not be considered paid (nor
shall the undersigned's obligation to pay the same be considered discharged or
satisfied) as a result of the issuance of this note.
NEW CENTURY MORTGAGE CORPORATION
By
Its
2
<PAGE>
EXHIBIT H
TO FIRST AMENDMENT TO AMENDED
AND RESTATED CREDIT AGREEMENT
MATTERS TO BE
COVERED BY THE OPINION OF COUNSEL
TO THE COMPANY AND NCFC
The opinions of Brad A. Morrice, counsel to NCFC and the Company, which are
called for by Section 3(d)(v) of the First Amendment to Credit Agreement, shall
be satisfactory in form and substance to the Agent and shall cover the matters
set forth below, subject to such assumptions, exceptions and qualifications as
may be acceptable to the Agent and counsel to the Agent:
1. Each of NCFC and the Company (collectively, the "Transaction Parties"
and each, individually, a "Transaction Party") has been duly incorporated, is a
validly existing corporation and in good standing under the laws of its
respective jurisdiction of incorporation, and has the requisite corporate power
to own its respective properties and to conduct its respective businesses as
currently conducted by it. The Company is duly qualified to do business and is
in good standing as a foreign corporation in each jurisdiction in which the
character of the business conducted by it or the location of the properties
owned or leased by it make such qualification necessary, except in jurisdictions
in which failure to be in good standing will not preclude it from enforcing its
rights with respect to any material asset or expose it to any material
liability.
2. The execution, delivery and performance by the Company, and the
acknowledgment by NCFC, of the First Amendment, the execution, delivery and
performance by the Company of the restated Warehousing Note payable to GFB (the
"New Note") by the Company, and the consummation of the transactions
contemplated thereby are within the corporate powers of each Transaction Party,
have been duly authorized by all necessary corporate action and do not, and the
consummation of the transactions contemplated thereby and compliance by each
Transaction Party with the applicable provisions thereof will not, conflict
with, constitute a default under or violate (a) any of the terms, conditions or
provisions of its Articles or Certificate of Incorporation or bylaws, (b)any of
the terms, conditions or provisions of any document, agreement or other
instrument which is known to me to which it is a party or by which it is bound,
(c)any judgment, writ, injunction, decree, order or ruling of any court or
governmental authority binding on it and known to me, or (d) any statute, rule
or regulation of any governmental authority binding on it.
3. The First Amendment and the New Note have been duly executed and
delivered by the Company. The Credit Agreement, as amended by the First
Amendment,
H-1
<PAGE>
and the New Note are the legal, valid and binding obligation of the Company
enforceable against the Company in accordance with their respective terms, and
other giving effect to the First Amendment and the New Note, the Guaranty will
remain the legal, valid and binding obligation of NCFC enforceable against NCFC
in accordance with its terms, in each case subject to limitations as to
enforceability which might result from general equitable principles or
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other
similar laws affecting creditors' rights generally.
4. No consent, approval, waiver, license or authorization or other action
by or filing with any governmental authority is required in connection with the
execution, delivery and performance or acknowledgment by either Transaction
Party of the First Amendment or the New Note, the validity or enforceability of
the First Amendment or the New Note or the consummation of the transactions
contemplated thereby except for those which have already been obtained and are
in full force and effect.
5. To the best knowledge of such counsel, there are no actions, suits or
proceedings pending or threatened against or affecting either Transaction Party
or any of its properties before any court or arbitrator, or any governmental
department, board, agency or other instrumentality which (i) challenge the
legality, validity or enforceability of any Loan Document, or (ii) if determined
adversely to such Transaction Party, would have a material adverse effect on the
business, operations, property or condition (financial or otherwise) of either
Transaction Party or on the ability of either Transaction Party to perform its
obligations under the Loan Documents.
H-2
<PAGE>
FOURTH AMENDMENT TO CREDIT AGREEMENT
------------------------------------
THIS FOURTH AMENDMENT TO AMENDED AND RESTATED CREDIT AGREEMENT (the
"Amendment") dated as of April 16, 1997 by and among NEW CENTURY MORTGAGE
CORPORATION, a California corporation (the "Company"), FIRST BANK NATIONAL
ASSOCIATION, a national banking association ("First Bank"), GUARANTY FEDERAL
BANK, FSB, a federal savings bank ("GFB"), (First Bank, GFB and any other
financial institutions which may hereafter become parties hereto being
hereinafter referred to collectively as the "Banks" and individually as a
"Bank"), and FIRST BANK NATIONAL ASSOCIATION, a national banking association, in
its capacity as agent for the Banks (in such capacity, together with any
successor agents appointed hereunder, the "Agent"). Terms not otherwise
expressly defined herein shall have the meanings set forth in the Credit
Agreement.
WITNESSETH THAT:
WHEREAS, the Company, the Banks and the Agent are parties to an Amended and
Restated Credit Agreement dated as of October 25, 1996, as amended by a First
Amendment dated as of December 31, 1996, by a Second Amendment dated as of March
14, 1997, and by a Third Amendment dated as of March 28, 1997 (as so amended,
the "Credit Agreement"), pursuant to which the Banks provided the Company with
revolving mortgage warehousing and working capital credit facilities; and
WHEREAS, the Company and the Banks have agreed to amend the Credit
Agreement upon the terms and conditions herein set forth.
NOW THEREFORE, for value received, the receipt and sufficiency of which are
hereby acknowledged, the Company and the Banks agree as follows:
ARTICLE I - AMENDMENTS TO THE CREDIT AGREEMENT
1.1 Amendments to Definitions. Article I of the Credit Agreement is
-------------------------
amended as follows:
(a) The following definitions set forth in Section 1.01 are
amended in their entirety as follows:
"Warehousing Termination Date": the earliest of (a) May 31,
----------------------------
1998, (b) the date on which the Warehousing Commitments are
terminated or reduced to zero pursuant to Section 2.01(e), or (c)
the date on which the Warehousing Commitments are terminated
pursuant to Section 6.02.
<PAGE>
"Working Capital Commitment": as to First Bank, its
--------------------------
obligations to (a) make Working Capital Loans pursuant to Section
2.01(A)(a), and (b) issue Letters of Credit upon the request of
the Company in an aggregate principal amount outstanding not to
exceed $1,250,000, upon the terms and subject to the conditions
and limitations of this Agreement, in an aggregate amount not to
exceed the Working Capital Commitment Amount.
"Working Capital Termination Date": the earliest of
--------------------------------
(a) May 31, 1998, (b) the date on which the Working Capital
Commitments are terminated or reduced to zero pursuant to Section
2.01(e) or (c) the date on which the Working Capital Commitments
are terminated pursuant to Section 6.02.
(b) The following new definitions are added to Section 1.01 in
the appropriate alphabetical order:
"Holding Account": a deposit account belonging to
---------------
First Bank into which the Company may be required to make
deposits pursuant to the provisions of this Agreement, such
account to be under the sole dominion and control of First Bank
and not subject to withdrawal by the Company, with any amounts
therein to be held for application toward payment of (i) any
outstanding Letters of Credit when drawn upon or (ii) other
obligations of the Company to First Bank.
"Letter of Credit": an irrevocable letter of credit, in
----------------
form and substance satisfactory to First Bank, issued by First
Bank pursuant to this Agreement for the account of the Company.
"Letter of Credit Fee": as defined in Section 2.07(g).
--------------------
"Letter of Credit Obligations": as of any date of
----------------------------
determination, the sum of (a) the aggregate face amount of
Letters of Credit outstanding on such date and (b) the aggregate
amount of Unpaid Drawings on such date.
"Unpaid Drawing": as defined in Section 2.07(d).
--------------
1.2 Amendments to Terms of Lending. Article II of the Credit Agreement is
------------------------------
amended as follows:
(a) Section 2.01A(a) is amended in its entirety to read as
follows:
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<PAGE>
(a) Working Capital Credit Commitment. Upon the terms and
---------------------------------
subject to the conditions of this Agreement, during the period
beginning on the Effective Date and ending on the Working Capital
Termination Date, First Bank agrees to lend (and after repayment, to
relend) to the Company, at such times and in such amounts as the
Company shall request, up to an aggregate principal amount at any time
outstanding equal to First Bank's Working Capital Commitment Amount;
provided, that First Bank shall not be obligated to make any Working
--------
Capital Loan under the Working Capital Commitment if the sum of the
aggregate principal amount of Working Capital Loans which would be
outstanding as a result of making such Working Capital Loan, plus
----
Letter of Credit Obligations, would exceed the Working Capital
Commitment Amount.
(b) Section 2.01A(c) is amended in its entirety to read as follows:
(c) Working Capital Note. Working Capital Loans made by First
--------------------
Bank shall be evidenced by the Company's promissory note in the form
of Exhibit F-1 to the Second Amendment hereto (together with any
promissory note subsequently executed and delivered by the Company to
evidence First Bank's Working Capital Loans, the "Working Capital
Note"), which shall be made payable to the order of First Bank in an
amount equal to First Bank's Working Capital Commitment Amount and
shall mature on the Working Capital Termination Date. The sum of (i)
the aggregate amount of all Working Capital Loans made by First Bank
under its Working Capital Commitment, plus (ii) the aggregate amount
----
of Unpaid Drawings on such date, minus (iii) all repayments of
-----
principal thereof shall be the principal amount owing and unpaid on
the Working Capital Note. The principal amount of each Working Capital
Loan made by First Bank and each Unpaid Drawing, and all principal
payments and prepayments thereof, may be noted by First Bank on a
schedule attached to the Working Capital Note and shall be entered by
First Bank on its ledgers and computer records. The failure of First
Bank to make such notations or entries shall not affect the
obligations of the Company under such Working Capital Note in respect
of such Working Capital Loans and Unpaid Drawings. The entries made by
First Bank on its ledgers and computer records and any notations made
by First Bank on any such schedule annexed to First Bank's Working
Capital Note and/or on its ledgers and computer records shall be
presumed to be accurate until the contrary is established.
-3-
<PAGE>
(c) Section 2.01A(e)(i) is amended in its entirety as follows:
(e) Termination and Reduction of the Working Capital
------------------------------------------------
Commitment.
----------
(i) The Company may, at any time, upon not less than thirty
days' prior written notice to First Bank, reduce the aggregate
Working Capital Commitment Amount, with any such reduction in a
minimum amount of $500,000, or, if more, in an integral multiple
of $1,000,000 in excess thereof; provided, that the Company may
not reduce the Working Capital Commitment Amount below the
aggregate principal amount of outstanding Working Capital Loans
plus any Letter of Credit Obligations. The Company may, upon not
----
less than thirty days' prior written notice to First Bank,
terminate the Working Capital Commitment in its entirety. Upon
termination of the Working Capital Commitment pursuant to this
Section, the Company shall pay to First Bank the aggregate amount
of all outstanding Working Capital Loans and Unpaid Drawings, all
accrued and unpaid interest thereon, any unpaid fees accrued to
the date of such termination and all other unpaid obligations of
the Company to First Bank in respect of its Working Capital
Commitments and Letters of Credit hereunder, and shall deposit
into the Holding Account an amount equal to the aggregate face
amount of Letters of Credit outstanding on such date.
(d) Article II of the Credit Agreement is further amended to add
a new Section 2.07 thereto as follows:
Section 2.07 Letters of Credit.
-----------------
(a) Letters of Credit. Upon the terms and subject to
-----------------
the conditions of this Agreement, First Bank agrees to issue
Letters of Credit for the account of the Company; provided that
--------
First Bank shall be under no obligation to issue any Letter of
Credit if, after giving effect to such issuance, the Company's
Letter of Credit Obligations would exceed $1,250,000 or if the
sum of the aggregate principal amount of Working Capital Loans
outstanding plus the Company's Letter of Credit Obligations would
exceed the Working Capital Commitment Amount.
(b) Procedures for Letter of Credit. The request for
-------------------------------
a Letter of Credit shall be made by the Company in writing, by
facsimile
-4-
<PAGE>
transmission or electronic conveyance received by First Bank by
2:00 p.m., Minneapolis time, on a Business Day which is not less
than one Business Day preceding the requested date of issuance
(which shall also be a Business Day). The request for a Letter of
Credit shall be deemed a representation by the Company that on
the date of issuance of such Letter of Credit, after giving
effect to the issuance of such Letter of Credit, the conditions
precedent set forth in Section 5.02 have been and will be
satisfied. Such requests shall be made substantially in the form
then used by First Bank for Letter of Credit applications.
(c) Terms of Letter of Credit. Letters of Credit
-------------------------
issued hereunder shall expire no later than the Working Capital
Commitment Termination Date. Letters of Credit shall be issued
in support of obligations of the Borrower, other than obligations
relating to the borrowing of money or obtaining other financing,
incurred in the ordinary course of business. No Letter of Credit
may have a term longer than 12 months.
(d) Agreement to Repay Letter of Credit Drawings. If
--------------------------------------------
First Bank has decided that it will pay a drawing on the Letter
of Credit, it will notify the Company of that fact; provided,
--------
that the failure of First Bank to provide such notice prior to
the payment of such drawing, shall in no way limit or reduce the
obligations of the Company hereunder. The Company shall
reimburse First Bank by 9:30 a.m. (Minneapolis time) on the day
on which such drawing is to be paid in Immediately Available
Funds in an amount equal to the amount of such drawing. Any
amount by which the Company has failed to reimburse First Bank
for the full amount of such drawing by 10:00 a.m. on the date on
which First Bank in its notice indicated that it would pay such
drawing, until reimbursed from the proceeds of Working Capital
Loans pursuant to Section 2.07(f) or out of funds available in
---------------
the Holding Account, is an "Unpaid Drawing."
(e) Obligation Absolute. The obligation of the
-------------------
Company under Section 2.07(d) to repay First Bank for any amount
---------------
drawn on the Letter of Credit and to repay First Bank for any
Working Capital Loans made under Section 2.07(f) to cover Unpaid
---------------
Drawings shall be absolute, unconditional and irrevocable, shall
continue for so long as the Letter of Credit is outstanding
notwithstanding any termination of this Agreement, and shall be
-5-
<PAGE>
paid strictly in accordance with the terms of this Agreement,
under all circumstances whatsoever, including without limitation
the following circumstances:
(i) Any lack of validity or enforceability of the
Letter of Credit;
(ii) The existence of any claim, setoff, defense
or other right which the Company may have or claim at any
time against any beneficiary, transferee or holder of the
Letter of Credit (or any Person for whom any such
beneficiary, transferee or holder may be acting), First Bank
or any other Person, whether in connection with the Letter
of Credit, this Agreement, the transactions contemplated
hereby, or any unrelated transaction; or
(iii) Any statement or any other document
presented under the Letter of Credit proving to be forged,
fraudulent, invalid or insufficient in any respect or any
statement therein being untrue or inaccurate in any respect
whatsoever.
Neither First Bank nor its officers, directors or employees
shall be liable or responsible for, and the obligations of the
Company to First Bank shall not be impaired by:
(A) The use which may be made of the Letter of
Credit or for any acts or omissions of any beneficiary,
transferee or holder thereof in connection therewith;
(B) The validity, sufficiency or genuineness of
documents, or of any endorsements thereon, even if such
documents or endorsements should, in fact, prove to be in
any or all respects invalid, insufficient, fraudulent or
forged;
(C) The acceptance by First Bank of documents
that appear on their face to be in order, without
responsibility for further investigation, regardless of any
notice or information to the contrary; or
(D) Any other circumstances whatsoever in making
or failing to make payment under the Letter of Credit if in
-6-
<PAGE>
good faith and in conformity with U.S. or foreign laws
applicable thereto.
Notwithstanding the foregoing, the Company shall have a claim
against First Bank, and First Bank shall be liable to the
Company, to the extent, but only to the extent, of any direct, as
opposed to consequential, damages suffered by the Company which
the Company proves were caused by First Bank's willful misconduct
or gross negligence in determining whether documents presented
under the Letter of Credit comply with the terms thereof.
(f) Advances to Cover Unpaid Drawings. Whenever any
---------------------------------
Unpaid Drawing exists for which there are not then funds in the
Holding Account to cover the same, First Bank is authorized (and
the Company does here so authorize First Bank) to, and First Bank
in its sole discretion may, make a Working Capital Loan to the
Company in an amount equal to the amount of the Unpaid Drawing.
First Bank shall apply the proceeds of such Working Capital Loan
directly to reimburse itself for such Unpaid Drawing. If at the
time First Bank makes a Working Capital Loan pursuant to the
provisions of this Section, the conditions precedent specified in
Section 5.02 shall not have been satisfied, or if at any time any
Unpaid Drawings remain unpaid, the Company shall pay to First
Bank interest on the funds so advanced and/or on such Unpaid
Drawing, as the case may be, at a floating rate per annum equal
to the sum of the Reference Rate, plus two percent (2.00%).
----
(g) Letter of Credit Fees. For each Letter of Credit
---------------------
issued, the Company shall pay to First Bank in advance payable on
the date of issuance, a fee (a "Letter of Credit Fee") in an
amount determined by applying a per annum rate of two percent
(2%) to the original face amount of the Letter of Credit for the
period from the date of issuance to the scheduled expiration date
of such Letter of Credit. In addition to the Letter of Credit
Fee, the Company shall pay to First Bank, on demand, all
issuance, amendment, drawing and other fees regularly charged by
First Bank to its letter of credit customers and all out-of-
pocket expenses incurred by First Bank in connection with the
issuance, amendment, administration or payment of any Letter of
Credit.
(h) Increased Cost for Letters of Credit. If any
------------------------------------
Regulatory Change shall either (a) impose, modify or make
applicable any
-7-
<PAGE>
reserve, deposit, capital adequacy or similar requirement against
Letters of Credit issued by First Bank, or (b) shall impose on
First Bank any other conditions affecting this Agreement or any
Letter of Credit; and the result of any of the foregoing is to
increase the cost to First Bank of issuing or maintaining any
Letter of Credit, or reduce the amount of any sum received or
receivable by First Bank hereunder, then, upon demand (which
demand shall be given by First Bank promptly after it determines
such increased cost or reduction), the Company shall pay to First
Bank the additional amount or amounts as will compensate First
Bank for such increased cost or reduction. A certificate
submitted to the Company by First Bank setting forth the basis
for the determination of such additional amount or amounts
necessary to compensate First Bank as aforesaid shall be
conclusive and binding on the Company absent error.
1.3 Amendments to Representations and Warranties. Section 3.07 of the
--------------------------------------------
Credit Agreement is amended as follows:
3.07 Use of Proceeds. All proceeds of the Warehousing
---------------
Loans will be used only in accordance with Section 2.01(h), all
proceeds of Working Capital Loans will be used only in accordance with
Section 2.01A(g) and all proceeds of Letters of Credit will only be
used in accordance with Section 2.07(c). No part of the proceeds of
the Warehousing Loans, the Swingline Loans, the Working Capital Loans
or the Letters of Credit will be used by the Company to purchase or
carry any margin stock (as such term is defined in Regulation U of the
Board of Governors of the Federal Reserve System (or any successor
thereto)) or to extend credit to any other Person for the purpose of
purchasing or carrying any margin stock.
1.4 Amendments to Covenants. Article IV of the Credit Agreement is
-----------------------
amended as follows:
(a) The introductory sentence to Article IV is amended in its
entirety to read as follows:
So long as the Commitments are in effect and thereafter so long
as any Obligation or any Letter of Credit Obligation shall remain
unpaid, or any Letter of Credit shall remain outstanding, the Company
covenants that, unless the Bank shall otherwise consent in writing, it
will perform all the covenants set forth in this Section 4.
-8-
<PAGE>
(b) Section 4.08(a) is amended in its entirety as follows:
(a) the Obligations and the Letter of Credit
Obligations;
1.5 Amendments to Conditions Precedent. Section 5.02 of the Credit
----------------------------------
Agreement is amended in its entirety as follows:
5.02 Conditions Precedent to all Loans. The obligation of
---------------------------------
each Bank to make each Loan (including the initial Loan), or, as
to First Bank, to issue Letters of Credit, is subject to the
satisfaction of each and every of the following additional
conditions:
(a) the Agent shall have received a timely and properly
completed notice under Section 2.01(c) or Section 2.01A(b) or a
request for a Letter of Credit under Section 2.07(b), as the case
may be;
(b) there shall not have been any Regulatory Change
after the Signing Date which would render the transactions
contemplated hereby unlawful or which would impose a cost on or
increase the cost to such Bank for making or maintaining its
Loans or issuing the requested Letter of Credit or which would
reduce any amount payable to such Bank under this Agreement or
its Note or Notes;
(c) no Event of Default or Unmatured Event of Default
shall have occurred and be continuing or will exist upon making
the requested Loan or issuing the requested Letter of Credit;
(d) all the representations and warranties set forth in
Section 3 of this Agreement, in Section 5 of the Pledge and
Security Agreement and in Section 15 of the Guaranty shall be
true and correct in all material respects as though made on and
as of the applicable Borrowing Date or the date of the issuance
of the requested Letter of Credit, as the case may be;
(e) no material adverse change in, or development
likely to have a material adverse effect on, the business,
operations, prospects, assets or condition (financial or
otherwise) of NCFC or the Company shall have occurred and no
occurrence or event which is likely to have a material adverse
effect on the rights and remedies of the Banks or the ability of
NCFC or the Company to perform their respective obligations to
the Banks shall have occurred; and
-9-
<PAGE>
(f) the requested Loan is permitted under Section 2.01
or Section 2.01A or the requested Letter of Credit is permitted
under Section 2.07, as the case may be.
1.6 Amendment to Defaults and Remedies. Section 6.02 of the Credit
----------------------------------
Agreement is amended to read as follows:
6.02 Remedies. If (a) any Event of Default described in
--------
Section 6.01(f), (g) or (h) shall occur, the Commitments shall
automatically terminate and the Obligations and Unpaid Drawings shall
automatically become immediately due and payable, and the Borrower
shall without demand pay into the Holding Account an amount equal to
the aggregate face amount of all outstanding Letters of Credit, in
each case without presentment, demand, protest or other notice of any
kind, all of which are hereby waived, anything in this Agreement or
any other Loan Document to the contrary notwithstanding, and
thereafter the Required Banks may direct the Agent to attempt to
enforce its rights under any one or more of the Loan Documents; or (b)
any other Event of Default shall occur and be continuing, then, the
Required Banks may do any or all of the following: (i) declare the
Commitments terminated, whereupon the Commitments shall be terminated,
(ii) declare the Obligations and Unpaid Drawings to be forthwith due
and payable, whereupon the Obligations and Unpaid Drawings shall
immediately become due and payable, in each case without presentment,
demand, protest or other notice of any kind, all of which are hereby
expressly waived, anything in this Agreement or in any other Loan
Document to the contrary notwithstanding, (iii) demand that the
Borrower pay into the Holding Account an amount equal to the aggregate
face amount of all outstanding Letters of Credit, and (iv) direct the
Agent to attempt to enforce its rights under any one or more of the
Loan Documents.
1.7 Amendment to Miscellaneous. Sections 7.10 and 7.11 of the Credit
--------------------------
Agreement are amended to read as follows:
7.10 Payments. All payments of principal of the
---------
Warehousing Notes and all other funds received by the Agent in respect
of any payments made by the Company pursuant to this Agreement, the
Warehousing Notes or the other Loan Documents, other than payments
under Sections 2.02A and 2.07 (which payments shall be retained by
First Bank for its own account), 2.05 and 2.06, and subject to the
effect of Section 7.11, shall be distributed forthwith by the Agent
(in like currency and funds) to the Banks on the date received or
deemed received pursuant to Section 2.03(a), in accordance with
Section 2.02(c) in the case of payments of interest, Usage Fees and
Balances Deficiency Fees, and ratably according to each Bank's Pro
Rata Share in the case of any other payment
-10-
<PAGE>
received by the Agent. If the Agent does not make any such
distribution (or provide Federal Reserve Bank reference numbers for
the wire transfer of the amount thereof) on the date any such payment
is received or deemed received pursuant to Section 2.03(a), the Agent
will pay interest to each Bank entitled to receive a portion of such
distribution on the amount distributable to it at the Federal Funds
Effective Rate from such date until the date such distribution is
made, such interest to be payable with such distribution.
Notwithstanding any of the foregoing or any other provision of this
Agreement, upon and after the occurrence of an Event of Default, (a)
all proceeds received by the Agent from the sale or other disposition
of the Warehousing Collateral shall be applied in accordance with
Section 17 of the Pledge and Security Agreement, and (b) all payments
made by the Guarantor to the Agent under the Guaranty shall be applied
in the same order of priority as is set forth in Section 17 of the
Pledge and Security Agreement with respect to application of the
proceeds of Warehousing Collateral.
7.11 Sharing of Payments. If any Bank shall receive and
-------------------
retain any payment during the continuance of an Event of Default or
Unmatured Event of Default, whether by setoff, application of deposit
balance or security, or otherwise, in respect of the Obligations or
Letter of Credit Obligations in excess of such Bank's Pro Rata Share
of all payments of the Obligations (other than payments under Sections
2.02A and 2.07, which shall be retained by First Bank for its own
account), then such Bank shall purchase from the other Banks for cash
and at face value and without recourse, such participation in the
Obligations held by them as shall be necessary to cause such excess
payment to be shared ratably as aforesaid with each of them; provided,
that if such excess payment or part thereof is thereafter recovered
from such purchasing Bank, the related purchases from the other Banks
shall be rescinded ratably and the purchase price restored as to the
portion of such excess payment so recovered, but without interest.
Each Bank agrees to exercise any and all rights of setoff,
counterclaim or bankers' lien first fully against the Obligations and
Letter of Credit Obligations and participations therein held by such
Bank, and only then to any other indebtedness of the Company to such
Bank.
ARTICLE II - REPRESENTATIONS AND WARRANTIES
To induce the Banks and the Agent to enter into this Amendment and to make
and maintain the Loans and issue the Letters of Credit under the Credit
Agreement as amended hereby, the Company hereby warrants and represents to the
Banks and the Agent that it is duly authorized to execute and deliver this
Amendment, and to perform its obligations under the Credit Agreement as amended
hereby, and that this
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<PAGE>
Amendment constitutes the legal, valid and binding obligation of the Company,
enforceable in accordance with its terms.
ARTICLE III - CONDITIONS PRECEDENT
This Amendment shall become effective when the Banks shall have received at
least four (4) counterparts of this Amendment, duly executed by the Company and
the Banks and acknowledged by New Century Financial Corporation ("NCFC"),
provided the following conditions are satisfied:
(a) Before and after giving effect to this Amendment, the
representations and warranties of the Company in Section 3 of the
Credit Agreement and Section 5 of the Pledge and Security Agreement
shall be true and correct as though made on the date hereof, except
for changes that are permitted by the terms of the Credit Agreement.
(b) Before and after giving effect to this Amendment, no Event of
Default and no Unmatured Event of Default shall have occurred and be
continuing under the Credit Agreement.
(c) No material adverse change in the business, assets, financial
condition or prospects of the Company shall have occurred since the
Effective Date.
(d) The following shall have been delivered to the Agent, each
duly executed or certified, as the case may be, and dated as of the
date of delivery thereof:
(i) certified copies of resolutions of the Board of
Directors of the Company authorizing or ratifying the execution,
delivery and performance of this Amendment;
(ii) a certified copy of any amendment or restatement of
the Articles of Incorporation or the By-laws of the Company made
or entered following the date of the most recent certified copies
thereof furnished to the Banks;
(iii) certified copies of all documents evidencing any
necessary corporate action, consent or governmental or regulatory
approval (if any) with respect to this Amendment;
-12-
<PAGE>
(iv) a favorable opinion of Brad A. Morrice, counsel to the
Company and NCFC, addressed to the Banks, as to the matters and
to the effect set forth on Exhibit H hereto; and
(v) such other documents, instruments, opinions and
approvals as the Banks may reasonably request.
-13-
<PAGE>
ARTICLE IV - ACKNOWLEDGEMENTS
The Company and the Banks each acknowledges that, as amended hereby, the
Credit Agreement remains in full force and effect with respect to the Company
and the Banks, and that each reference to the Credit Agreement in the Loan
Documents shall refer to the Credit Agreement, as amended hereby. The Company
confirms and acknowledges that it will continue to comply with the covenants set
out in the Credit Agreement and the other Loan Documents, as amended hereby, and
that its representations and warranties set out in the Credit Agreement and the
other Loan Documents, as amended hereby, are true and correct as of the date of
this Amendment. The Company further represents and warrants that (i) the
execution, delivery and performance of this Amendment by the Company is within
its corporate powers and has been duly authorized by all necessary corporate
action; (ii) this Amendment has been duly executed and delivered by the Company
and constitutes the legal, valid and binding obligation of the Company
enforceable against the Company in accordance with its terms (subject to
limitations as to enforceability which might result from bankruptcy, insolvency,
or other similar laws affecting creditors' rights generally) and (iii) no Events
of Default or Unmatured Events of Default exist.
ARTICLE V - GENERAL
(1) The Company agrees to reimburse the Banks upon demand for all
reasonable expenses (including reasonable attorneys fees and legal expenses)
incurred by the Banks in the preparation, negotiation and execution of this
Amendment and any other document required to be furnished herewith, and to pay
and save the Banks harmless from all liability for any stamp or other taxes
which may be payable with respect to the execution or delivery of this
Amendment, which obligations of the Company shall survive any termination of the
Credit Agreement.
(2) This Amendment may be executed in as many counterparts as may be deemed
necessary or convenient, and by the different parties hereto on separate
counterparts, each of which, when so executed, shall be deemed an original but
all such counterparts shall constitute but one and the same instrument.
(3) Any provision of this Amendment which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining portions
hereof or affecting the validity or enforceability of such provisions in any
other jurisdiction.
-14-
<PAGE>
(4) This Amendment shall be governed by, and construed in accordance with,
the internal law, and not the law of conflicts, of the State of Minnesota, but
giving effect to federal laws applicable to national banks.
(5) This Amendment shall be binding upon the Company, the Banks and their
respective successors and assigns, and shall inure to the benefit of the
Company, the Banks and the successors and assigns of the Banks.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
-15-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed as of the day and year first above written.
NEW CENTURY MORTGAGE CORPORATION
By /s/ Brad A. Morrice
------------------------------------------------
Its Co-Chairman and Co-CEO
------------------------------------------------
FIRST BANK NATIONAL ASSOCIATION
By /s/ Edwin J. Jenkins
-----------------------------------------------
Its Vice President
-----------------------------------------------
GUARANTY FEDERAL BANK, FSB
By /s/ James Meintjes
----------------------------------------------
Its Assistant Vice President
----------------------------------------------
<PAGE>
[Signature Page for Fourth Amendment to
Amended and Restated Credit Agreement]
<PAGE>
CONSENT AND ACKNOWLEDGEMENT
---------------------------
THE UNDERSIGNED, NEW CENTURY FINANCIAL CORPORATION, HEREBY (1) AGREES
THAT EACH REFERENCE TO THE CREDIT AGREEMENT, OR WORDS OF SIMILAR IMPORT,
CONTAINED IN THE AMENDED AND RESTATED GUARANTY DATED AS OF OCTOBER 25, 1996 (THE
"GUARANTY") BY THE UNDERSIGNED TO FIRST BANK NATIONAL ASSOCIATION AND GUARANTY
FEDERAL BANK, F.S.B., SHALL BE A REFERENCE TO THE CREDIT AGREEMENT AS AMENDED BY
THE FOREGOING AMENDMENT, (2) CONFIRMS THAT THE GUARANTY SHALL REMAIN IN FULL
FORCE AND EFFECT AFTER GIVING EFFECT TO THE FOREGOING AMENDMENT, AND (3)
CONFIRMS AND ACKNOWLEDGES THAT ITS REPRESENTATIONS AND WARRANTIES SET FORTH IN
SECTION 15 OF THE GUARANTY ARE TRUE AND CORRECT AS OF THE DATE OF THE FOREGOING
AMENDMENT.
NEW CENTURY FINANCIAL CORPORATION
By /s/ Brad A. Morrice
------------------------------------------------
Its Co-Chairman and Co-CEO
------------------------------------------------
<PAGE>
EXHIBITS
H Matters to be Covered by Opinion of Counsel to the Company and NCFC
EXHIBIT H
TO FOURTH AMENDMENT TO AMENDED
AND REINSTATED CREDIT AGREEMENT
MATTERS TO BE
COVERED BY THE OPINION OF COUNSEL
TO THE COMPANY AND NCFC
The opinions of Brad A. Morrice, counsel to NCFC and the Company, which are
called for by Section 3(d)(iv) of the Fourth Amendment to Credit Agreement,
shall be satisfactory in form and substance to the Agent and shall cover the
matters set forth below, subject to such assumptions, exceptions and
qualifications as may be acceptable to the Agent and counsel to the Agent:
1. Each of NCFC and the Company (collectively, the "Transaction Parties"
and each, individually, a "Transaction Party") has been duly incorporated, is a
validly existing corporation and in good standing under the laws of its
respective jurisdiction of incorporation, and has the requisite corporate power
to own its respective properties and to conduct its respective businesses as
currently conducted by it. The Company is duly qualified to do business and is
in good standing as a foreign corporation in each jurisdiction in which the
character of the business conducted by it or the location of the properties
owned or leased by it make such qualification necessary, except in jurisdictions
in which failure to be in good standing will not preclude it from enforcing its
rights with respect to any material asset or expose it to any material
liability.
2. The execution, delivery and performance by the Company, and the
acknowledgment by NCFC, of the Fourth Amendment and the consummation of the
transactions contemplated thereby are within the corporate powers of each
Transaction Party, have been duly authorized by all necessary corporate action
and do not, and the consummation of the transactions contemplated thereby and
compliance by each Transaction Party with the applicable provisions thereof will
not, conflict with, constitute a default under or violate (a) any of the terms,
conditions or provisions of its Articles or Certificate of Incorporation or
bylaws, (b) any of the terms, conditions or provisions of any document,
agreement or other instrument which is known to me to which it is a party or by
which it is bound, (c) any judgment, writ, injunction, decree, order or ruling
of any court or governmental authority binding on it and known to me, or (d) any
statute, rule or regulation of any governmental authority binding on it.
3. The Fourth Amendment has been duly executed and delivered by the
Company. The Credit Agreement, as amended by the Fourth Amendment,
H-1
<PAGE>
is the legal, valid and binding obligation of the Company enforceable against
the Company in accordance with their respective terms, and after giving effect
to the Fourth Amendment, the Guaranty will remain the legal, valid and binding
obligation of NCFC enforceable against NCFC in accordance with its terms, in
each case subject to limitations as to enforceability which might result from
general equitable principles or bankruptcy, insolvency, reorganization,
moratorium, fraudulent transfer or other similar laws affecting creditors'
rights generally.
4. No consent, approval, waiver, license or authorization or other action
by or filing with any governmental authority is required in connection with the
execution, delivery and performance or acknowledgment by either Transaction
Party of the Fourth Amendment, the validity or enforceability of the Fourth
Amendment or the consummation of the transactions contemplated thereby except
for those which have already been obtained and are in full force and effect.
5. To the best knowledge of such counsel, there are no actions, suits or
proceedings pending or threatened against or affecting either Transaction Party
or any of its properties before any court or arbitrator, or any governmental
department, board, agency or other instrumentality which (i) challenge the
legality, validity or enforceability of any Loan Document, or (ii) if determined
adversely to such Transaction Party, would have a material adverse effect on the
business, operations, property or condition (financial or otherwise) of either
Transaction Party or on the ability of either Transaction Party to perform its
obligations under the Loan Documents.
H-2
<PAGE>
EXHIBIT 10.7
FORM OF WARRANT TO PURCHASE COMMON STOCK
----------------------------------------
NEITHER THIS WARRANT NOR THE COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR ANY
STATE SECURITIES LAW, AND THUS NEITHER THIS WARRANT NOR SUCH COMMON STOCK MAY BE
TRANSFERRED UNLESS REGISTERED UNDER THE ACT OR SUCH SECURITIES LAWS OR UNLESS AN
EXEMPTION THEREFROM IS AVAILABLE. ANY TRANSFER OF THIS WARRANT AND SUCH COMMON
STOCK ARE ALSO SUBJECT TO THE TERMS OF A SHAREHOLDERS AGREEMENT DATED NOVEMBER
22, 1995, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY.
NEW CENTURY FINANCIAL CORPORATION
---------------------------------
WARRANT TO PURCHASE COMMON STOCK
--------------------------------
NEW CENTURY FINANCIAL CORPORATION, a Delaware corporation (the "Company"),
certifies for value received _______________ (the "Purchaser") is entitled to
purchase from the Company, at any time during the period set forth in Section
2.1 hereof, at $____ per share (the "Purchase Price") ________ shares of Common
Stock of the Company, subject to adjustment as hereinafter provided (the
"Warrant Stock"), on the terms and subject to the conditions herein set forth.
1. Definitions. As used in this Warrant, the following terms shall mean:
-----------
1.1 "Common Stock" refers to the shares of the Company's common stock,
$0.01 par value.
1.2 "Warrant" shall refer to this Warrant and any warrant delivered in
substitution or exchange therefore as provided herein.
2. Exercise.
--------
2.1 Time of Exercise. This Warrant may be exercised at the office of
----------------
the Company at any time or from time to time, from and after the date hereof and
until 5:00 p.m., Pacific time on December 4, 2001 (the "Expiration Date"), at
which time this Warrant shall expire and be of no further force or effect.
2.2 Manner of Exercise.
------------------
(a) This Warrant is exercisable, in whole or in part, at the
Purchase Price payable in cash or by wire, cashier's check or other good funds
payable to the order of the Company. Upon surrender of the Warrant together with
payment of the Purchase Price for the Warrant Stock purchased (and any
applicable transfer taxes) to the Company, and delivery of the purchase form
attached hereto, the Purchaser shall be entitled to receive a certificate or
certificates for the Warrant Stock so purchased with any appropriate private
placement or other legends thereon, together with a new Warrant for any portion
of this Warrant not exercised.
<PAGE>
(b) With the approval of the Board, the Purchaser may elect to (i)
pay all or part of the Purchase Price with securities of the Company (including
the unexercised portion of this Warrant) outstanding prior to the exercise of
this Warrant, with such securities to be credited toward such purchase price at
the fair market value of the securities, in which event the certificates
evidencing the securities delivered shall accompany the notice of exercise and
shall be duly endorsed or accompanied by duly executed stock powers to transfer
the same to the Company; provided, however, that such payment in securities
instead of cash or check shall not be effective and shall be rejected by the
Company if the Company is then prohibited by applicable law from purchasing or
acquiring the tendered securities, or (ii) accept payment of the fair market
value of all or part of the Warrant Stock net of the Purchase Price for such
Warrant Stock in consideration for the cancellation of the corresponding portion
of the rights of Purchaser under this Warrant.
For purposes of this Section 2.2(b), the fair market value of
securities delivered upon exercise of the Warrant shall (i) if "publicly traded"
(as defined below), be valued at either (x) the initial public offering price,
if the Warrant is exercised concurrently with the initial public offering of the
securities, or (y) the average of the closing prices for the securities for the
30-day period immediately preceding the delivery to the Company of the
certificate(s) evidencing such securities, or (ii) if not publicly traded, be
valued in good faith by the Board of Directors of the Company; provided,
however, that if in the good faith judgement of the Warrantholder the valuation
established by the Board of Directors under this clause (ii) does not reasonably
reflect the fair market value of the securities to be delivered in exercise of
this Warrant, then the determination of fair market value shall be made by an
independent appraiser or investment banking institution mutually acceptable to
the Company and to the Warrantholder (or, if such selection cannot be made by
the Company and the Warrantholder, by an independent appraiser or investment
banking firm selected by the American Arbitration Association in accordance with
its rules), with the fees and expenses of such independent appraiser or
investment banking institution to be paid by the Warrantholder. For purposes of
the preceding sentence, the "closing prices" shall mean the closing prices of
securities of the class and series of securities delivered as reported with
respect to the market (or the composite of the markets, if more than one) in
which such securities are then traded, or if no such closing prices are
reported, the lowest independent offer quotation reported therefor in Level 2 of
NASDAQ for trading days during the applicable 30-day averaging period. "Publicly
traded" means a security which is listed or admitted to unlisted trading
privileges on a national securities exchange or as to which sales or bid and
offer quotations are reported in the automated
2
<PAGE>
quotation system ("NASDAQ") operated by the National Association of Securities
Dealers, Inc.
3. Protection Against Dilution.
---------------------------
3.1 Adjustment for Stock Splits and Combinations.
--------------------------------------------
If, while this Warrant is outstanding, the Company effects a
subdivision of the outstanding Common Stock, the Purchase Price then in effect
shall be proportionately decreased and the number of shares of Warrant Stock
issuable on exercise of this Warrant shall be increased in proportion to such
increase of outstanding shares, and conversely, if, during such time, the
Company combines the outstanding shares of Common Stock, the Purchase Price then
in effect shall be proportionately increased and the number of shares of Warrant
Stock issuable on exercise of this Warrant shall be decreased in proportion to
such decrease in outstanding shares. Any adjustment under this Section 3.1 shall
become effective as of the record date for such event and if such subdivision or
combination is not consummated in full the Purchase Price shall be readjusted
accordingly. For purposes of this Section 3.1 a stock dividend shall be
considered a stock split.
3.2 Adjustments for Other Dividends and Distributions. If, while
--------------------------------------------------
this Warrant is outstanding, the Company makes a dividend or other distribution
payable in securities of the Company other than shares of Common Stock, then and
in each such event provision shall be made so that the Purchaser shall receive
upon exercise of the Warrant (but only to the extent the Warrant is exercised),
in addition to the Warrant Stock receivable thereupon, the amount of securities
of the Company which the Purchaser would have received had it owned such Warrant
Stock on the date of such event.
3.3 Adjustment for Reclassification, Exchange and Substitution. If
-----------------------------------------------------------
the Warrant Stock issuable upon the exercise of this Warrant is changed into the
same or a different number of shares of the same or any other class or classes
of stock, whether by recapitalization, reclassification or otherwise (other than
a subdivision or combination of shares or a merger, consolidation or sale of
assets, provided for elsewhere in this section), then and in any such event
Purchaser shall have the right thereafter, upon exercise of the Warrant to
receive in lieu of Warrant Stock the kind and amount of stock and other
securities and property receivable upon such recapitalization, reclassification
or other change, in an amount equal to the amount that such Purchaser would have
been entitled to had this Warrant been exercised to such extent prior to such
event.
3.4 Reorganizations, Mergers, Consolidations or Sales of Assets.
------------------------------------------------------------
If, while this Warrant is outstanding, there is a capital reorganization of the
Common Stock (other than as
3
<PAGE>
provided for elsewhere in this Section 3) or merger or consolidation of the
Company with or into another corporation, or the sale of all or substantially
all of the Company's properties and assets to any other person then, as a part
of such transaction, the Board of Directors of the Company may, but shall not be
obligated to, make provision so that the Purchaser shall thereafter be entitled
to receive, upon exercise of this Warrant (but only to the extent the Warrant is
exercised), the number of shares of stock or other securities or property of the
Company, or of the successor corporation resulting from such merger or
consolidation or sale, to which a holder of Common Stock deliverable upon the
exercise of this Warrant would have been entitled in such transaction. If the
Board of Directors does not make provision for the preservation of the purchase
rights of the Warrant holder, then any Warrant rights not exercised as of the
effective date of the closing of the subject transaction (the "Effective Date")
shall be cancelled and of no further force or effect; provided that: (1) the
election of the Board to cause cancellation of the Warrants shall be evidenced
by a resolution of the Board approved by seven-ninths of the directors, (2) the
holder of this Warrant shall receive written notice from the Company not less
than 30 days prior to the Effective Date stating (a) the proposed Effective
Date, (b) which of the rights evidenced by this Warrant are proposed to be
cancelled, and (c) a description of the transaction which would result in the
full or partial cancellation of this Warrant, and (3) if the subject transaction
does not close within 120 days of the Effective Date stated in the notice, then
the notice of cancellation, as well as any notices of intended exercise of this
Warrant by the holder, shall be deemed rescinded.
4. Fractional Interests.
--------------------
The Company shall not be required to issue fractional shares of
Common Stock on the exercise of Warrants. If more than one Warrant shall be
presented for exercise in full at the same time by the same Holder, the number
of full shares of Common Stock which shall be issuable upon the exercise thereof
shall be computed on the basis of the aggregate number of shares of Common Stock
represented by the Warrants so presented. If any fraction of a share would,
except for the provisions of this Section 4, be issuable on the exercise of any
Warrant (or specified portion thereof), the Company shall pay an amount in cash
equal to the current fair market value per share of Common Stock multiplied by
such fraction.
5. Transfer of Securities.
----------------------
5.1 Restriction on Transfer. The Purchaser, by its acceptance
-----------------------
hereof, represents, warrants, covenants and agrees that (i) the Purchaser has
knowledge of the business and affairs of the Company, and (ii) this Warrant and
the Warrant Stock issuable upon the exercise of this Warrant are being acquired
for
4
<PAGE>
investment for the Purchaser's own account and not with a view to the
distribution hereof, and that absent an effective registration statement under
the Act covering the disposition of this Warrant or the Warrant Stock issued or
issuable upon exercise of this Warrant, they will not be sold, transferred,
assigned, hypothecated or otherwise disposed of without first providing the
Company with evidence satisfactory to the Company, including, at the Company's
discretion, an opinion of counsel, satisfactory to the Company, to the effect
that such sale, transfer, assignment, hypothecation or other disposal will be
exempt from the registration and prospectus delivery requirements, of applicable
Federal and state securities laws and regulations and the Purchaser consents to
the Company making a notation in its records or giving to any transfer agent of
this Warrant or the Warrant Stock an order to implement such restriction on
transferability.
5.2 Transfer. Subject to the terms hereof and the application of
--------
any shareholders' agreement or other agreement that may restrict
transferability, this Warrant and all rights hereunder are transferable, in
whole or in part, on the books of the Company maintained for such purpose by the
Purchaser, or by duly authorized attorney or representative (accompanied by
proper evidence of succession, assignment or authority to transfer), upon
surrender of this Warrant properly endorsed, payment of any necessary transfer
tax or other governmental charge imposed upon such transfer and delivery of the
Form of Assignment attached hereto. Upon any partial transfer, the Company will
issue and deliver to the Purchaser a new Warrant with respect to the Warrant
Stock not so transferred. Each taker and Purchaser of the Warrant, by taking or
holding the same, consents and agrees that the Warrant when endorsed in blank
shall be deemed negotiable and that when the Warrant shall have been so
endorsed, the Purchaser hereof may be treated by the Company and all other
persons dealing with this Warrant, as the absolute owner hereof for all
purposes, any notice to the contrary notwithstanding.
6. Payment of Taxes.
----------------
All Warrant Stock issued upon the exercise of this Warrant shall
be validly issued, fully paid and nonassessable, and the Company shall pay all
taxes and other governmental charges that may be imposed upon the issue or
delivery thereof (but not on income related thereto). The Company shall not be
required, however, to pay any tax or other charge imposed in connection with any
transfer of this Warrant or the issue of any certificate for Warrant Stock in
any name other than that of the Purchaser, and the Company shall not be required
to issue or deliver any stock certificate until such tax or the charge has been
paid or it has been established to the Company's satisfaction that no tax or
other charge is due.
5
<PAGE>
7. Affirmative Duties of the Company.
---------------------------------
7.1 Reservation of Warrant Stock. The Company shall at all times
-----------------------------
reserve and keep available out of its authorized but unissued Common Stock,
solely for the purpose of issuance upon the exercise of this Warrant, such
number of Shares of Common Stock as shall be issuable upon the exercise hereof.
The Company covenants and agrees that, upon exercise of this Warrant and payment
of the Purchase Price for the Warrant Stock, all shares of Warrant Stock
issuable upon such exercise shall be duly and validly issued, fully paid and
non-assessable.
7.2 No Impairment. The Company will not amend its Certificate of
-------------
Incorporation, reorganize, dissolve, or take any other voluntary action, a
primary purpose of which is to avoid or seek to avoid the observance or
performance of any of the terms of this Warrant.
8. Notices to Warrant Holders.
--------------------------
8.1 Notice to be Given. Nothing contained in this Warrant shall be
------------------
construed as conferring upon the Purchaser the right to vote or to consent or to
receive notice as a shareholder in respect of any meetings of shareholders for
the election of directors or any other matter or as having any rights whatsoever
as a shareholder of the Company. If, however, at any time prior to the
expiration of this Warrant and prior to its exercise, any of the following
events shall occur:
(a) The Company shall take a record of the holders of its
shares of Common Stock for the purpose of entitling them to receive a dividend
or distribution; or
(b) The Company shall offer to the holders of its Common
Stock, or others, any additional shares of capital stock of the Company or
securities convertible into or exchangeable for shares of capital stock of the
Company, or any option, right or warrant to subscribe therefore; or
(c) The Company proposes to register any of its securities
under the Securities Act; or
(d) A capital reorganization or reclassification of the Common
Stock, a merger or consolidation of the Company with any other entity,
dissolution, liquidation or winding up of the Company or a sale of all or
substantially all of its property, assets and business as an entirety shall be
proposed; then the Company shall give written notice of such event to the
Purchaser of this Warrant at least 30 days prior to the date fixed as the record
date or the date of closing the transfer books in connection with such
transaction unless greater notice is required pursuant to the terms of Section
3.4 hereof. Such notice shall specify such record date or the date of closing
the
6
<PAGE>
transfer books, as the case may be. Such notice shall also set forth such facts
as shall indicate the effect of such action (to the extent such effect may be
known at the date of such notice) on the Purchase Price and the kind and amount
of the Common Stock and other securities and property deliverable upon exercise
of this Warrant. Such notice shall also specify the date as of which the
holders of the Common Stock of record shall participate in any such distribution
or subscription rights or shall be entitled to exchange their Common Stock for
securities or other property deliverable upon any such reorganization,
reclassification, sale, consolidation, merger, dissolution, liquidation or
winding up, as the case may be (on which date, in the event of voluntary or
involuntary dissolution, liquidation or winding up of the Company, the right to
exercise this Warrant shall terminate).
9. Addresses. All notices, requests, consents and other communications
---------
hereunder shall be in writing and shall be deemed to have been duly made when
delivered or three days after mailing by registered or certified mail, postage
prepaid, return receipt requested addressed to the parties at the following
addresses or at such other addresses as shall be specified in writing and in
accordance with this Section:
If to the Purchaser:
If to the Company: New Century Financial Corporation
4910 Birch Street, Suite 100
Newport Beach, California 92660
Attn: Brad A. Morrice
10. Miscellaneous.
-------------
10.1 Replacement of Warrants. Upon receipt of evidence reasonably
-----------------------
satisfactory to the Company of the ownership of and the loss, theft, destruction
or mutilation of this Warrant and upon delivery of an indemnity agreement in an
amount reasonably satisfactory to the Company, or upon surrender and
cancellation of the mutilated Warrant, the Company will execute and deliver, in
lieu thereof, a new Warrant of like tenor.
10.2 Successors. All the covenants, agreements, representations
----------
and warranties contained in this Warrant shall bind the parties hereto and their
respective heirs, executors, administrators, distributees, successors and
assigns.
10.3 Change; Waiver. Neither this Warrant nor any term hereof may
--------------
be changed, waived, discharged or terminated orally but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
7
<PAGE>
10.4 Headings. The section headings in this Warrant are inserted
--------
for purposes of convenience only and shall have no substantive effect.
10.5 Law Governing. This Warrant is deliverable in the State of
-------------
California, but shall for all purposes be construed and enforced in accordance
with, and governed by the internal laws of the State of Delaware, without giving
effect to principles of conflict of laws.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed
by its duly authorized officer effective as of December 4, 1996.
NEW CENTURY FINANCIAL CORPORATION
By:
------------------------------
Brad A. Morrice, President
8
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ____________________________________ hereby sells,
assigns and transfers unto ____________________________________________________
(Please print name and address of transferee)
_______________________________________________________________________________
this Warrant Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _________________ Attorney,
to transfer the within Warrant Certificate on the books of the within-named
Company, with full power of substitution.
Dated: __________________, 19__
Signature
---------------------------------
NOTICE
The signature to the foregoing Assignment must correspond to the name
as written upon the face of this Warrant Certificate in every particular,
without alteration or enlargement or any change whatsoever.
9
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to
exercise the Warrant certificate.)
The undersigned hereby irrevocably elects to exercise _______________
Warrants represented by this Warrant Certificate to purchase the shares of
Common Stock issuable upon the exercise of such Warrants and requests that
certificates for such shares be issued in the name of:
Please insert social security
or other identifying number
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please print name and address)
If such number of Warrants shall not be all the Warrants evidenced by
this Warrant Certificate, a new Warrant Certificate for the balance remaining of
such Warrants shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please print name and address)
Dated: ___________________, 19__
-------------------------------------------
Signature
(Signature must conform in all respects to
name of holder as specified on the face of
this Warrant Certificate)
10
<PAGE>
EXHIBIT 10.10
FORM OF FOUNDING MANAGERS'
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement ("Agreement") is effective as of June 1, 1997 between
New Century Financial Corporation, a Delaware corporation (the "Company"), and
_______________ (the "Executive"). In consideration of the mutual covenants and
agreements set forth herein, the parties hereto agree as follows:
ARTICLE I
EMPLOYMENT
----------
The Company hereby employs Executive and Executive accepts employment with
the Company upon the terms and conditions herein set forth.
1.1 Employment. The Company hereby employs Executive, and Executive
----------
agrees to serve, as the Company's ____________________________________________
during the term of this Agreement. Executive agrees to perform such duties as
may be assigned to Executive from time to time by the Board of Directors.
Executive agrees to devote substantially his full business time and attention
and best efforts to the affairs of the Company during the term of this
Agreement.
1.2 Term. The term of employment of Executive hereunder will be for the
----
period commencing on the date of this Agreement and ending on the earliest of:
(a) December 31, 1999,
(b) The date of termination of Executive's employment in accordance
with Article IV of this Agreement,
(c) The date of Executive's voluntary retirement in accordance with
the Company's plans and policies; or
(d) The date of Executive's death.
Unless this Agreement is terminated pursuant to Paragraphs (b), (c) or (d)
above, the term of this Agreement shall be extended automatically for successive
one year periods, unless and until at least six months written notice is given
by either party requesting termination or renegotiation of this Agreement prior
to any anniversary date.
ARTICLE II
COMPENSATION
------------
2.1 Base Salary. Effective June 1, 1997 and during the employment of
-----------
Executive, the Company shall pay to the Executive a base salary at the rate of
$256,000 per year (retroactive to January 1, 1997) during 1997, and thereafter
at a rate determined by the Company's Board of Directors (the "Base Salary");
provided, however, that Executive's Base Salary shall be increased
<PAGE>
by a minimum of 7.5% per year commencing January 1, 1998. The Base Salary shall
be payable in substantially equal semi-monthly installments.
2.2 Profit Sharing and Bonuses. Executive shall be eligible to
--------------------------
participate in the Founding Managers Incentive Compensation Plan as established
by the Board of Directors.
2.3 Reimbursement of Expenses. The Executive shall be entitled to receive
-------------------------
prompt reimbursement of all reasonable expenses incurred by the Executive in
performing services hereunder, including all expenses of travel, car phone,
entertainment and living expenses while away from home on business at the
request of, or in the service of, the Company, provided that such expenses are
incurred and accounted for in accordance with the policies and procedures
established by the Company.
2.4 Automobile Expenses. The Company shall provide Executive with an
-------------------
automobile allowance of $500 per month. In addition, the Company shall at
Executive's request enter into a lease agreement to provide an automobile for
Executive's use subject to a reduction in Executive's Base Salary equal to the
amount of all lease and insurance payments. If Executive elects to utilize a
lease agreement, Executive will be responsible for all operating costs of the
vehicle and will provide the Company with records to substantiate the business
use of the vehicle. In such event, the Company will calculate and report an
amount of taxable income to Executive based on Executive's personal use of the
vehicle, such calculation and reporting to be in accordance with applicable IRS
guidelines.
2.5 Benefits. The Executive shall be entitled to participate in and be
--------
covered by all health, insurance, pension, disability insurance, physical exam
and other employee plans and benefits established by the Company (collectively
referred to herein as the "Company Benefit Plans") on the same terms as are
generally applicable to other senior executives of the Company, subject to
meeting applicable eligibility requirements.
2.6 Vacations and Holidays. During Executive's employment with the
----------------------
Company, Executive shall be entitled to an annual vacation leave at full pay,
such vacation to be four weeks in each year of the term hereof or such greater
vacation benefits as may be provided for by the Company's vacation policies
applicable to senior executives. Executive shall be entitled to such holidays
as are established by the Company for all employees.
ARTICLE III
NON-COMPETITION, CONFIDENTIALITY AND NONDISCLOSURE
--------------------------------------------------
3.1 Confidentiality. Executive will not during Executive's employment by
---------------
the Company or thereafter at any time disclose, directly or indirectly, to any
person or entity or use for Executive's own benefit any trade secrets or
confidential information relating to the Company's business operations,
marketing data, business plans, strategies, employees, negotiations and
contracts with other companies, or any other subject matter pertaining to the
business of the Company or any of its clients, customers, consultants,
licensees, or affiliates, known, learned, or acquired by Executive during the
period of
2
<PAGE>
Executive's employment by the Company (collectively "Confidential Information"),
except as may be necessary in the ordinary course of performing Executive's
particular duties as an employee of the Company.
3.2 Return of Confidential Material. Executive shall promptly deliver to
-------------------------------
the Company on termination of Executive's employment with the Company, whether
or not for cause and whatever the reason, or at any time the Company may so
request, all memoranda, notes, records, reports, manuals, drawings, blueprints,
and any other documents of a confidential nature belonging to the Company,
including all copies of such materials which Executive may then possess or have
under Executive's control. Upon termination of Executive's employment by the
Company, Executive shall not take any document, data, or other material of any
nature containing or pertaining to the proprietary information of the Company.
3.3 No Competing Employment. During the term of this Agreement and, if
-----------------------
Executive terminates this Agreement, for a period ending one year thereafter,
or, if longer, for any period during which Executive receives any compensation
from the Company hereunder (subject to the right of Executive to waive any right
to receive further compensation from the Company) (the "Restricted Period"), the
Executive shall not, unless he receives the prior written consent of the
Company, directly or indirectly own an interest in, manage, operate, join,
control, lend money or render financial assistance to, as an officer, employee,
partner, stockholder, consultant or otherwise, any individual, partnership,
firm, corporation or other business organization or entity that, at such time
directly competes with, or intends to compete with, the Company or its
affiliates in the business of, underwriting, purchasing, securitizing, selling
or servicing subprime credit grade secured loans or any other principal line of
business engaged in by the Company at the time of such termination (a "Competing
Company"). Notwithstanding the foregoing, Executive shall be entitled to own
securities of any entity if such securities are registered under Section 12(b)
or (g) of the Securities Exchange Act of 1934, as amended, and, upon approval of
the Company's Board of Directors, Executive shall be entitled to purchase
securities of a Competing Company entity if such securities are offered to
investors irrespective of any employment or other participation in the entity by
the investor.
3.4 Prohibition on Solicitation of Customers. During the term of
----------------------------------------
Executive's employment with the Company and for a period of one year thereafter
or, if longer, for any period during which Executive receives any compensation
from the Company hereunder, Executive shall not, directly or indirectly, either
for Executive or for any other person or entity, solicit any person or entity to
terminate such person's or entity's contractual and/or business relationship
with the Company, nor shall Executive interfere with or disrupt or attempt to
interfere with or disrupt any such relationship.
3.5 Prohibition on Solicitation of the Company's Employees or Independent
---------------------------------------------------------------------
Contractors After Termination. For a period of one year following the
- -----------------------------
termination of Executive's employment with the Company or, if longer, for any
period during which Executive receives any compensation from the Company
hereunder, Executive will not directly or indirectly solicit any of the
Company's employees, agents, or independent contractors to leave the employ of
the Company for a competitive company or business.
3.6 Right to Injunctive and Equitable Relief. Executive's obligations not
----------------------------------------
to disclose or use Confidential Information and to refrain from the
solicitations described in this Article III
3
<PAGE>
are of a special and unique character which gives them a peculiar value. The
Company cannot be reasonably or adequately compensated in damages in an action
at law in the event Executive breaches such obligations. Therefore, Executive
expressly agrees that the Company shall be entitled to injunctive and other
equitable relief without bond or other security in the event of such breach in
addition to any other rights or remedies which the Company may possess.
Furthermore, the obligations of Executive and the rights and remedies of the
Company under this Article III are cumulative and in addition to, and not in
lieu of, any obligations, rights, or remedies created by applicable law relating
to misappropriation or theft of trade secrets or confidential information.
3.7 No Violation of Other Agreements. Executive represents that his
--------------------------------
performance of all the terms of this Agreement and as an employee of the Company
does not and will not breach any agreement to (i) not compete or interfere with
the business of a former employer (which term for purposes of this Section 3.7
shall also include persons, firms, corporations and other entities for which
Executive has acted as an independent contractor or consultant), (ii) not
solicit employees, customers or vendors of any former employer or (iii) keep in
confidence proprietary information acquired by Executive in confidence or in
trust prior to Executive's employment with the Company. Executive represents
and warrants to and covenants with the Company that Executive will not bring to
the Company any materials or documents of a former employer containing
confidential or proprietary information that is not generally available to the
public, unless Executive shall have obtained express written authorization from
any such former employer for their possession and use.
ARTICLE IV
TERMINATION
-----------
4.1 Definitions. For purposes of this Article IV, the following
-----------
definitions shall apply to the terms set forth below:
(a) Cause. "Cause" shall be defined as follows:
(i) Executive's conviction of any felony (whether or not
involving the Company) which constitutes a crime of moral
turpitude or which is punishable by imprisonment in a
state or federal correction facility;
(ii) Actions by Executive during the term of this Agreement
involving willful malfeasance or gross negligence;
(iii) Executive's commission of an act of fraud or dishonesty,
whether prior or subsequent to the date hereof, upon the
Company,
(iv) Executive's repeated, willful failure or refusal to
perform his duties as required by this Agreement on an
exclusive and full-time basis; provided that termination
of Executive's employment pursuant to this subparagraph
(iv) shall not constitute valid termination for cause
unless
4
<PAGE>
Executive shall have first received written notice from
the Board of Directors of the Company stating the nature
of such failure or refusal and affording Executive at
least ten (10) days to correct the act or omission
complained of to the satisfaction of the Board of
Directors;
(v) Executive's willful violation of any reasonable rule or
regulation of the Board of Directors applicable to all
senior executives if such violation is not cured to the
satisfaction of the Board of Directors promptly following
notice to Executive; and
(vi) Any knowing or intentional material misrepresentation made
in connection with the transactions contemplated by that
certain Investment Agreement dated November 21, 1995 to
which the Company is a party.
(b) Disability. "Disability" shall mean a physical or mental
----------
incapacity as a result of which the Executive becomes unable to continue the
proper performance of his duties hereunder in substantially a full time capacity
(reasonable absences because of sickness for up to six (6) consecutive months
excepted, provided, however, that any new period of incapacity or absences shall
be deemed to be part of a prior period of incapacity or absences if the prior
period terminated within ninety (90) days of the beginning of the new period of
incapacity or absence and the new capacity or absence is determined by the
Company's Board of Directors, in good faith, to be related to the prior
incapacity or absence.) A determination of Disability shall be subject to the
certification of a qualified medical doctor agreed to by the Company and the
Executive or, in the event of the Executive's incapacity to designate a doctor,
the Executive's legal representative. In the absence of agreement between the
Company and the Executive, each party shall nominate a qualified medical doctor
and the two doctors so nominated shall select a third doctor, who shall make the
determination as to Disability.
4.2 Termination by Company. The Company may terminate the Executive's
----------------------
employment hereunder immediately for Cause. Subject to the other provisions
contained in this Agreement, the Company may terminate this Agreement for any
reason other than Cause upon 30 days' written notice to Executive.
4.3 Termination by Executive. The Executive may terminate this Agreement
------------------------
upon 30 days' written notice to the Company.
4.4 Benefits Received Upon Termination.
----------------------------------
(a) If the Executive's employment is terminated by the Company for
Cause, or if this Agreement is terminated by Executive, then the Company shall
pay the Executive his Base Salary through the effective date of such termination
plus credit for any vacation earned but not taken and the Company shall
thereafter have no further obligations to Executive under this Agreement;
provided, however, that the Company will continue to honor
5
<PAGE>
any obligations that may have vested or accrued under the existing Company
Benefit Plans or any other Agreements or arrangements applicable to the
Executive.
(b) If the Executive's employment is terminated by the Company without
Cause, then the Company shall:
(i) pay to the Executive within two business days following the
date of termination his Base Salary through the end of the month
during which such termination occurs plus credit for any vacation
earned but not taken;
(ii) pay to the Executive as severance pay (a) the Executive's
Base Salary in effect as of the date of termination, such
payments to be made in accordance with the Company's usual
payroll periods for a minimum of six (6) months or, if longer,
through the expiration of the term of employment then in effect
under this Agreement, without additional renewals as otherwise
provided hereunder, plus (b) an amount equal to the most recent
annual profit sharing and/or incentive bonus received by the
Executive from the Company or, if more, the amount which would be
due under the profit sharing and/or incentive bonus plans
applicable to Executive for the then current year calculated as
of the effective date of termination; such payment to be made in
substantially equal installments in accordance with the Company's
usual payroll periods over such time period as Executive receives
Base Salary payments hereunder;
(iii) maintain, at the Company's expense, in full force and
effect, for the Executive's continued benefit until the earlier
of (i) the expiration of the term of employment then in effect,
or (ii) the Executive's commencement of full time employment with
a new employer, all Company medical insurance and reimbursement
plans and other programs or arrangements in which the Executive
was entitled to participate immediately prior to the date of
termination, provided that the Executive's continued
participation is possible under the general terms and provisions
of such plans and programs. In the event that the Executive's
participation in any such plan or program is barred, the Company
shall arrange to provide the Executive with medical benefits
substantially similar to those which the Executive was entitled
to receive under such plans or programs; and
(iv) pay, for the benefit of Executive, all costs, up to a
maximum of $20,000, related to Executive's participation in a
senior executive outplacement program at Lee Hecht Harrison or a
similar outplacement firm.
(c) Termination Because of Employee Disability. Should Executive
------------------------------------------
become disabled from performing his duties hereunder as defined above, Executive
acknowledges that his employment may be terminated anytime thereafter if such
disability continues; provided that, during the period of the disability prior
to such termination of employment, Executive shall
6
<PAGE>
continue to receive all compensation and benefits as if he were actively
employed less any sums received directly by the Executive, if any, under any
policy or policies of disability income insurance purchased by the Company. In
the event of such termination, Executive's rights to receive any salary or
payments under this Agreement shall terminate but Executive shall have the right
to continue to receive any and all payments made by an insurance company under
any and all policies of disability insurance purchased by the Company.
Executive's rights under any Company Benefit Plans will be those rights accorded
to any terminated employee under the plan provisions and applicable law.
Executive will remain entitled to receive any benefits under state disability or
worker's compensation laws.
(d). Any termination for cause hereunder will only be effective if
approved by at least a majority vote of the entire Board of Directors, pursuant
to votes casts in person at a meeting at which Executive shall be entitled to be
present to answer any charges which might be asserted as cause for his
termination.
4.5 Effect of Termination. Upon any termination of this Agreement, for
---------------------
any reason, Executive shall be deemed to have immediately resigned as a director
of the Company and all subsidiaries, if applicable, without the giving of any
notice or the taking of any other action.
ARTICLE V
ASSUMPTION OF OBLIGATIONS BY SUCCESSOR TO COMPANY
-------------------------------------------------
5.1 Assumption of Obligations. The Company will require any successor or
-------------------------
assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, by agreement in form and substance satisfactory to the Executive,
expressly, absolutely and unconditionally to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession or assignment had taken place. Any
failure of the Company to obtain such agreement prior to the effectiveness of
any such succession or assignment shall be a material breach of this Agreement.
As used in this Agreement, "Company" shall mean the Company as herein before
defined and any successor or assign to its business and/or assets as aforesaid
which executes and delivers the agreement provided for in this Article V or
which otherwise becomes bound by all the terms and provisions of this Agreement
by operation of law. If at any time during the term of this Agreement the
Executive is employed by any corporation a majority of the voting securities of
which is then owned by the Company, "Company" as used in this Agreement shall in
addition include such employer.
5.2 Beneficial Interests. This Agreement shall inure to the benefit of
--------------------
and be enforceable by the Executive's personal and legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If the Executive should die while any amounts are still payable to
him or her hereunder, all such amounts, unless otherwise provided herein, shall
be paid in accordance with the terms of this Agreement to the Executive's
devisee, legatee, or other designee or, if there be no such designee, to the
Executive's estate.
7
<PAGE>
ARTICLE VI
GENERAL PROVISIONS
------------------
6.1 Notice. For purposes of this Agreement, notices and all other
------
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
If to the Company: New Century Financial Corporation
4910 Birch Street, Suite 100
Newport Beach, CA 92660
Attn: President
If to the Executive: ____________________________________
New Century Financial Corporation
4910 Birch Street, Suite 100
Newport Beach, CA 92660
or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
6.2 No Waivers. No provision of this Agreement may be modified, waived or
----------
discharged unless such waiver, modification or discharge is agreed to in writing
signed by the Executive and the Company. No waiver by either party hereto at
any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
6.3 Governing Law. This agreement shall be governed by and construed in
-------------
accordance with the laws of the State of California.
6.4 Severability or Partial Invalidity. The invalidity or
----------------------------------
unenforceability of any provisions of this Agreement shall not affect the
validity or enforceability of any other provision of this Agreement, which shall
remain in full force and effect.
6.5 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
6.6 Legal Fees and Expenses. Should any party institute any action or
-----------------------
proceeding to enforce this Agreement or any provision hereof, or for damages by
reason of any alleged breach of this Agreement or of any provision hereof, or
for a declaration of rights hereunder, the prevailing party in any such action
or proceeding shall be entitled to receive from the other party all costs and
expenses, including reasonable attorneys' fees, incurred by the prevailing party
in connection with such action or proceeding.
8
<PAGE>
6.7 Entire Agreement. This Agreement constitutes the entire agreement of
----------------
the parties and supersedes all prior written or oral and all contemporaneous
oral agreements, understandings, and negotiations between the parties with
respect to the subject matter hereof. This Agreement is intended by the parties
as the final expression of their agreement with respect to such terms as are
included in this Agreement and may not be contradicted by evidence of any prior
or contemporaneous agreement. The parties further intend that this Agreement
constitutes the complete and exclusive statement of its terms and that no
extrinsic evidence may be introduced in any judicial proceeding involving this
Agreement.
6.8 Assignment. This Agreement and the rights, duties, and obligations
----------
hereunder may not be assigned or delegated by any party without the prior
written consent of the other party and any such attempted assignment and
delegation shall be void and be of no effect. Notwithstanding the foregoing
provisions of this Section 6.8, the Company may assign or delegate its rights,
duties, and obligations hereunder to any person or entity which succeeds to all
or substantially all of the business of the Company through merger,
consolidation, reorganization, or other business combination or by acquisition
of all or substantially all of the assets of the Company; provided that such
person assumes the Company's obligations under this Agreement in accordance with
Section 5. 1.
6.9 Arbitration. Any controversy, dispute, claim or other matter in
-----------
question arising out of or relating to this Agreement shall be settled, at the
request of either party, by binding arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association ("AAA"),
and judgment upon the award rendered by the arbitrators may be entered in any
court having jurisdiction thereof, subject to the following terms, conditions
and exceptions:
(a) Notice of the demand for arbitration shall be filed in writing
with the other party and with the AAA. There shall be a panel of three (3)
arbitrators whose selection shall be made in accordance with the procedures then
existing for the selection of such arbitrators by the AAA.
(b) Reasonable discovery shall be allowed in arbitration.
(c) The costs and fees of the arbitration shall be allocated by the
arbitrators.
6.10 Indemnification. To the extent permitted by law, applicable statutes
---------------
and the Articles of Incorporation, Bylaws or resolutions of the Company in
effect from time to time, the Company shall indemnify Executive against
liability or loss arising out of Executive's actual or asserted misfeasance or
nonfeasance in the performance of Executive's duties or out of any actual or
asserted wrongful act against, or by, the Company including but not limited to
judgments, fines, settlements and expenses incurred in the defense of actions,
proceedings and appeals therefrom. The Company shall endeavor to obtain
Directors and Officers Liability Insurance to indemnify and insure the Company
and Executive from and
9
<PAGE>
against the aforesaid liabilities. The provisions of this paragraph shall apply
to the estate, executor, administrator, heirs, legatees or devisees of
Executive.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
NEW CENTURY FINANCIAL CORPORATION _________________________________
By: ______________________________ _________________________________
("Executive")
10
<PAGE>
EXHIBIT 10.12
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT (this "Agreement"), which shall be
effective as of May 30, 1997, is made and entered into by and among New Century
Financial Corporation, a Delaware corporation (the "Company"), and the
shareholders whose names are set forth on the signature pages hereto (the
"Stockholders").
RECITALS
--------
WHEREAS, the Company has agreed to provide the registration rights set
forth in this Agreement with respect to the "Registrable Securities" (as such
term is defined in Section 1) to the Stockholders;
NOW, THEREFORE, in consideration of the foregoing premises and the
mutual covenants and agreements herein contained, the parties, intending to be
legally bound, hereby agree as follows:
1. Definitions. For purposes of this Agreement:
-----------
(a) the term "Common Stock" means the Company's Common Stock, $.01 par
value, and any class of securities issued in exchange for the Common Stock or
into which the Common Stock is converted;
(b) the term "Founding Managers" means Robert K. Cole, Brad A.
Morrice, Steven G. Holder and Edward F. Gotschall;
(c) the term "Holder" means any person owning of record Registrable
Securities or any permitted assignee thereof in accordance with Section 10
hereof;
(d) the term "Initiating Holders" means the Holders of 25% or more of
the Registrable Securities then outstanding (other than the Registrable
Securities held by Founding Managers who are then employees of the Company);
(e) the term "Registrable Securities" means: (i)
1
<PAGE>
the shares of Common Stock set forth on Schedule 1 attached hereto (the
"Registrable Common Stock") which are (x) held by the Stockholders, (y) issued
to the Stockholders upon conversion of the Stockholders' shares of Series A
Preferred Stock and Series B Preferred Stock of the Company, and (z) issued to
the Stockholders upon exercise of the Stockholders' Warrants to Purchase
Common Stock of the Company, and (ii) any Common Stock of the Company issued
as (or issuable upon the conversion or exercise of any warrant, right or other
security which is issued as) a dividend or other distribution with respect to,
or in exchange for or in replacement of, the Registrable Common Stock,
excluding in all cases, however, any shares of Common Stock that (x) are sold
by a Holder in a transaction in which its rights under this Agreement are not
assigned, (y) may be sold under Rule 144(k) of the Securities Act of 1933, as
amended (the "1933 Act"), or (z) are currently registered under an effective
registration statement;
(f) the term "Registration Expenses" means all reasonable fees and
disbursements of one counsel to the Holders (as a group) selected by the
Initiating Holders and all expenses incurred by the Company in complying with
Sections 2 and 3 hereof, including, without limitation, all registration and
filing fees, printing expenses, fees and disbursements of counsel for the
Company, and blue sky fees and expenses (but not including the compensation of
regular employees of the Company which shall be paid in any event by the
Company);
(g) the terms "register," "registered" and "registration" refer to a
registration effected by pre paring and filing a registration statement or
similar document in compliance with the 1933 Act, and the declaration or
ordering of the effectiveness of such registration statement or document by
the Securities and Exchange Commission (the "SEC");
(h) the term "Selling Expenses" means all underwriting discounts and
selling commissions applicable to the sale of Registrable Securities and the
fees and disbursements of any counsel, other than the primary counsel to the
Holders, engaged by the Holders; and
2
<PAGE>
(i) the number of shares of Registrable Securities "then outstanding"
shall be the number of shares of Common Stock outstanding which are, and the
number of shares of Common Stock which upon exercise or conversion of then
exercisable or convertible securities will be, Registrable Securities.
3
<PAGE>
2. Demand Registration Rights.
--------------------------
(a) If the Company shall receive, at any time commencing after
November 22, 1998 a written request from the Initiating Holders with respect
to the Registrable Securities that the Company file a registration statement
under the 1933 Act covering the registration of at least 40% of the
Registrable Securities then outstanding (or any lesser percentage if the
anticipated aggregate offering price, net of underwriting discounts and
commissions, would exceed $1,000,000), the Company shall promptly give written
notice of such request to all Holders and shall as soon as practicable,
subject to the limitations of this Section 2, effect the registration under
the 1933 Act of all such Registrable Securities which the Initiating Holders
request to be registered, together with all of the Registrable Securities of
any other Holder or Holders who so request by notice to the Company which is
given within 15 days after the notice from the Company described above;
provided, however, that (i) in no event shall the Company be required to
effect a registration of Registrable Securities if the anticipated aggregate
offering price, net of underwriting discounts and commissions, would be less
than $1,000,000, and (ii) only Cornerstone Fund I, L.L.C. ("Cornerstone") has
the right to request the Company to file a registration statement under the
1933 Act for an initial public offering of the Common Stock of the Company.
Notwithstanding the foregoing, if the Company shall furnish to the Initiating
Holders a cer tificate signed by the President of the Company stating that in
the good faith judgment of the Board of Directors it would be seriously
detrimental to the Company for a registration statement to be filed in the
near future, then the Company's obligation to use its best efforts to file a
registration statement shall be deferred for a period not to exceed 120 days;
provided, however, that the Company shall not obtain such a deferral more than
once in any 12-month period.
(b) If the Initiating Holders intend to dis tribute the Registrable
Securities covered by their re quest by means of an underwriting, they shall
so advise the Company as a part of their request made pursuant to this Section
2 and the Company shall include such informa tion in the written notice
referred to in Section 2(a).
4
<PAGE>
In such event, the right of any Holder to include its Registrable Securities
in such registration shall be conditioned upon such Holder's participation in
such underwriting and the inclusion of such Holder's Registrable Securities in
the underwriting (unless oth erwise mutually agreed by a majority in interest
of the Initiating Holders, by the underwriter, by the Company, and by such
Holder) to the extent provided herein.
(c) All Holders proposing to distribute their securities through such
underwriting (together with the Company as provided in Section 4(e)) shall
enter into an underwriting agreement in customary form with the repre
sentative of the underwriter or underwriters selected for such underwriting by
a majority in interest of the Initiating Holders and reasonably acceptable to
the Com pany. Notwithstanding any other provisions of this Sec tion 2, if
the underwriter advises the Initiating Holders in writing that marketing
factors require a limitation of the number of shares to be underwritten, the
Initiating Holders shall so advise all Holders of Registrable Securities. Any
reduction in the number of shares of Registrable Securities included in the
registration and underwriting shall be borne (i) first, by the Founding
Managers who are then employees of the Company, pro rata based on the number
of shares, if any, for which registration was requested by such Holders, and
(ii) second, by other Holders of Registrable Securities including any Founding
Managers who are not then employees of the Company, pro rata based on the
number of shares, if any, for which registration was requested by such
Holders. No Registrable Securities excluded from the underwriting by reason of
the underwriter's marketing limitation shall be included in such registration.
If any Holder of Registrable Securities disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by written notice to
the Company, the underwriter and, unless otherwise provided, the Initiating
Holders. The securities so withdrawn shall also be withdrawn from
registration. If the underwriter has not limited the number of Registrable
Securities to be underwritten, the Company may include its securities for its
own account in such registration if the underwriter so agrees and if the
number of Registrable Securities which would otherwise have been included in
such registration and underwriting
5
<PAGE>
will not thereby be limited.
(d) The Company is obligated to effect only three demand registrations
for the Holders pursuant to this Section 2. A registration will not count as
one of the three demand registrations until such registration has become
effective. If the Company qualifies to file a Form S-2 or S-3 or any similar
short-form registration ("Short-Form Registration") covering the registration
of the Registrable Securities for which registration was requested, the
Company may elect to register such Registrable Securities on a Short-Form
Registration and such Short-Form Registration shall be in satisfaction of the
Holders' demand registration rights.
(e) The Company shall not be obligated to effect a demand registration
within 180 days after the effective date of a previous demand registration or
a previous registration in which the holders of Registrable Securities were
given piggy-back registration rights pursuant to Section 3 hereof and in which
there was no reduction in the number of Registrable Securities requested to be
included.
(f) After the Company has become subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended (the "1934 Act"), the
Company will use reasonable efforts to make Short-Form Registrations available
for the sale of Registrable Securities but shall not be obligated to do so.
3. Piggy-back Registration Rights. If, at any time the Company
------------------------------
proposes to register (including for this purpose a registration effected by the
Company for stock holders other than the Holders) any of its securities under
the 1933 Act in connection with a public offering of such securities solely for
cash (other than a registration form relating to: (a) a registration of a stock
option, stock purchase or compensation or incentive plan or of stock issued or
issuable pursuant to any such plan, or a dividend investment plan; (b) a
registration of securities proposed to be issued in exchange for securities or
assets of or in connection with a merger or consolidation with, another
corporation; or (c) a registration of securities proposed to be issued in
exchange for other securities of the Company),
6
<PAGE>
the Company shall, each such time, promptly give each Holder written notice of
such registration. Upon the written request of any Holder given within 15 days
after receipt of such written notice from the Company in accordance with Section
14, the Company shall subject to the provisions of Section 7 (in the case of an
underwritten offering), use its best efforts to cause to be registered under the
1933 Act all of the Registrable Securities that each such Holder has requested
to be registered.
4. Obligations of the Company. Whenever required under this
--------------------------
Agreement to effect the registration of any Registrable Securities, the Company
shall, as expeditiously as reasonably possible:
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective and, upon the request of the
Holders of a majority of the Registrable Securities registered thereunder,
keep such registration effective for up to 180 days; provided, however, that
the Company may suspend effectiveness of any such registration effected
pursuant to this Section 4(a) in the event, and for such period of time as,
such a suspension is required by the rules and regulations of the SEC, in
which case the Company will use its best efforts to cause such suspension to
terminate at the earliest possible date;
(b) Prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provi sions of
the 1933 Act with respect to the disposition of all securities covered by such
registration statement;
(c) Furnish to the Holders such numbers of copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
1933 Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them;
(d) Use its best efforts to register and qualify the securities
covered by such registration statement
7
<PAGE>
under the securities laws of such jurisdictions as the Company believes shall
be reasonably appropriate for the distribution of the securities covered by
the registration statement and such jurisdictions as the Holders participating
in the offering shall reasonably request, provided that the Company shall not
be required in connection therewith or as a condition thereto to qualify to do
business or to file a general consent to service of process in any such
jurisdiction, and further provided that (anything in this Agreement to the
contrary notwithstanding with respect to the bearing of expenses) if any
jurisdiction in which the securities shall be qualified shall require that
expenses incurred in connection with the qualification of the securities in
that jurisdiction be borne by selling stockholders and provided there is no
exemption from such requirement by reason of the Company's obligation to pay
such expenses pursuant to the foregoing provisions of this Section 4, such
expenses shall be payable by the selling Holders pro rata, to the extent
required by such jurisdiction; and
(e) In the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement with customary terms
reasonably satisfactory to the managing underwriter of such offering. Each
Holder participating in such underwriting shall also enter into and perform
its obligations under such an agreement.
5. Furnish Information. It shall be a condition precedent to the
-------------------
obligations of the Company to take any ac tion pursuant to this Agreement that
the selling Holders shall furnish to the Company such information regarding
themselves, the Registrable Securities held by them, and the intended method of
disposition of such securities as shall be required to effect the registration
of their Registrable Securities. In that connection, each selling Holder shall
be required to represent to the Company that all such information which is given
is both complete and accurate in all material respects.
6. Expenses of Registration. All Registration Expenses incurred in
------------------------
connection with any registration, qualification or compliance pursuant to this
Agreement shall be borne by the Company, and all Selling Expenses shall be
8
<PAGE>
borne by the Holders of the securities so registered pro rata on the basis of
the number of shares so registered.
7. Underwriting Requirements. The right of any Holder to
-------------------------
"piggyback" in an underwritten public offering of the Company's securities
pursuant to Section 3 shall be con ditioned upon such Holder's participation in
such underwrit ing and the inclusion of such Holder's Registrable Securi ties
in the underwriting to the extent provided herein. All Holders proposing to
distribute their securities through such underwriting shall (together with the
Company and any other holders distributing their securities through such
underwriting) enter into an underwriting agreement in cus tomary form with the
underwriter or underwriters selected for underwriting by the Company.
Notwithstanding any other provision of Section 3 and this Section 7, if the
under writer determines that marketing factors require a limita tion of the
number of shares to be underwritten, the un derwriter may exclude some or all
Registrable Securities from such registration and underwriting. Any reduction
in the number of Registrable Securities included in such registration shall be
borne first by the Founding Managers pro rata based on the number of shares, if
any, for which registration was requested by the Founding Managers, and then
equally by the other Holders as a group pro rata based on the number of shares
for which registration was requested by such Holders. If any Holder disapproves
of the terms of any such underwriting, it may elect to withdraw therefrom by
written notice to the Company and the underwriter. Any Registrable Securities
excluded or withdrawn from such underwriting shall be withdrawn from such
registration.
8. Delay of Registration. No Holder shall have any right to obtain
---------------------
or seek an injunction restraining or otherwise delaying any such registration as
a result of any controversy that might arise with respect to the interpreta
tion or implementation of this Agreement.
9. Indemnification. If any Registrable Securi ties are included in
---------------
a registration statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, the officers, directors, partners and members of
each Holder,
9
<PAGE>
any underwriter (as defined in the 1933 Act) for such Holder and each person,
if any, who controls such Holder or underwriter within the meaning of the 1933
Act or the 1934 Act, against any losses, claims, damages, or liabili ties
(joint or several) to which they or any of them may become subject under the
1933 Act, the 1934 Act or any other federal or state law, insofar as such
losses, claims, damages, or liabilities (or actions in respect thereof) arise
from or are based upon any of the following statements, omissions or
violations (collectively a "Violation"): (i) any untrue statement or alleged
untrue statement of a material fact contained in such registration statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto; (ii) the omission or alleged omission
to state therein a material fact required to be stated therein, or necessary
to make the statements therein not misleading; or (iii) any violation or
alleged violation by the Company of the 1933 Act, the 1934 Act, any state
securities law or any rule or regulation promulgated under the 1933 Act, the
1934 Act or any state securities law; and the Company will reimburse each such
Holder, officer, director or partner, underwriter or controlling person for
any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability, or action;
provided, however, that the indemnity agreement contained in this Section 9
shall not apply to amounts paid in settlement of any such loss, claim, damage,
liability or action if such settlement is effected without the consent of the
Company (which consent shall not be unreasonably withheld), nor shall the
Company be liable in any such case for any such loss, claim, damage,
liability, or action to the extent that it arises from or is based upon a
violation which occurs in reliance upon and in conformity with written
information furnished expressly for use in connection with such registration
by any such Holder, underwriter or controlling person.
(b) To the extent permitted by law, each selling Holder will indemnify
and hold harmless the Company, each of its directors, each of its officers who
have signed the registration statement, each person, if any, who controls the
Company within the meaning of the 1933 Act, any underwriter (within the
meaning of the 1933 Act) for the
10
<PAGE>
Company, any person who controls such underwriter, any other Holder selling
securities in such registration statement or any of its directors or officers
or any person who controls such Holder against any losses, claims, damages or
liabilities (joint or several) to which the Company or any such director,
officer, controlling person, or underwriter or other such Holder or director,
officer or controlling person may become subject, under the 1933 Act, the 1934
Act or any other federal or state law, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereto) arise from or are
based upon any Violation, in each case to the extent (and only to the extent)
that such Violation occurs in reliance upon and in conformity with written
information furnished by such Holder expressly for use in connection with such
registration; and each such Holder will reimburse any legal or other expenses
reasonably incurred by the Company or any such director, officer, controlling
person, underwriter or controlling person, other Holder, officer, director or
controlling person in connection with investigation or defending any such
loss, claim, damage, liability, or action; provided, however, that the
indemnity agreement contained in this Section 9 shall not apply to amounts
paid in settlement of any such loss, claim damage, liability or action if such
settlement is effected without the consent of the Holder which consent shall
not be unreasonably withheld; provided, further, that in no event shall any
indemnity under this Section 9(b) exceed the gross proceeds from the offering
received by the Holder.
(c) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Section 9 is
applicable but for any reason is held to be unavailable from the Company or
any Holder, the Company and the Holders participating in the registration
shall contribute to the aggregate losses, claims, damages and liabilities
(including any investigation, legal and other expenses incurred in connection
with, and any amount paid in settlement of, any action, suit or proceeding or
any claims asserted) to which the Company and the participating Holders may be
subject in such proportion so that the participating Holders are responsible
for that portion of the foregoing amount represented by the ratio of the
proceeds received
11
<PAGE>
by the participating Holders in the offering to the total proceeds received
from the offering by the Company and all selling stockholders (other than
participating Holders) and the Company shall be responsible for the portion
represented by the ratio of proceeds received by the Company to the total
proceeds received by the Company and all selling stockholders (other than
participating Holders); provided, however, that no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act) shall
be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 9(c), each person,
if any, who controls the Company or any Holder within the meaning of the 1933
Act, each officer of the Company who shall have signed the registration
statement and each director of the Company shall have the same rights to
contribution as the Company.
(d) No settlement shall be effected without the prior written consent
of the Holders participating in a registration unless (i) the obligations of
the Company for indemnification or contribution pursuant to this Agreement
survive and are not extinguished by reason of the settlement and remain in
full force and effect under applicable federal and state laws, rules,
regulations and orders or (ii) all claims and actions against the
participating Holders and each person who controls a participating holder
within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act
are extinguished by the settlement and the indemnifying party obtains a full
release of all claims and actions against the participating Holders and each
such control person, which release shall be to the reasonable satisfaction of
the participating Holders.
(e) Promptly after receipt by an indemnified party under this Section
9 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 9, notify the
indemnifying party in writing of the commencement thereof and the indemnifying
party shall have the right to participate in, and, to the extent the
indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the
12
<PAGE>
defense thereof with counsel mutually satisfactory to the parties; provided,
however, that an indemnified party shall have the right to retain its own
counsel, with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by
such counsel in such proceeding. The failure to notify an indemnifying party
within a reasonable time of the commencement of any such action, to the extent
prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this
Section 9, but the omission so to notify the indemnifying party will not
relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 9.
(f) The obligations of the Company and the Holders under this Section
9 shall survive through the completion of any offering of Registrable
Securities in a registration statement made under the terms of this Agreement
and otherwise.
10. Assignment of Registration Rights. The rights to cause the
---------------------------------
Company to register Registrable Securities pursuant to this Agreement may be
assigned by a Holder to a transferee or assignee of such securities to the
extent such transferee or assignee acquires at least 150,000 shares (as
presently constituted) of Registrable Securities originally purchased or
purchasable by the transferor on the date hereof held by transferor provided the
Company is, within a reasonable time after such transfer, furnished with written
notice of the name and address of such transferee or assignee and the securities
with respect to which such registration rights are being assigned; provided,
however, that no such assignment shall be effective if, immediately following
the transfer, the transferee is free to dispose of all of such securities
without regard to any restrictions imposed under the 1933 Act (including,
without limitation, the volume limitations of Rule 144 promulgated under the
1933 Act). Any transferee asserting registration rights hereunder shall be
bound by the applicable provisions of this Agreement.
13
<PAGE>
11. "Market Stand-off" Agreement. Each Holder hereby agrees that it
----------------------------
shall not, to the extent requested by the Company and an underwriter of Common
Stock (or other securities) of the Company, sell or otherwise transfer or
dispose of any Registrable Securities in a market transaction during the 180-day
period following the effective date of a registration statement of the Company
filed under the 1933 Act; provided, however, that:
(a) such agreement shall be applicable only to any registration in
which any of the Holders of Registrable Securities have rights to participate
under the terms of this Agreement (provided that such agreement shall not
apply to any shares which are included in any such registration); and
(b) all officers, directors and significant stockholders (i.e., those
stockholders who beneficially own greater than 5% of the Company's outstanding
stock) of the Company and all other persons with registration rights (whether
or not pursuant to this agreement) enter into similar agreements.
In order to enforce the foregoing covenant, the Company may impose
stop-transfer instructions with respect to the Registrable Securities of each
Holder (and the shares or securities of every other person subject to the
foregoing restriction) until the end of such 180-day period.
12. Amendments and Waivers. The provisions of this Agreement,
----------------------
including the provisions of this sentence, may not be amended, modified or
supplemented, and waivers or consents to departures from the provisions hereof
may not be given, unless the Company has obtained the written consent of Holders
of at least a majority of the then outstanding Registrable Securities.
Notwithstanding the foregoing, a waiver or consent to departure from the
provisions hereof with respect to a matter which relates exclusively to the
rights of Holders of Registrable Securities whose securities are being sold
pursuant to a registration statement and which does not directly or indirectly
affect the rights of other holders of Registrable Securities may be given by the
holders of a majority of the Registrable Securities being sold; provided,
however, that the provisions of this sentence may not be amended, modified or
supplemented except
14
<PAGE>
in accordance with the provisions of the immediately preceding sentence.
13. Notices. All notices, demands and requests required by this
-------
Agreement shall be in writing and shall be deemed to have been given for all
purposes (a) upon personal delivery, (b) one business day after being sent, when
sent by professional overnight courier service from and to locations within the
continental United States, or (c) five days after posting when sent by
registered or certified mail (return receipt requested), addressed to the
Company or a Stockholder at his, her or its address set forth on the signature
pages hereof. Any party hereto may from time to time by notice in writing
served upon the others as provided herein, designate a different mailing address
or a different person to which such notices or demands are thereafter to be
addressed or delivered.
14. Successors and Assigns. Except as otherwise provided herein,
----------------------
this Agreement shall inure to the benefit of and be binding upon the successors
and assigns of each of the parties, including, without limitation and without
the need for an express assignment, subsequent holders of Registrable Securities
to which the registration rights granted by this Agreement have been assigned as
permitted herein.
15. Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which shall be deemed to be an original, and when
executed, separately or together, shall constitute a single original instrument,
effective in the same manner as if the parties hereto had executed one and the
same instrument.
16. Captions. Captions are provided herein for convenience only and
--------
they are not to serve as a basis for interpretation or construction of this
Agreement, nor as evidence of the intention of the parties hereto.
17. Cross-References. All cross-references in this Agreement, unless
----------------
specifically directed to another agreement or document, refer to provisions
within this Agreement.
18. Governing Law. This Agreement shall be
-------------
15
<PAGE>
governed by, interpreted under, and construed and enforced in accordance with
the internal laws, and not the laws pertaining to conflicts or choice of laws,
of the State of California applicable to agreements made and to be performed
wholly within the State of California.
19. Severability. The provisions of this Agree ment are severable.
------------
The invalidity, in whole or in part, of any provision of this Agreement shall
not affect the validity or enforceability of any other of its provisions. If one
or more provisions hereof shall be declared invalid or unenforceable, the
remaining provisions shall remain in full force and effect and shall be
construed in the broadest possible manner to effectuate the purposes hereof.
The parties further agree to replace such void or unenforceable provisions of
this Agreement with valid and enforceable provisions which will achieve, to the
extent possible, the economic, business and other purposes of the void or
unenforceable provisions.
20. Entire Agreement. This Agreement contains the entire
----------------
understanding among the parties hereto with respect to the subject matter hereof
and supersedes all prior written and oral agreements, understandings, commit
ments and practices between the parties, including all prior agreements with
respect to registration rights.
16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Registration
Rights Agreement with the intent and agreement that the same shall be effective
as of the day and year first above written.
THE COMPANY:
NEW CENTURY FINANCIAL CORPORATION,
a Delaware corporation
By: /s/ Brad A. Morrice
- ------------------------------
Title: President
- ------------------------------
Address:4910 Birch Street, Suite 100
Newport Beach, CA 92660
SHAREHOLDERS:
CORNERSTONE FUND I, L.L.C.
By Cornerstone Equity Partners, LLC
Attorney-In-Fact
By: /s/ John C. Bentley
- ------------------------------
Title: Manager
- ------------------------------
Address: 5050 N. 40th Street
Suite 310
Phoenix, AZ 85018
/s/ Robert K. Cole
- ------------------------------
Robert K. Cole
Address: New Century Financial Corp
4910 Birch Street, Suite 100
Newport Beach, CA 92660
/s/ Brad A. Morrice
- -----------------------------------------
Brad A. Morrice
Address: 2461 Park Ave.
Laguna Beach, CA 92651
17
<PAGE>
/s/ Edward F. Gotschall
- -----------------------------
Edward F. Gotschall
Address: New Century Financial Corp.
4910 Birch, Suite 100
Newport Beach, CA 92660
/s/ Steven G. Holder
- ---------------------------
Steven G. Holder
Address: 25032 Nellie Gail Road
Laguna Hills, CA 92653
/s/ David A. Krinsky
- ----------------------------
David A. Krinsky
Address: 1212 Temple Terrace
Laguna Beach, CA 92651
/s/ Harlan W. Smith
- -----------------------------
Harlan W. Smith
Address: 10040 E. Happy Valley Rd. #673
Scottsdale, AZ 85255
HARCOL LIMITED PARTNERSHIP
By: /s/ Harlan W. Smith
- ------------------------------
Title: General Partner
- -------------------------------
Address: 10040 E. Happy Valley Road
Scottsdale, AZ 85255
WESTREC ROLLOVER PS PLAN
By: /s/ Michael M. Sachs
- ------------------------------
Title: Trustee
- ------------------------------
Address:______________________
______________________
______________________
/s/ Michael M. Sachs
- -----------------------------
Michael M. Sachs
Address:______________________
______________________
______________________
18
<PAGE>
CORNERSTONE EQUITY PARTNERS, L.L.C.
By: /s/ John C. Bentley
- ---------------------------------
Title: Manager
---------------------
Address: 5050 N. 40th Street
Suite 310
Phoenix, AZ 85018
OAK CRAFT INC EMPLOYEES PROFIT SHARING PLAN
By: /s/ Daniel Spitler
- ------------------------------
Title: Administrator
- ------------------------------
Address: P.O. Box 730
Peoria, AZ 85380-0730
MARTIN F. RYAN, LTD. DEFINED BENEFIT PENSION PLAN
By: /s/ Martin Ryan
- ------------------------------
Title: Trustee
- ------------------------------
Address:6262 N. Swan
Suite 255
Tucson, AZ 85718-3600
COMERICA, INCORPORATED
By: /s/ Mark Yonkman
- ------------------------------
Title:________________________
Address:______________________
______________________
______________________
SAMANTHA H. MORRICE TRUST
By: /s/ Bruce A. Morrice
- ------------------------------
Title: Trustee
- ------------------------------
Address: c/o Bruce A. Morrice
Morrice Financial
16250 Dallas Parkway, Suite 203
Dallas, TX 75248
19
<PAGE>
SCHEDULE 1
Registrable Common Stock
------------------------
<TABLE>
<CAPTION>
Stockholder Shares
- ----------------------------- ------------------------
<S> <C>
Cornerstone Fund I, L.L.C. Common Stock - 4,220,656
Westrec Rollover PS Plan Common Stock - 211,032
Michael M. Sachs Common Stock - 316,550
Harlan W. Smith Common Stock - 211,032
Harcol Limited Partnership Common Stock - 211,032
David A. Krinsky Common Stock - 211,032
Cornerstone Equity Partners Common Stock - 211,032
Oak Craft Inc. Employees
Profit Sharing Plan Common Stock - 52,758
Martin F. Ryan, Defined
Benefit Pension Plan Common Stock - 158,274
Samantha H. Morrice Trust Common Stock - 21,103
Comerica Incorporated Common Stock - 545,000
Warrants - 333,333
Brad A. Morrice Common Stock - 1,109,615
Restricted Stock -92,500
Edward F. Gotschall Common Stock - 1,027,132
Restricted Stock- 92,500
Robert K. Cole Common Stock - 1,130,235
Restricted Stock- 92,500
Steven G. Holder Common Stock - 985,891
Restricted Stock -92,500
</TABLE>
20
<PAGE>
EXHIBIT 10.13
NEW CENTURY FINANCIAL CORPORATION
EQUALIZATION NONQUALIFIED STOCK OPTION AGREEMENT
------------------------------------------------
THIS OPTION AGREEMENT dated as of the ___ day of ________, 1997, by
and between NEW CENTURY FINANCIAL CORPORATION, a Delaware corporation (the
"CORPORATION"), and __________ (the "EMPLOYEE").
R E C I T A L S
---------------
WHEREAS, the Corporation has granted to the Employee effective as of
the 4th day of December, 1996 (the "GRANT DATE") a nonqualified stock option to
purchase all or any part of ________ shares of the Corporation's common stock,
$0.01 par value (the "COMMON STOCK") subject to and upon the terms and
conditions set forth herein; and
WHEREAS, such option has been granted by the Corporation to the
Employee in addition to, and not in lieu of, any other form of compensation
otherwise payable or to be paid to the Employee;
NOW, THEREFORE, in consideration of the mutual promises and covenants
made herein and the mutual benefits to be derived herefrom, the parties agree as
follows:
SECTION 1. GRANT OF OPTION.
---------------
This Option Agreement evidences the Corporation's grant to the
Employee of the right and option to purchase, subject to and on the terms and
conditions set forth herein, all or any part of ________ shares of the
Corporation's Common Stock at the price of $_____ per share (the "OPTION"),
exercisable to the extent then vested and prior to the close of business on the
day before the tenth anniversary of the Grant Date (the "EXPIRATION DATE"),
unless earlier terminated pursuant to Sections 6 or 7. Such price equals the
fair market value of the Common Stock as of the Grant Date.
SECTION 2. CONSIDERATION TO THE CORPORATION.
--------------------------------
In consideration of the granting of the Option by the Corporation, the
Employee agrees to render faithful, competent, and efficient services to the
Corporation, with such duties and responsibilities as the Corporation shall from
time to time prescribe. Nothing contained in this Option Agreement or in any
other documents related to the Plan shall confer upon the Employee any right to
continue in the employ of the Corporation or constitute any contract of
employment, or interfere in any way with the right of the Corporation to reduce
such person's
1
<PAGE>
compensation or other benefits or to terminate the employment of the Employee,
with or without Cause (as defined in Section 7 below).
SECTION 3. EXERCISABILITY OF OPTION.
------------------------
Except as otherwise provided by Section 16, the Option may be
exercised in installments as to 33-1/3% of the aggregate number of shares set
forth in Section 1 hereof (subject to adjustment) on and after the first
anniversary of the Grant Date and as to an additional 33-1/3% of such agggregate
number of shares (subject to adjustment) on each of the second and third
anniversaries of the Award Date.
To the extent that the Option is vested and exercisable, if the
Employee does not in any year purchase all or any part of the shares Common
Stock to which the Employee is entitled, the Employee has the right cumulatively
thereafter to purchase any shares not so purchased and such right shall continue
until the Option terminates or expires. The Option shall only be exercisable in
respect of whole shares, and fractional share interests shall be disregarded.
The Option may only be exercised as to at least 100 shares unless the number
purchased is the total number at the time available for purchase under the
Option.
SECTION 4. METHOD OF EXERCISE OF OPTION.
----------------------------
The Option shall be exercisable by the delivery to the Secretary of
the Corporation of a written notice stating the number of shares of Common Stock
to be purchased pursuant to the Option and accompanied by (i) delivery of an
executed EXERCISE AGREEMENT in the form attached hereto as EXHIBIT I, (ii)
payment of the full purchase price of the shares to be purchased and (iii) the
amount of any tax withholding obligation under federal, state and local law,
made
(a) in cash or check payable to the Corporation;
(b) subject to the Corporation's approval, by shares of Common
Stock already owned by the Employee; or
(c) in any combination of the arbitration permitted by the
foregoing subsections;
subject to such further limitations, rules and procedures as the Corporation may
from time to time establish as to any non-cash payment by persons exercising
options. In addition, the Employee (or the Employee's beneficiary or personal
representative) must furnish any written statements required pursuant to Section
9 of this Option Agreement.
2
<PAGE>
SECTION 5. NO SERVICE COMMITMENT.
---------------------
Nothing contained in this Option Agreement shall confer upon Employee
any right to continue to serve as an officer or employee of the Corporation nor
shall interfere in any way with any right of the Corporation to terminate
Employee's service as an officer or employee, with or without cause.
SECTION 6. EFFECT OF TERMINATION OF EMPLOYMENT.
-----------------------------------
The Option and all other rights hereunder, to the extent not exercised
and whether vested or not, shall terminate and become null and void at such time
as the Employee ceases to be employed by the Corporation or any subsidiary,
except that:
(a) if Employee terminates or is terminated for any reason other
than for Cause, Employee has 90 days (or such longer period not to exceed
12 months that the Board of Directors ("Board") of the Corporation may, in
its sole discretion, permit by resolution) after the date of termination to
exercise the Option to the extent the Option was exercisable on the date of
termination;
(b) if Employee is terminated for Cause, the Option shall lapse
immediately upon such termination of employment;
(c) if Employee terminates from employment by or providing
services to the Corporation or any subsidiary after attaining age 65 (and,
with respect to employees, in accordance with the retirement policies of
the Corporation then in effect), Employee may exercise the Option to the
extent the Option may be exercisable on the date of Employee's termination
of employment, within a period of 90 days from the date of termination;
(d) if Employee (i) terminates as a result of a permanent and
total disability (within the meaning of Section 22(e)(3) of the Internal
Revenue Code of 1986, as amended), or (ii) suffers a permanent and total
disability within 90 days of a termination of employment under subsection
(a) or (c) above, Employee or Employee's personal representative may
exercise the Option, to the extent the Option was exercisable on the date
of Employee's termination of employment, within a period of 12 months from
the date of Disability (or, if earlier, termination of employment) to the
extent the Option was exercisable on such date;
(e) if Employee dies while in the employ of the Company, or
within 90 days after a termination described in subsection (a), (c) or (d)
of this Section 7, then Employee's beneficiary may exercise the Option, to
the extent the Option was exercisable on the date of Employee's termination
of employment, within a period of 12 months
3
<PAGE>
after the date of Employee's death (or, if earlier, Employee's termination
of employment);
provided, however, that in no event may the Option be exercised by anyone under
this section or otherwise after the Expiration Date.
For purposes of this Agreement, "Cause" shall be defined as follows:
(i) Employee's conviction of any felony (whether or not involving the Company)
which constitutes a crime of moral turpitude or which is punishable by
imprisonment in a state or federal correction facility; (ii) actions by Employee
during the term of this Agreement involving willful malfeasance or gross
negligence; (iii) Employee's commission of an act of fraud or dishonesty,
whether prior or subsequent to the date hereof, upon the Company; (iv)
Employee's repeated, willful failure or refusal to perform his duties as
required by this Agreement on an exclusive and full-time basis; provided that
termination of Employee's employment pursuant to this clause (iv) shall not
constitute valid termination for cause unless Employee shall have first received
written notice from the Board of Directors of the Company stating the nature of
such failure or refusal and affording Employee at least ten (10) days to correct
the act or omission complained of to the satisfaction of the Board of Directors;
(v) Employee's willful violation of any reasonable rule or regulation of the
Board of Directors applicable to all senior executives if such violation is not
cured to the satisfaction of the Board of Directors promptly following notice to
Employee; and (vi) any knowing or intentional material misrepresentation made in
connection with the transactions contemplated by that certain Investment
Agreement dated November 21, 1995 to which the Company is a party.
SECTION 7. TERMINATION OF OPTION IN CERTAIN EVENTS.
---------------------------------------
This Option may be exercised only by, and shares issuable pursuant to
this Option shall be issued only to Employee or, if Employee has died, his
beneficiary or, if Employee has suffered a permanent and total disability
(within the meaning of Section 22(e)(3) of the Internal Revenue Code of 1986, as
amended), his personal representative, if any, or if there is none, Employee or
to a third party pursuant to such conditions and procedures as the Board of
Directors of the Corporation may establish. Other than by will or the laws of
descent and distribution, no right or benefit under this Option shall be
transferrable by Employee or shall be subject in any manner to anticipation,
alienation, sale,transfer, assignment, pledge, encumbrance or charge and any
such attempted action shall be void. Employee's designation of a beneficiary
shall not constitute a transfer for these purposes.
SECTION 8. ADJUSTMENT AND TERMINATION UPON CERTAIN EVENTS.
----------------------------------------------
If there shall occur any extraordinary distribution in respect of the
Common Stock (whether in the form of stock, other
4
<PAGE>
securities, or other property), or any recapitalization, stock split (including
a stock split in the form of a stock dividend), reverse stock split,
reorganization, merger, combination, consolidation, split-up, spin-off,
combination, or exchange of Common Stock or other securities of the Corporation,
or a sale of substantially all of the assets of the Corporation as an entirety,
then the Board of Directors shall, in such manner and to such extent (if any) as
the Board of Directors in its discretion determines is appropriate and
equitable, (1) proportionately adjust any or all of (a) the number, amount and
type of shares of Common Stock subject to this Option, and (b) the exercise
price of this Option, or (2) in the case of an extraordinary distribution,
merger, reorganization, consolidation, combination, sale of assets, split up,
exchange, or spin off, make provision for a substitution or exchange of this
Option or for a change in the Common Stock deliverable upon exercise of this
Option, based upon the distribution or consideration payable to holders of the
Common Stock of the Corporation upon or in respect of such event; provided,
--------
however, that (i) such adjustment and the Board's actions in respect thereof are
- -------
based on objective criteria and (ii) such adjustment is effected in a manner
consistent with adjustments to comparable options (if any) held by other
persons.
Notwithstanding the foregoing, the Option to the extent not previously
exercised shall terminate upon an event or transaction in which the Corporation
does not survive provided that: (1) Employee shall have had at least ten (10)
days advance written notice of any such termination, and shall have had the
right prior to or simultaneously with the consummation of the event or other
transaction to exercise the Option; (2) the Board (or the terms of such
transaction) shall have provided for an adjustment to the securities or other
property deliverable upon exercise of the Option consistent with the provisions
of the preceding paragraph; or (3) the Board provides for payment in cash or
shares of Common Stock in lieu of, and in complete satisfaction of, the Option.
SECTION 9. SECURITIES LAW COMPLIANCE.
-------------------------
9.1 INVESTMENT REPRESENTATIONS. Employee acknowledges that the
Options and shares of Common Stock are not being registered under the Securities
Act of 1933, as amended ("Securities Act"), based, in part, on reliance that the
issuance of the shares is exempt from registration under Rule 701 promulgated
under the Securities Act and exempt from qualification under California
Corporate Securities Law (S) 25102(f). Employee further acknowledges that the
Corporation's reliance on such exemptions is predicated, in part, on the
representations set forth below made by Employee to the Corporation.
. Employee is acquiring the Option and if able and willing to do so will
acquire any shares solely for Employee's own account, for investment
purposes only,
5
<PAGE>
and not with an intent to sell, or offer for resale in connection with
any unregistered distribution of all or any portion of the shares
within the meaning of the Securities Act or the California Corporate
Securities Law.
. In evaluating the merits and risks of an investment in the shares,
Employee has and will rely upon the advice of Employee's own legal
counsel, tax advisors, and/or investment advisors.
. Employee is knowledgeable about the Corporation or has a preexisting
business relationship with the Corporation. As a result of such
relationship, Employee has access on a regular basis to or may request
the Corporation's consolidated balance sheet and consolidated income
statement setting forth information material to the Corporation's
financial condition, operations and prospects.
. Employee is aware that the Option may be of no practical value, that
any value it may have depends on its vesting and exercisability as well
as an increase in the fair market value of the underlying shares from
the current date to the date of exercise, and that an investment in
shares of a closely held corporation such as the Corporation is non-
marketable, non-transferable and could require Employee's capital to be
invested for an indefinite period of time, possibly without return and
at risk of loss.
. Employee understands that any shares acquired on exercise of the Option
will be characterized as "restricted securities" under the federal
securities laws since the shares are being acquired from the
Corporation in a transaction not involving a public offering and that
under such laws and applicable regulations such securities may be
resold without registration under the Securities Act only in certain
limited circumstances. Employee acknowledges receiving a copy of Rule
144 promulgated under the Securities Act, as presently in effect,
represents that he or she is familiar with such rule, and understands
the resale limitations imposed thereby and by the Securities Act and
the California Corporate Securities Law.
. Purchaser understands the restrictions and limitations imposed on the
Option and any shares which may be acquired thereunder, including, but
not limited to, the following: (i) the termination provisions of
Sections 7 and 8 hereof; and (ii) the non-transferability provisions of
Section 11 hereof and Section 3 of the Exercise Agreement.
6
<PAGE>
. At no time was an oral representation made to Employee relating to the
Option or the purchase of shares or was Employee presented with or
solicited by any promotional meeting or material relating to the
Options or the shares.
9.2 STOCK CERTIFICATE LEGEND.
Employee understands and acknowledges that the certificate evidencing
the shares (or evidencing any other securities issued with respect thereto
pursuant to any stock split, stock dividend, merger or other form of
reorganization or recapitalization) if and when issued shall bear, in addition
to any other legends which may be required by the Exercise Agreement or
applicable state securities laws, the following legends:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, BUT ARE ISSUED IN RELIANCE ON THE
REPRESENTATION THAT THEY ARE TAKEN FOR INVESTMENT AND NOT FOR
REDISTRIBUTION. AS A CONDITION OF ANY TRANSFER HEREOF, THE COMPANY MAY
REQUIRE AN OPINION OF COUNSEL SATISFACTORY TO IT THAT ALL STATUTORY
REGISTRATION PROVISIONS HAVE BEEN MET OR DO NOT APPLY.
THE SHARES OF CAPITAL STOCK OF THE COMPANY REPRESENTED BY THIS STOCK
CERTIFICATE AND THE DISPOSITION THEREOF ARE SUBJECT TO THE TERMS OF A
SHAREHOLDERS AGREEMENT DATED AS OF NOVEMBER 22, 1995 (THE 'SHAREHOLDERS
AGREEMENT') BY AND AMONG THE COMPANY AND CERTAIN OTHER PARTIES. A COPY
OF THE SHAREHOLDERS AGREEMENT IS ON FILE AT THE PRINCIPAL OFFICE OF THE
COMPANY AND MAY BE INSPECTED BY THE REGISTERED OWNER OF THIS STOCK
CERTIFICATE OR A DULY AUTHORIZED REPRESENTATIVE OF SUCH OWNER UPON
REQUEST DURING THE COMPANY'S NORMAL BUSINESS HOURS."
SECTION 10. NO TRANSFER OR ASSIGNMENT.
-------------------------
This Option Agreement and all of the provisions hereof shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assignees. Neither this Option Agreement nor any of
the rights, interests or obligations hereunder shall be assigned by either party
without the prior written consent of the other. This Option Agreement and the
rights, interests and obligations hereunder may not otherwise be sold or
transferred.
7
<PAGE>
SECTION 11. SHARES TO BE RESERVED.
---------------------
The Corporation shall at all times during the term of the Option
reserve and keep available such number of shares of Common Stock as will be
sufficient to satisfy the requirements of this Option Agreement.
SECTION 12. NOTICES.
-------
Any notice to be given under the terms of this Option Agreement shall
be in writing and addressed to the Corporation at its principal office to the
attention of the Secretary, and to the Employee at the address given beneath the
Employee's signature hereto, or at such other address as either party may
hereafter designate in writing to the other. Any such notice shall be deemed to
have been duly given when enclosed in a properly sealed envelope addressed as
aforesaid, registered or certified, and deposited (postage and registry or
certification fee prepaid) in a post office or branch post office regularly
maintained by the United States Government.
SECTION 13. ENTIRE AGREEMENT.
----------------
This Option Agreement and the Exercise Agreement, together constitute
the entire agreement and supersede all prior understandings and agreements,
written or oral, of the parties hereto with respect to the subject matter
hereof. This Option Agreement and the Exercise Agreement may be amended only by
mutual agreement of the parties. Such amendment must be in writing and signed
by both parties. The Corporation may, however, unilaterally waive any provision
hereof in writing to the extent such waiver does not adversely affect the
interests of the Employee hereunder, but no such waiver shall operate as or be
construed to be a subsequent waiver of the same provision or a waiver of any
other provision hereof.
SECTION 14. GOVERNING LAW.
-------------
14.1 CALIFORNIA LAW. This Option Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of California
without regard to conflict of law principles thereunder.
14.2 ARBITRATION. Any controversy or claim arising out of or
relating to this Option Agreement or the Exercise Agreement, their enforcement
or interpretation, or because of an alleged breach, default, or
misrepresentation in connection with any of their provisions, shall be submitted
to arbitration, to be held in Orange County, California in accordance with
California Civil Procedure Code (S)(S) 1282-1284.2. In the event either party
institutes arbitration under this Section, the party prevailing in any such
litigation shall be entitled, in addition to all other relief, to reasonable
attorney's fees relating to such arbitration. The non-prevailing party shall be
responsible for
8
<PAGE>
all costs of the arbitration, including but not limited to, the arbitration
fees, court reporter fees, etc.
SECTION 15. NO REGISTRATION, PUBLIC OFFERING REPRESENTATIONS.
------------------------------------------------
Notwithstanding anything else contained herein or in any related
document to the contrary, the Corporation has no obligation to register the
Common Stock or file any registration statement under either federal or state
securities laws, nor does the Corporation make any guarantee concerning the
likelihood of a public offering of the Common Stock.
SECTION 16. ACCELERATION OF OPTION; POSSIBLE EARLY TERMINATION OF ACCELERATED
-----------------------------------------------------------------
OPTION.
------
(a) Unless prior to an Event the Board of Directors of the Corporation
determines that, upon its occurrence, there shall be no acceleration of the
Option, then upon the occurrence of an Event the Option shall become immediately
exercisable to the full extent theretofore not exercisable. For purposes of
this section, the Board shall mean the Board as constituted immediately prior to
the Event.
(b) If the Option has been fully accelerated as permitted by
Subsection 16(a) but is not exercised prior to an Event or transaction in which
the Corporation does not survive, then the Option shall thereupon terminate
provided that: (1) Employee shall have had at least ten (10) days advance
written notice of any such termination, and shall have had the right prior to or
simultaneously with the consummation of the Event or other transaction to
exercise the Option; (2) the Board (or the terms of such transaction) shall have
provided for an adjustment to the securities or other property deliverable upon
exercise of the Option consistent with the provisions of the preceding
paragraph; or (3) the Board provides for payment in cash or shares of Common
Stock in lieu of, and in complete satisfaction of, the Option.
(c) For purposes of this Agreement, the term "Event" means any of the
following:
(1) Approval by the shareholders of the Corporation of the
dissolution or liquidation of the Corporation;
(2) Approval by the shareholders of the Corporation of an
agreement to merge or consolidate, or otherwise reorganize, with or into
one or more entities other than subsidiaries, as a result of which less
than 50% of the outstanding voting securities of the surviving or resulting
entity are, or are to be, owned by former shareholders of the Company; or
9
<PAGE>
(3) Approval by the shareholders of the Company of the sale of
substantially all of the Company's business assets to a person or entity
which is not a subsidiary.
IN WITNESS WHEREOF, the Corporation has caused this Option Agreement
to be executed on its behalf by a duly authorized officer and the Employee has
hereunto set his or her hand.
"THE CORPORATION"
NEW CENTURY FINANCIAL CORPORATION,
a Delaware corporation
By:
--------------------------------
Title:
-----------------------------
"THE EMPLOYEE"
-----------------------------------
(Signature)
-----------------------------------
(Print Name)
4910 Birch Street, Suite 100
Newport Beach, California 92660
10
<PAGE>
CONSENT OF SPOUSE
-----------------
In consideration of the execution of the foregoing Equalization
Nonqualified Stock Option Agreement by New Century Financial Corporation, I,
___________________________, the spouse of the Employee herein named, do hereby
agree to be bound by all of the terms and provisions thereof.
DATED: _________________, 1997. ____________________________
Signature of Spouse
11
<PAGE>
EXHIBIT 10.14
NEW CENTURY FINANCIAL CORPORATION
1995 STOCK OPTION PLAN
(Amended and Restated May 30, 1997)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
I. THE PLAN............................................................. 1
1.1 Purpose........................................................ 1
1.2 Administration................................................. 1
1.3 Participation.................................................. 2
1.4 Shares Available Under the Plan................................ 2
1.5 Grant of Awards................................................ 3
1.6 Exercise of Awards............................................. 3
1.7 No Transferability; Limited Exception to Transfer
Restrictions................................................... 3
II. OPTIONS.............................................................. 4
2.1 Grants......................................................... 4
2.2 Option Price................................................... 5
2.3 Option Period.................................................. 5
2.4 Exercise of Options............................................ 6
2.5 Limitations on Grant of Incentive Stock Options................ 6
2.6 Non-Employee Director Awards................................... 7
III. STOCK APPRECIATION RIGHTS............................................ 8
3.1 Grants......................................................... 8
3.2 Exercise of Stock Appreciation Rights.......................... 9
3.3 Payment........................................................ 9
IV. RESTRICTED STOCK AWARDS.............................................. 10
4.1 Grants......................................................... 10
4.2 Restrictions................................................... 10
V. PERFORMANCE SHARE AWARDS............................................. 11
5.1 Grants of Performance Share Awards............................. 11
5.2 Grants of Performance-Based Share Awards....................... 11
VI. OTHER PROVISIONS..................................................... 13
6.1 Rights of Eligible Employees, Participants and Beneficiaries... 13
6.2 Adjustments Upon Changes in Capitalization..................... 14
6.3 Termination of Employment...................................... 15
6.4 Acceleration of Awards......................................... 17
6.5 Government Regulations......................................... 17
6.6 Tax Withholding................................................ 18
6.7 Amendment, Termination and Suspension.......................... 18
6.8 Privileges of Stock Ownership.................................. 19
6.9 Effective Date of the Plan..................................... 19
6.10 Term of the Plan............................................... 19
6.11 Governing Law.................................................. 20
6.12 Plan Construction.............................................. 20
6.13 Non-Exclusivity of Plan........................................ 21
VII. DEFINITIONS.......................................................... 21
7.1 Definitions.................................................... 21
</TABLE>
i
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
1995 STOCK OPTION PLAN
(Amended and Restated as of May 30, 1997)
I. THE PLAN.
1.1 Purpose.
-------
The purpose of this Plan is to promote the success of the Company by providing
an additional means to attract, motivate and retain key personnel, consultants,
advisors and knowledgeable directors through the grant of Options and other
Awards that provide added long term incentives for high levels of performance
and for significant efforts to improve the financial performance of the Company.
Capitalized terms are defined in Article VII.
1.2 Administration.
--------------
(a) This Plan shall be administered by the Committee. Action of the Committee
with respect to the administration of this Plan shall be taken pursuant to a
majority vote or the unanimous written consent of its members. In the event
action by the Committee is taken by written consent, the action shall be deemed
to have been taken at the time specified in the consent or, if none is
specified, at the time of the last signature. The Committee may delegate
administrative functions to individuals who are officers or employees of the
Company.
(b) Subject to the express provisions of this Plan, the Committee shall have
the authority to construe and interpret this Plan and any agreements defining
the rights and obligations of the Company and Participants under this Plan, to
further define the terms used in this Plan, to prescribe, amend and rescind
rules and regulations relating to the administration of this Plan, to determine
the duration and purposes of leaves of absence which may be granted to
Participants without constituting a termination of their employment or
consulting services for purposes of this Plan, to accelerate or extend the
exercisability or extend the term of any or all outstanding Awards within the
maximum term of such Awards required by Section 2.3 or applicable law, and to
make all other determinations necessary or advisable for the administration of
this Plan. The determination of the Committee on any of the foregoing matters
shall be conclusive.
1
<PAGE>
(c) Any action taken by, or inaction of, the Company, any Subsidiary, the
Board or the Committee relating to this Plan shall be within the absolute
discretion of that entity or body. No member of the Board or Committee, or
officer of the Company or any Subsidiary, shall be liable for any such action or
inaction.
(d) In making any determination or in taking or not taking any action under
this Plan, the Company, any Subsidiary, the Board or the Committee may obtain
and rely upon the advice of experts, including professional advisors to the
Company. No member of the Board or Committee, or officer of the Company or any
Subsidiary, shall be liable for any such action or determination made or
omitted.
(e) Subject to the requirements of Section 7.1(h), the Board, at any time it
so desires, may increase or decrease the number of members of the Committee, may
remove from membership on the Committee all or any portion of its members, and
may appoint such person or persons as it desires to fill any vacancy existing on
the Committee, whether caused by removal, resignation or otherwise.
1.3 Participation.
-------------
Awards may be granted only to Eligible Employees. An Eligible Employee who
has been granted an Award may, if otherwise eligible, be granted additional
Awards if the Committee shall so determine. Except as provided in Section 2.6
below, members of the Board who are not officers or employees of the Company
shall not be eligible to receive Awards.
2
<PAGE>
1.4 Shares Available Under the Plan.
-------------------------------
Subject to the provisions of Section 6.2, the capital stock that may be
delivered under this Plan shall be shares of the Company's authorized but
unissued Common Stock and any shares of its Common Stock held as treasury
shares. The aggregate maximum number of shares of Common Stock that may be
issued or transferred pursuant to Awards (including Incentive Stock Options)
granted under this Plan shall not exceed 1,565,000 shares (or, after the
completion of the initial public offering of the Common Stock and the
registration of the Common Stock under Section 12 of the Exchange Act, 2,000,000
shares). The maximum number of shares of Common Stock that may be delivered
pursuant to options qualified as Incentive Stock Options granted under the Plan
is 1,565,000 shares (or, after the completion of the initial public offering of
the Common Stock and the registration of the Common Stock under Section 12 of
the Exchange Act, 2,000,000 shares). The maximum number of shares that may be
subject to Options and Stock Appreciation Rights that are granted during any
calendar year to any individual shall not exceed 500,000 shares. Each of the
foregoing numerical limits shall be subject to adjustment as contemplated by
this Section 1.4 and Section 6.2. If any Option and any related Stock
Appreciation Right shall lapse or be cancelled or terminate without having been
exercised in full, or any Common Stock subject to a Restricted Stock Award shall
not vest or any Common Stock subject to a Performance Share Award shall not have
been transferred, the unpurchased, unvested or nontransferred shares subject
thereto shall again be available for purposes of this Plan.
1.5 Grant of Awards.
---------------
Subject to the express provisions of this Plan, the Committee shall determine
from the class of Eligible Employees those individuals to whom Awards under this
Plan shall be granted, the terms of Awards (which need not be identical) and the
number of shares of Common Stock subject to each Award. Each Award shall be
subject to the terms and conditions set forth in this Plan and such other terms
and conditions established by the Committee as are not inconsistent with the
purpose and provisions of this Plan. The grant of an Award is made on the Award
Date.
1.6 Exercise of Awards.
------------------
An Option or Stock Appreciation Right shall be deemed to be exercised when the
Secretary of the Company receives written notice of such exercise from the
Participant, together with payment of the purchase price made in accordance with
Section 2.2(a), except to the extent payment may be permitted to be made
following delivery of written
3
<PAGE>
notice of exercise in accordance with Section 2.2(b). Notwithstanding any other
provision of this Plan, the Committee may impose, by rule and in Awards
Agreements, such conditions upon the exercise of Awards (including, without
limitation, conditions limiting the time of exercise to specified periods) as
may be required to satisfy applicable regulatory requirements.
1.7 No Transferability; Limited Exception to Transfer Restrictions.
--------------------------------------------------------------
(a) Unless otherwise expressly provided below (or pursuant to) this Section
1.7, by applicable law and by the Award Agreement, as the same may be amended,
(i) all Awards are non-transferable and shall not be subject in any manner to
sale, transfer, anticipation, alienation, assignment, pledge, encumbrance or
charge; Awards shall be exercised only by the Participant; and (ii) amounts
payable or shares issuable pursuant to an Award shall be delivered only to (or
for the account of) the Participant.
(b) The Committee may permit Awards to be exercised by and paid to certain
persons or entities related to the Participant, including but not limited to
members of the Participant's immediate family and/or charitable institutions, or
to such other persons or entities as may be approved by the Committee, pursuant
to such conditions and procedures as the Committee may establish. Any permitted
transfer shall be subject to the condition that the Committee receive evidence
satisfactory to it that the transfer is being made for estate and/or tax
planning purposes on a gratuitous or donative basis and without consideration
(other than minimal consideration). Notwithstanding the foregoing, Incentive
Stock Options and Restricted Stock Awards shall be subject to any and all
additional transfer restrictions under the Code.
(c) The exercise and transfer restrictions in Section 1.7(a) shall not apply
to:
(i) transfers to the Company;
(ii) the designation of a beneficiary to receive benefits in the event of
the Participant's death or, if the Participant has died, transfers to or
exercise by the Participant's beneficiary, or in the absence of a validly
designated beneficiary, transfers by will or the laws of descent and
distribution;
(iii) transfers pursuant to a QDRO order if approved or ratified by the
Committee;
(iv) if the Participant has suffered a Total Disability, permitted
transfers or exercises on behalf of
4
<PAGE>
the Participant by his legal representative;
(v) the authorization by the Committee of "cashless exercise" procedures
with third parties who provide financing for the purpose of (or who otherwise
facilitate) the exercise of Awards consistent with applicable laws and the
express authorization of the Committee.
II. OPTIONS.
2.1 Grants.
------
One or more Options may be granted to any Eligible Employee. Each Option so
granted shall be designated by the Committee as either a Nonqualified Stock
Option or an Incentive Stock Option; provided, however, that consultants or
advisors may not be granted Incentive Stock Options under the Plan.
2.2 Option Price.
------------
(a) The purchase price per share of Common Stock covered by each Option shall
be determined by the Committee, but in the case of Incentive Stock Options
shall not be less than 100% (110% in the case of a Participant who owns more
than 10% of the total combined voting power of all classes of stock of the
Company) of the Fair Market Value of the Common Stock on the date the Incentive
Stock Option is granted. The purchase price of any shares purchased shall be
paid in full at the time of each purchase in one or a combination of the
following methods: (i) in cash or by check payable to the order of the Company,
(ii) if authorized by the Committee or specified in the Option being exercised,
by a promissory note made by the Participant in favor of the Company, upon the
terms and conditions determined by the Committee, and secured by the Common
Stock issuable upon exercise in compliance with applicable law (including,
without limitation, state corporate law and federal margin requirements) or
(iii) if authorized by the Committee or specified in the Option being exercised,
by shares of Common Stock of the Company already owned by the Participant;
provided, however, that any shares delivered which were initially acquired upon
exercise of a stock option must have been owned by the Participant at least six
months as of the date of delivery. Shares of Common Stock used to satisfy the
exercise price of an Option shall be valued at their Fair Market Value on the
date of exercise.
(b) In addition to the payment methods described in subsection (a), the Option
may provide that the Option can be exercised and payment made by delivering a
properly executed exercise notice together with irrevocable instructions to a
bank or broker to promptly deliver to the
5
<PAGE>
Company the amount of sale or loan proceeds necessary to pay the exercise price
and, unless otherwise allowed by the Committee, any applicable tax withholding
under Section 6.6. The Company shall not be obligated to deliver certificates
for the shares unless and until it receives full payment of the exercise price
therefor.
2.3 Option Period.
-------------
Each Option and all rights or obligations thereunder shall expire on such date
as shall be determined by the Committee, but not later than 10 years after the
Award Date, and shall be subject to earlier termination as hereinafter provided.
2.4 Exercise of Options.
-------------------
(a) Subject to Sections 6.2 and 6.4, an Option may become exercisable or vest,
in whole or in part, on the date or dates specified in the Award Agreement and
thereafter shall remain exercisable until the expiration or earlier termination
of the Option. An Option may be exercisable or vest on the Award Date.
(b) The Committee may, at any time after grant of the Option and from time to
time, increase the number of shares exercisable at any time so long as the total
number of shares subject to the Option is not increased. No Option shall be
exercisable except in respect of whole shares, and fractional share interests
shall be disregarded. Not less than 10 shares of Common Stock may be purchased
at one time unless the number purchased is the total number at the time
available for purchase under the terms of the Option.
2.5 Limitations on Grant of Incentive Stock Options.
-----------------------------------------------
(a) To the extent that the aggregate fair market value of stock with respect
to which incentive stock options first become exercisable by a Participant in
any calendar year exceeds $100,000, taking into account both Common Stock
subject to Incentive Stock Options under this Plan and stock subject to
incentive stock options under all other plans of the Company, such options shall
be treated as nonqualified stock options. For purposes of determining whether
the $100,000 limit is exceeded, the fair market value of stock subject to
options shall be determined as of the date the options are awarded. In reducing
the number of options treated as incentive stock options to meet the $100,000
limit, the most recently granted options shall be reduced first. To the extent
a reduction of simultaneously granted options is necessary to meet the $100,000
limit, the Company may, in the manner and to the extent permitted by law,
designate which shares of Common Stock are to be treated as shares acquired
pursuant to the exercise of an Incentive Stock Option.
6
<PAGE>
(b) There shall be imposed in any Award Agreement relating to Incentive Stock
Options such terms and conditions as are required in order that the Option be an
"incentive stock option" as that term is defined in Section 422 of the Code.
(c) No Incentive Stock Option may be granted to any person who, at the time
the Incentive Stock Option is granted, owns shares of outstanding Common Stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company, unless the exercise price of such Option is at least 110%
of the Fair Market Value of the stock subject to the Option and such Option by
its terms is not exercisable after the expiration of five years from the date
such Option is granted.
2.6 Non-Employee Director Awards.
----------------------------
(a) Participation. Awards under this Section 2.6 shall be made only to Non-
-------------
Employee Directors.
(b) Option Grants. Each Non-Employee Director who is elected to the Board in
-------------
May 1997 shall be granted a Nonqualified Stock Option (the Award Date of which
shall be the date of such annual meeting) to purchase 15,000 shares of Common
Stock. Subsequent to such election, upon an individual's initial election to the
Board as a Non-Employee Director (or initial appointment to the Board as a Non-
Employee Director), such Non-Employee Director shall be granted a Nonqualified
Stock Option (the Award Date of which shall be the date of such election or
appointment) to purchase 15,000 shares of Common Stock.
(c) Option Price. The purchase price per share of the Common Stock covered by
------------
each Option granted pursuant to this Section 2.6 shall be one hundred percent of
the Fair Market Value of the Common Stock on the Award Date. The purchase price
of any shares purchased shall be paid in full at the time of each purchase in
cash or by check or in shares of Common Stock valued at their Fair Market Value
on the business day next preceding the date of exercise of the Option, or partly
in such shares and partly in cash.
(d) Option Period. Each Option granted under this Section 2.6 and all rights
-------------
or obligations thereunder shall expire on the tenth anniversary of the Award
Date and shall be subject to earlier termination as provided below.
(e) Exercise of Options. Except as otherwise provided in the applicable Award
-------------------
Agreement and as otherwise provided in Sections 2.6(f) and 2.6(g), each Option
granted under this Section 2.6 shall become exercisable according to the
following schedule: (i) one-third of the total number of shares subject to the
Option shall become exercisable on the first anniversary of the Award Date, (ii)
an additional one-third of the total number of
7
<PAGE>
shares subject to the Option shall become exercisable on the second anniversary
of the Award Date, and (iii) the remaining number of shares subject to the
Option shall become exercisable on the third anniversary of the Award Date.
Notwithstanding the foregoing, the vesting and excercisability of Options
granted to Non-Employee Directors prior to May 24, 1997 shall be governed by the
terms of this Section 2.6(e) as it existed prior to such date.
(f) Termination of Directorship. If a Non-Employee Director Participant's
---------------------------
services as a member of the Board terminate, each Option granted pursuant to
Section 2.6(b) hereof held by such Non-Employee Director Participant which is
not then exercisable shall terminate; provided, however, that if a Non-Employee
Director Participant's services as a member of the Board terminate by reason of
death or Total Disability, either the Board or the Committee may, in its
discretion, consider to be exercisable a greater portion of any such Option than
would otherwise be exercisable, upon such terms as the Board or the Committee
shall determine. If a Non-Employee Director Participant's services as a member
of the Board terminate by reason of death or Total Disability, any portion of
any such Option which is then exercisable may be exercised for one year after
the date of such termination or the balance of such Option's term, whichever
period is shorter. If a Non-Employee Director Participant's services as a
member of the Board terminate for any other reason, any portion of any such
Option which is then exercisable may be exercised for six months after the date
of such termination or the balance of such Option's term, whichever period is
shorter.
(g) Acceleration Upon an Event. Immediately prior to the occurrence of an
--------------------------
Event, in order to protect the holders of Options granted under this Section
2.6, each Option granted under Section 2.6(b) hereof shall become exercisable in
full.
(h) Adjustments. The specific number of shares stated in the foregoing
-----------
Section 2.6(b) hereof and the consideration payable for such shares shall be
subject to adjustment in certain events as provided in Section 6.2 of this Plan.
8
<PAGE>
III. STOCK APPRECIATION RIGHTS.
3.1 Grants.
------
In its discretion, the Committee may grant Stock Appreciation Rights
concurrently with the grant of Options. A Stock Appreciation Right shall extend
to all or a portion of the shares covered by the related Option. A Stock
Appreciation Right shall entitle the Participant who holds the related Option,
upon exercise of the Stock Appreciation Right and surrender of the related
Option, or portion thereof, to the extent the Stock Appreciation Right and
related Option each were previously unexercised, to receive payment of an amount
determined pursuant to Section 3.3. Any Stock Appreciation Right granted in
connection with an Incentive Stock Option shall contain such terms as may be
required to comply with the provisions of Section 422 of the Code and the
regulations promulgated thereunder. In its discretion, the Committee may also
grant Stock Appreciation Rights independently of any Option subject to such
conditions as the Committee may in its absolute discretion provide.
3.2 Exercise of Stock Appreciation Rights.
-------------------------------------
(a) A Stock Appreciation Right granted concurrently with an Option shall be
exercisable only at such time or times, and to the extent, that the related
Option shall be exercisable and only when the Fair Market Value of the stock
subject to the related Option exceeds the exercise price of the related Option.
(b) In the event that a Stock Appreciation Right granted concurrently with an
Option is exercised, the number of shares of Common Stock subject to the related
Option shall be charged against the maximum amount of Common Stock that may be
issued or transferred pursuant to Awards under this Plan. The number of shares
subject to the Stock Appreciation Right and the related Option of the
Participant shall also be reduced by such number of shares.
(c) If a Stock Appreciation Right granted concurrently with an Option extends
to less than all the shares covered by the related Option and if a portion of
the related Option is thereafter exercised, the number of shares subject to the
unexercised Stock Appreciation Right shall be reduced only if and to the extent
that the remaining number of shares covered by such related Option is less than
the remaining number of shares subject to such Stock Appreciation Right.
(d) A Stock Appreciation Right granted independently of any Option shall be
exercisable pursuant to the terms of the Award Agreement.
9
<PAGE>
3.3 Payment.
-------
(a) Upon exercise of a Stock Appreciation Right and surrender of an
exercisable portion of the related Option, the Participant shall be entitled to
receive payment of an amount determined by multiplying
(i) the difference obtained by subtracting the exercise price per share
of Common Stock under the related Option from the Fair Market Value of a share
of Common Stock on the date of exercise of the Stock Appreciation Right, by
(ii) the number of shares with respect to which the Stock Appreciation
Right shall have been exercised.
(b) The Committee, in its sole discretion, may settle the amount determined
under paragraph (a) above solely in cash, solely in shares of Common Stock
(valued at Fair Market Value on the date of exercise of the Stock Appreciation
Right), or partly in such shares and partly in cash, provided that the Committee
shall have determined that such exercise and payment are consistent with
applicable law. In any event, cash shall be paid in lieu of fractional shares.
Absent a determination to the contrary, all Stock Appreciation Rights shall be
settled in cash as soon as practicable after exercise. The exercise price for
the Stock Appreciation Right shall be the exercise price of the related Option.
Notwithstanding the foregoing, the Committee may, in the Award Agreement,
determine the maximum amount of cash or stock or a combination thereof which may
be delivered upon exercise of a Stock Appreciation Right.
(c) Upon exercise of a Stock Appreciation Right granted independently of any
Option, the Participant shall be entitled to receive payment of an amount based
on a percentage, specified in the Award Agreement, of the difference obtained by
subtracting the Fair Market Value per share of Common Stock on the Award Date
from the Fair Market Value per share of Common Stock on the date of exercise of
the Stock Appreciation Right. Such amount shall be paid as described in
paragraph (b) above.
10
<PAGE>
IV. RESTRICTED STOCK AWARDS.
4.1 Grants.
------
Subject to Section 1.4, the Committee may, in its discretion, grant one or
more Restricted Stock Awards to any Eligible Employee. Each Restricted Stock
Award agreement shall specify the number of shares of Common Stock to be issued
to the Participant, the date of such issuance, the price, if any, to be paid for
such shares by the Participant and the restrictions imposed on such shares,
which restrictions shall not terminate earlier than six months after the Award
Date.
4.2 Restrictions.
------------
(a) Shares of Common Stock included in Restricted Stock Awards may not be
sold, assigned, transferred, pledged or otherwise disposed of or encumbered,
either voluntarily or involuntarily, until such shares have vested.
(b) Participants receiving Restricted Stock shall be entitled to dividend and
voting rights for the shares issued even though they are not vested, provided
that such rights shall terminate immediately as to any forfeited Restricted
Stock.
(c) In the event that the Participant shall have paid cash in connection with
the Restricted Stock Award, the Award Agreement shall specify whether and to
what extent such cash shall be returned upon a forfeiture (with or without an
earnings factor).
11
<PAGE>
V. PERFORMANCE SHARE AWARDS.
5.1 Grants of Performance Share Awards.
----------------------------------
The Committee may, in its discretion, grant Performance Share Awards to
Eligible Employees based upon such factors as the Committee shall determine. A
Performance Share Award agreement shall specify the number of shares of Common
Stock (if any) subject to the Performance Share Award, the price, if any, to be
paid for any such shares by the Participant and the conditions upon which
payment or issuance to the Participant shall be based. The amount of cash or
shares or other property that may be deliverable pursuant to a Performance Share
Award shall be based upon the degree of attainment over a specified period of
not more than 10 years (a "performance cycle") as may be established by the
Committee of such measure(s) of the performance of the Company (or any part
thereof) or the Participant as may be established by the Committee. The
Committee may provide for full or partial credit, prior to completion of such
performance cycle or the attainment of the performance achievement specified in
the Award in the event of the Participant's death, Retirement, or Total
Disability, an Event or in such other circumstances as the Committee, consistent
with Section 6.12, may determine.
5.2 Grants of Performance-Based Share Awards.
----------------------------------------
Without limiting the generality of the foregoing, and in addition to Options
and Stock Appreciation Rights granted under other provisions of this Plan which
are intended to satisfy the exception for "performance-based compensation" under
Section 162(m) of the Code (with such Awards hereinafter referred to as
"Qualifying Options" or "Qualifying Stock Appreciation Rights," respectively),
other performance-based awards within the meaning of Section 162(m) of the Code
("Performance-Based Awards"), whether in the form of Cash-Based Awards,
restricted stock, performance stock, phantom stock or other rights, the grant,
vesting, exercisability, or payment of which depends on the degree of
achievement of the Performance Goals relative to preestablished targeted levels
for the Company or a consolidated segment, subsidiary, or division of the
Company, may be granted under this Plan. Any Qualifying Option or Qualifying
Stock Appreciation Right shall be subject only to the requirements of
subsections (a) and (c) below in order for such Awards to satisfy the
requirements for Performance-Based Awards under this Section 5.2. With the
exception of any Qualifying Option or Qualifying Stock Appreciation Right, an
Award that is intended to satisfy the requirements of this Section 5.2 shall be
designated as a Performance-Based Award at the time of grant.
(a) The eligible class of persons for Performance-Based
12
<PAGE>
Awards under this Section shall be executive officers of the Company.
(b) The applicable performance goals for Performance-Based Awards (other than
Qualifying Options) shall be, on an absolute or relative basis, one or more of
the Performance Goals, as selected by the Committee in its sole discretion. The
Committee shall establish in the applicable Award Agreement the specific
performance targets(s) relative to the Performance Goal(s) which must be
attained before the compensation under the Performance-Based Award becomes
payable. The specific targets shall be determined within the time period
permitted under Section 162(m) of the Code (and any regulations issued
thereunder) so that such targets are considered to be preestablished and so that
the attainment of such targets is substantially uncertain at the time of their
establishment. The applicable performance measurement period may not be less
than one nor more than 10 years.
(c) Notwithstanding any other provision of the Plan to the contrary, the
maximum number of shares of Common Stock which may be delivered pursuant to
Awards qualified as Performance-Based Awards to any Participant in any calendar
year shall not exceed 500,000 shares, either individually or in the aggregate,
subject to adjustment as provided in Section 6.2. Awards that are cancelled
during the year shall be counted against this limit to the extent required by
Section 162(m) of the Code. In addition, the aggregate amount of compensation
to be paid to any Participant in any calendar year in respect of any Cash-Based
Awards granted during any calendar year as Performance-Based Awards shall not
exceed $1,000,000.
(d) Before any Performance-Based Award under this Section 5.2 is paid (other
than a Qualifying Option or Qualifying Stock Appreciation Right), the Committee
must certify in writing that the Performance Goals and any other material terms
of the Performance-Based Award were satisfied; provided, however, that a
Performance-Based Award may be paid without regard to the satisfaction of the
applicable Performance Goal(s) with respect to an Event in accordance with
Section 6.4.
(e) The Committee will have discretion to determine the restrictions or other
limitations of the individual Awards under this Section 5.2 (including the
authority to reduce Awards, payouts or vesting or to pay no Awards, in its sole
discretion, if the Committee preserves such authority at the time of grant by
language to this effect in its authorizing resolutions or otherwise).
(f) In the event of a change in corporate capitalization, such as a stock
split or stock dividend, or a corporate
13
<PAGE>
transaction, such as a merger, consolidation, spinoff, reorganization or similar
event, or any partial or complete liquidation of the Company, or any similar
event consistent with the regulations issued under Section 162(m) of the Code
including, without limitation, any material change in accounting policies or
practices affecting the Company and/or the Performance Goals or targets, then
the Committee may make adjustments to the Performance Goals and targets relating
to outstanding Performance-Based Awards to the extent such adjustments are made
to reflect the occurrence of such an event; provided, however, that adjustments
described in this subsection may be made only to the extent that the occurrence
of an event described herein was unforeseen at the time the targets for a
Performance-Based Award were established by the Committee.
VI. OTHER PROVISIONS.
6.1 Rights of Eligible Employees, Participants and Beneficiaries.
------------------------------------------------------------
(a) Status as an Eligible Employee shall not be construed as a commitment that
any Award will be granted under this Plan to any Eligible Employee generally.
(b) Nothing contained in this Plan (or in Award Agreements or in any other
documents related to this Plan or to Awards) shall confer upon any Eligible
Employee or Participant any right to continue in the service or employ of the
Company or constitute any contract or agreement of service or employment, or
interfere in any way with the right of the Company to reduce such person's
compensation or other benefits or to terminate the services or employment of
such Eligible Employee or Participant, with or without cause, but nothing
contained in this Plan or any document related thereto shall affect any
independent contractual right of any Eligible Employee or Participant. Nothing
contained in this Plan or any document related hereto shall influence the
construction or interpretation of the Company's Certificate of Incorporation or
Bylaws regarding service on the Board.
(c) Options payable under this Plan shall be payable in shares and no special
or separate reserve, fund or deposit shall be made to assure payment of such
Options. No Participant, Beneficiary or other person shall have any right,
title or interest in any fund or in any specific asset (including shares of
Common Stock) of the Company by reason of any Award granted hereunder. Neither
the provisions of this Plan (or of any documents related hereto), nor the
creation or adoption of this Plan, nor any action taken pursuant to the
provisions of this Plan shall create, or be construed to create, a trust of any
kind or a
14
<PAGE>
fiduciary relationship between the Company and any Participant, Beneficiary or
other person. To the extent that a Participant, Beneficiary or other person
acquires a right to receive an Award hereunder, such right shall be no greater
than (and will be subordinate to) the right of any unsecured general creditor of
the Company.
6.2 Adjustments Upon Changes in Capitalization.
------------------------------------------
(a) If the outstanding shares of Common Stock are changed into or exchanged
for cash or a different number or kind of shares or securities of the Company or
of another issuer, or if additional shares or new or different securities are
distributed with respect to the outstanding shares of the Common Stock, through
a reorganization or merger to which the Company is a party, or through a
combination, consolidation, recapitalization, reclassification, stock split,
stock dividend, reverse stock split, stock consolidation or other capital change
or adjustment, an appropriate adjustment shall be made in the number and kind of
shares or other consideration that is subject to or may be delivered under this
Plan and pursuant to outstanding Awards. A corresponding adjustment to the
consideration payable with respect to Awards granted prior to any such change
and to the price, if any, paid in connection with Restricted Stock Awards or
Performance Share Awards shall also be made. Any such adjustment, however,
shall be made without change in the total payment, if any, applicable to the
portion of the Award not exercised but with a corresponding adjustment in the
price for each share. Corresponding adjustments shall be made with respect to
Stock Appreciation Rights based upon the adjustments made to the Options to
which they are related or, in the case of Stock Appreciation Rights granted
independently of any Option, based upon the adjustments made to Common Stock.
(b) Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving corporation,
the Plan shall terminate. Notwithstanding the foregoing, the Committee may
provide in writing in connection with, or in contemplation of, any such
transaction for any or all of the following alternatives (separately or in
combinations): (i) for the assumption by the successor corporation of the Awards
theretofore granted or the substitution by such corporation for such Awards of
Awards covering the stock of the successor corporation, or a parent or
subsidiary thereof, with appropriate adjustments as to the number and kind of
shares and prices; (ii) for the continuance of this Plan by such successor
corporation in which event this Plan and the Options shall continue in the
manner and under the terms so provided; or (iii) for the payment in cash or
shares of Common Stock in lieu of and in complete satisfaction of such
15
<PAGE>
Awards.
(c) In adjusting Awards to reflect the changes described in this Section 6.2,
or in determining that no such adjustment is necessary, the Committee may rely
upon the advice of independent counsel and accountants of the Company, and the
determination of the Committee shall be conclusive. No fractional shares of
stock shall be issued under this Plan on account of any such adjustment.
6.3 Termination of Employment.
-------------------------
(a) If the Participant's service to or employment by the Company terminates
for any reason other than Retirement, death or Total Disability, the Participant
shall have, subject to earlier termination pursuant to or as contemplated by
Section 2.3, thirty days or such shorter period as is provided in the Award
Agreements from the date of termination of services or employment to exercise
any Option to the extent it shall have become exercisable on the date of
termination of employment, and any Option not exercisable on that date shall
terminate. Notwithstanding the preceding sentence, in the event the Participant
is discharged for cause as determined by the Committee in its sole discretion,
all Options shall lapse immediately upon such termination of services or
employment.
(b) If the Participant's service to or employment by the Company terminates as
a result of Retirement or Total Disability, the Participant or Participant's
Personal Representative, as the case may be, shall have, subject to earlier
termination pursuant to or as contemplated by Section 2.3, 3 months or such
shorter period as is provided in the Award Agreements from the date of
termination of services or employment to exercise any Option to the extent it
shall have become exercisable by the date of termination of services or
employment and any Option not exercisable on that date shall terminate.
(c) If the Participant's service to or employment by the Company terminates as
a result of death while the Participant is rendering services to the Company or
is employed by the Company or during the 3 month period referred to in
subsection (b) above, the Participant's Option shall be exercisable by the
Participant's Beneficiary, subject to earlier termination pursuant to or as
contemplated by Section 2.3, during the 3 month period or such shorter period as
is provided in the Award Agreements following the Participant's death, as to all
or any part of the shares of Common Stock covered thereby to the extent
exercisable on the date of death (or earlier termination).
(d) Each Stock Appreciation Right granted concurrently with an Option shall
have the same termination provisions
16
<PAGE>
and exercisability periods as the Option to which it relates. The termination
provisions and exercisability periods of any Stock Appreciation Right granted
independently of an Option shall be established in accordance with Section
3.2(d). The exercisability period of a Stock Appreciation Right shall not exceed
that provided in Section 2.3 or in the related Award Agreement and the Stock
Appreciation Right shall expire at the end of such exercisability period.
(e) In the event of termination of services to or employment with the Company
for any reason, (i) shares of Common Stock subject to the Participant's
Restricted Stock Award shall be forfeited in accordance with the provisions of
the related Award Agreement to the extent such shares have not become vested on
that date; and (ii) shares of Common Stock subject to the Participant's
Performance Share Award shall be forfeited in accordance with the provisions of
the related Award Agreement to the extent such shares have not been issued or
become issuable on that date.
(f) In the event of termination of services to or employment with the Company
for any reason, other than discharge for cause, the Committee may, in its
discretion, increase the portion of the Participant's Award available to the
Participant, or Participant's Beneficiary or Personal Representative, as the
case may be, upon such terms as the Committee shall determine.
(g) If an entity ceases to be a Subsidiary, such action shall be deemed for
purposes of this Section 6.3 to be a termination of services or employment of
each consultant or employee of that entity who does not continue as a consultant
or as an employee of another entity within the Company.
(h) Upon forfeiture of a Restricted Stock Award pursuant to this Section 6.3,
the Participant, or his or her Beneficiary or Personal Representative, as the
case may be, shall transfer to the Company the portion of the Restricted Stock
Award not vested at the date of termination of services or employment, without
payment of any consideration by the Company for such transfer unless the
Participant paid a purchase price in which case repayment, if any, of that price
shall be governed by the Award Agreement. Notwithstanding any such transfer to
the Company, or failure, refusal or neglect to transfer, by the Participant, or
his or her Beneficiary or Personal Representative, as the case may be, such
nonvested portion of any Restricted Stock Award shall be deemed transferred
automatically to the Company on the date of termination of services or
employment. The Participant's original acceptance of the Restricted Stock Award
shall constitute his or her appointment of the Company and each of its
authorized
17
<PAGE>
representatives as attorney(s)-in-fact to effect such transfer and to execute
such documents as the Company or such representatives deem necessary or
advisable in connection with such transfer.
6.4 Acceleration of Awards.
----------------------
(a) Unless prior to an Event the Board determines that, upon its occurrence,
there shall be no acceleration of Awards or determines those selected Awards
which shall be accelerated and the extent to which they shall be accelerated,
upon the occurrence of an Event (i) each Option and each related Stock
Appreciation Right shall become immediately exercisable to the full extent
theretofore not exercisable, (ii) Restricted Stock shall immediately vest free
of restrictions and (iii) the number of shares covered by each Performance Share
Award shall be issued to the Participant; subject, however, to compliance with
applicable regulatory requirements, including without limitation Section 422 of
the Code. For purposes of this section only, the Board shall mean the Board as
constituted immediately prior to the Event.
(b) If any Option or other right to acquire Common Stock under this Plan has
been fully accelerated as permitted by Section 6.4(a) but is not exercised prior
to (i) a dissolution of the Corporation, or (ii) an event described in Section
6.2 that the Corporation does not survive, such Option or right shall thereupon
terminate, subject to any provision that has been expressly made by the
Committee pursuant to Section 6.2(b) for the survival, substitution, exchange or
other settlement of such Option or right.
6.5 Government Regulations.
----------------------
This Plan, the granting and vesting of Awards under this Plan and the issuance
or transfer of shares of Common Stock (and/or the payment of money) pursuant
thereto are subject to compliance with all applicable federal and state laws,
rules and regulations (including but not limited to state and federal securities
law and federal margin requirements) and to such approvals by any listing,
regulatory or governmental authority as may, in the opinion of counsel for the
Company, be necessary or advisable in connection therewith. Any securities
delivered under this Plan shall be subject to such restrictions, and the person
acquiring such securities shall, if requested by the Company, provide such
assurances and representations to the Company as the Company may deem necessary
or desirable to assure compliance with all applicable legal requirements.
18
<PAGE>
6.6 Tax Withholding.
---------------
(a) Upon the disposition by a Participant or other person of shares of Common
Stock acquired pursuant to the exercise of an Incentive Stock Option prior to
satisfaction of the holding period requirements of Section 422 of the Code, or
upon the exercise of a Nonqualified Stock Option, the exercise of a Stock
Appreciation Right, the vesting of a Restricted Stock Award or the payment of a
Performance Share Award the Company shall have the right at its option to (i)
require such Participant or such other person to pay by cash or check payable to
the Company, the amount of any taxes which the Company may be required to
withhold with respect to such transactions or (ii) deduct from amounts paid in
cash the amount of any taxes which the Company may be required to withhold with
respect to such cash amounts. The above notwithstanding, in any case where a
tax is required to be withheld in connection with the issuance or transfer of
shares of Common Stock under this Plan, the Participant may elect, pursuant to
such rules as the Committee may establish, to have the Company reduce the number
of such shares issued or transferred by the appropriate number of shares to
accomplish such withholding.
(b) The Committee may, in its discretion, permit a loan from the Company to a
Participant in the amount of any taxes which the Company may be required to
withhold with respect to shares of Common Stock received pursuant to a
transaction described in subsection (a) above. Such a loan will be for a term,
at a rate of interest and pursuant to such other terms and rules as the
Committee may establish.
6.7 Amendment, Termination and Suspension.
-------------------------------------
(a) The Board may, at any time, terminate or, from time to time, amend, modify
or suspend this Plan (or any part hereof). In addition, the Committee may, from
time to time, amend or modify any provision of this Plan except Section 6.4 and,
with the consent of the Participant, make such modifications of the terms and
conditions of such Participant's Award as it shall deem advisable. The
Committee, with the consent of the Participant, may also amend the terms of any
Option to provide that the Option price of the shares remaining subject to the
original Award shall be reestablished at a price not less than 100% of the Fair
Market Value of the Common Stock on the effective date of the amendment. No
modification of any other term or provision of any Option which is amended in
accordance with the foregoing shall be required, although the Committee may, in
its discretion, make such further modifications of any such Option as are not
inconsistent with or prohibited by this Plan. No Awards may be granted during
any suspension of this Plan or after its termination.
19
<PAGE>
(b) If an amendment would materially (i) increase the benefits accruing to
Participants, (ii) increase the aggregate number of shares which may be issued
under this Plan, or (iii) modify the requirements of eligibility for
participation in this Plan, the amendment shall be approved by the Board and, to
the extent then required by applicable law or deemed necessary or desirable by
the Board, by a majority of the shareholders.
(c) In the case of Awards issued before the effective date of any amendment,
suspension or termination of this Plan, such amendment, suspension or
termination of the Plan shall not, without specific action of the Board or the
Committee and the consent of the Participant, in any way modify, amend, alter or
impair any rights or obligations under any Award previously granted under the
Plan.
6.8 Privileges of Stock Ownership.
-----------------------------
Except as otherwise expressly authorized by the Committee or under this Plan,
a Participant shall not be entitled to any privilege of stock ownership as to
any shares of Common Stock not actually delivered to and held of record by him
or her. No adjustment will be made for dividends or other rights as a
shareholder for which a record date is prior to such date of delivery.
6.9 Effective Date of the Plan.
--------------------------
This Plan shall be effective upon its approval by the Board, subject to
approval by the shareholders of the Company within twelve months from the date
of such Board approval.
6.10 Term of the Plan.
----------------
Unless previously terminated by the Board, this Plan shall terminate ten years
after the Effective Date of the Plan, and no Awards shall be granted under it
thereafter, but such termination shall not affect any Award theretofore granted.
6.11 Governing Law.
-------------
This Plan and the documents evidencing Awards and all other related documents
shall be governed by, and construed in accordance with, the laws of the State of
California. If any provision shall be held by a court of competent jurisdiction
to be invalid and unenforceable, the remaining provisions of this Plan shall
continue to be fully effective.
20
<PAGE>
6.12 Plan Construction.
-----------------
(a) It is the intent of the Company that transactions in and affecting Awards
in the case of Participants who are or may be subject to Section 16 of the
Exchange Act satisfy any then applicable requirements of Rule 16b-3 so that such
persons (unless they otherwise agree) will be entitled to the benefits of such
rule or other exemptive rules under Section 16 of the Exchange Act in respect of
those transactions and will not be subjected to avoidable liability thereunder.
If any provision of the Plan or of any Award would frustrate or otherwise
conflict with the intent expressed above, that provision to the extent possible
shall be interpreted as to avoid such conflict. If the conflict remains
irreconcilable, the Committee may disregard the provision if it concludes that
to do so furthers the interest of the Company and is consistent with the
purposes of the Plan as to such persons in the circumstances.
(b) It is the further intent of the Company that Options and Stock
Appreciation Rights with an exercise or base price not less than Fair Market
Value on the date of grant and Performance Share Awards under Section 5.2 of
this Plan that are granted to or held by a person subject to Section 16 of the
Exchange Act shall qualify as performance-based compensation under Section
162(m) of the Code, and this Plan shall be interpreted consistent with such
intent.
6.13 Non-Exclusivity of Plan.
-----------------------
Nothing in this plan shall limit or be deemed to limit the authority of the
Board to grant options, stock awards or authorize any other compensations under
any other plan or authority.
VII. DEFINITIONS.
7.1 Definitions.
-----------
(a) "Award" means an Option, which may be designated as a Nonqualified Stock
-----
Option or an Incentive Stock Option, a Stock Appreciation Right, Restricted
Stock Award, Performance Share Award or Performance-Based Award.
(b) "Award Agreement" means a written agreement setting forth the terms of an
---------------
Award.
(c) "Award Date" means the date upon which the Committee took the action
----------
granting an Award or such later date as is prescribed by the Committee or, in
the case of Options granted under Section 2.6, the date specified in such
Section 2.6.
21
<PAGE>
(d) "Beneficiary" means the person, persons, trust or trusts entitled by will
-----------
or the laws of descent and distribution to receive the benefits specified under
this Plan in the event of a Participant's death.
(e) "Board" means the Board of Directors of the Company.
-----
(f) "Cash-Based Awards" mean Awards that, if paid, must be paid in cash and
-----------------
that are neither denominated in nor have derived the value of, nor an exercise
or conversion privilege at a price related to, shares of Common Stock.
(g) "Cash Flow" shall mean cash and cash equivalents derived from either (i)
---------
net cash flow from operations, or (ii) net cash flow from operations, financings
and investing activities, as determined by the Committee at the time the Award
is granted.
(h) "Code" means the Internal Revenue Code of 1986, as amended from time to
----
time.
(i) "Commission" means the Securities and Exchange Commission.
----------
(j) "Committee" means the Board or a committee appointed by the Board to
---------
administer this Plan, which committee shall be comprised only of two or more
directors or such greater number of directors as may be required under
applicable law, each of whom (i) in respect of any transaction at a time when
the affected Participant may be subject to Section 162(m) of the Code, shall be
an "outside director" within the meaning of Section 162(m) of the Code, and (ii)
in respect of any transaction at a time when the affected Participant may be
subject to Section 16 of the Exchange Act, shall be a "Non-Employee Director"
within the meaning of Rule 16b-3(b)(3) under the Exchange Act.
(k) "Common Stock" means the Common Stock of the Company.
------------
(l) "Company" means New Century Financial Corporation, a Delaware corporation,
-------
and its successors.
(m) "Director" means member of the board of Directors of the Company or any
--------
person performing similar functions with respect to the Company.
(n) "Earnings Per Share" shall mean earnings per share of Common Stock on a
------------------
fully diluted basis determined by dividing (i) net earnings, less dividends on
any preferred stock of the Company, by (ii) the weighted average number of
common shares and common share equivalents outstanding.
(o) "Eligible Employee" means (i) an officer or key
-----------------
22
<PAGE>
employee of the Company and (ii) any individual consultant or advisor who
renders or has rendered bona fide services (other than services in connection
---- ----
with the offering or sale of securities of the Company in a capital raising
transaction) to the Company, and who is selected to participate in this Plan by
the Committee.
(p) "Event" means any of the following:
-----
(1) Approval by the shareholders of the Company of the dissolution or
liquidation of the Company;
(2) Approval by the shareholders of the Company of an agreement to merge
or consolidate, or otherwise reorganize, with or into one or more entities
other than Subsidiaries, as a result of which less than 50% of the outstanding
voting securities of the surviving or resulting entity are, or are to be, owned
by former shareholders of the Company; or
(3) Approval by the shareholders of the Company of the sale of
substantially all of the Company's business assets to a person or entity which
is not a Subsidiary.
(q) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
(r) "Fair Market Value" means (i) if the stock is listed or admitted to trade
-----------------
on a national securities exchange, the closing price of the stock on the
Composite Tape, as published in the Western Edition of The Wall Street Journal,
-----------------------
of the principal national securities exchange on which the stock is so listed or
admitted to trade, on such date, or, if there is no trading of the stock on such
date, then the closing price of the stock as quoted on such Composite Tape on
the next preceding date on which there was trading in such shares; (ii) if the
stock is not listed or admitted to trade on a national securities exchange, the
last price for the stock on such date, as furnished by the National Association
of Securities Dealers, Inc. ("NASD") through the NASDAQ National Market
Reporting System or a similar organization if the NASD is no longer reporting
such information; (iii) if the stock is not listed or admitted to trade on a
national securities exchange and is not reported on the National Market
Reporting System, the mean between the bid and asked price for the stock on such
date, as furnished by the NASD; or (iv) if the stock is not listed or admitted
to trade on a national securities exchange, is not reported on the National
Market Reporting System and if bid and asked prices for the stock are not
furnished by the NASD or a similar organization, the values established by the
Committee for purposes of the Plan.
(s) "Gain on Sale of Loans" means the total gain
---------------------
23
<PAGE>
recognized on loans sold through whole loan transactions or through
securitizations, net of premiums paid to acquire such loans and net of expenses
associated with the sale of such loans, as reported in the Company's quarterly
and/or annual financial statements.
(t) "Incentive Stock Option" means an option which is designated as an
----------------------
incentive stock option within the meaning of Section 422 of the Code, the award
of which contains such provisions as are necessary to comply with that section.
(u) "Loan Production Volume" means loans funded during any given period as
----------------------
reported in the Company's quarterly and/or annual financial statements.
(v) "Loan Quality" means the number of loans originated in accordance with the
------------
Company's underwriting policies and procedures and is measured as loans sold,
either individually, through bulk sales transactions, or through
securitizations, at a premium price as a percentage of total loans sold, based
on information as reported in the Company's quarterly and/or annual financial
statements.
(w) "Non-Employee Director" means a member of the Board who is not an officer
---------------------
or employee of the Company.
(x) "Non-Employee Director Participant" means a Non-Employee Director who has
---------------------------------
been granted an Option under Section 2.6.
(y) "Nonqualified Stock Option" means an option which is designated as a
-------------------------
Nonqualified Stock Option and shall include any Option intended as an Incentive
Stock Option that fails to meet applicable legal requirements thereof. Any
Option granted hereunder that is not designated as an Incentive Stock Option
shall be deemed to be designated a Nonqualified Stock Option under this Plan and
not an incentive stock option under the Code.
(z) "Officer" means a president, vice-president, secretary, treasurer or
-------
principal financial officer, comptroller or principal accounting officer and any
person routinely performing corresponding functions with respect to the Company.
(aa) "Option" means an option to purchase Common Stock under this Plan. An
------
Option shall be designated by the Committee as a Nonqualified Stock Option or an
Incentive Stock Option.
(bb) "Participant" means an Eligible Employee who has been granted an Award or
-----------
a Non-Employee Director Participant.
(cc) "Performance-Based Award" means an Award of a right
-----------------------
24
<PAGE>
to receive shares of Common Stock or other compensation (including cash) under
Section 5.2, the issuance or payment of which is contingent upon, among other
conditions, the attainment of performance objectives specified by the Committee.
(dd) "Performance Goal" shall mean Cash Flow, Earnings Per Share, Gain on Sale
----------------
of Loans, Loan Production Volume, Loan Quality, Return on Equity, Total
Stockholder Return, or any combination thereof.
(ee) "Performance Share Award" means an award of a right to receive shares of
-----------------------
cash or Common Stock under Section 5.1, or to receive shares of Common Stock or
other compensation (including cash) under Section 5.2, the issuance or payment
of which is contingent upon, among other things, the attainment of performance
objectives specified by the Committee.
(ff) "Personal Representative" means the person or persons who, upon the
-----------------------
disability or incompetence of a Participant, shall have acquired on behalf of
the Participant by legal proceeding or otherwise the power to exercise the
rights and receive the benefits specified in this Plan.
(gg) "Plan" means the New Century Financial Corporation 1995 Stock Option
----
Plan, as amended.
(hh) "QDRO" means an order requiring the transfer of an Award or portion
----
thereof pursuant to a state domestic relations law to the spouse, former spouse,
child or other dependent of a Participant. Such order must be in a form
substantially identical to a qualified domestic relations order as defined by
the Code or Title I of the Employee Retirement Income Security Act of 1974, as
amended.
(ii) "Restricted Stock" means those shares of Common Stock issued pursuant to
----------------
a Restricted Stock Award which are subject to the restrictions set forth in the
related Award Agreement.
(jj) "Restricted Stock Award" means an award of a fixed number of shares of
----------------------
Common Stock to the Participant subject, however, to payment of such
consideration, if any, and such forfeiture provisions, as are set forth in the
Award Agreement.
(kk) "Retirement" means retirement from employment by or providing services to
----------
the Company or any Subsidiary after age 65 and, in the case of employees, in
accordance with the retirement policies of the Company then in effect.
(ll) "Return on Equity" means consolidated net income of the Company (less any
----------------
preferred dividends), divided by the
25
<PAGE>
average consolidated common shareholders equity.
(mm) "Rule 16b-3" means Rule 16b-3 as promulgated by the Commission pursuant
----------
to the Exchange Act as amended from time to time.
(nn) "Securities Act" means the Securities Act of 1933, as amended.
--------------
(oo) "Stock Appreciation Right" means a right to receive a number of shares of
------------------------
Common Stock or an amount of cash, or a combination of shares and cash,
determined as provided in Section 3.3 (a).
(pp) "Subsidiary" means any corporation or other entity a majority or more of
----------
whose outstanding voting stock or voting power is beneficially owned directly or
indirectly by the Company.
(qq) "Total Disability" means a "permanent and total disability" within the
----------------
meaning of Section 22(e)(3) of the Code.
(rr) "Total Stockholder Return" means, with respect to the Company or other
------------------------
entities (if measured on a relative basis), the (i) change in the market price
of its Common Stock (as quoted on the principal market on which it is traded as
of the beginning and ending of the period) plus dividends and other
distributions paid, divided by (ii) the beginning quoted market price, all of
which is adjusted for any changes in equity structure, including but not limited
to stock splits and stock dividends.
26
<PAGE>
EXHIBIT 10.16
NEITHER THIS WARRANT NOR THE COMMON STOCK ISSUABLE UPON EXERCISE HEREOF HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR ANY
STATE SECURITIES LAW, AND THUS NEITHER THIS WARRANT NOR SUCH COMMON STOCK MAY BE
TRANSFERRED UNLESS REGISTERED UNDER THE ACT OR SUCH SECURITIES LAWS OR UNLESS AN
EXEMPTION THEREFROM IS AVAILABLE. ANY TRANSFER OF THIS WARRANT AND SUCH COMMON
STOCK ARE ALSO SUBJECT TO THE TERMS OF A SHAREHOLDERS AGREEMENT DATED NOVEMBER
22, 1995, AS AMENDED, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE
COMPANY.
NEW CENTURY FINANCIAL CORPORATION
---------------------------------
WARRANT TO PURCHASE COMMON STOCK
--------------------------------
NEW CENTURY FINANCIAL CORPORATION, a Delaware corporation (the "Company"),
certifies for value received Comerica Incorporated, a Delaware corporation and
bank holding company (the "Purchaser") is entitled to purchase from the Company,
at any time during the period set forth in Section 2.1 hereof, at $7.50 per
share (the "Purchase Price") 100,000 shares of Common Stock of the Company,
subject to adjustment as hereinafter provided (the "Warrant Stock"), on the
terms and subject to the conditions herein set forth. If the closing of the
initial public offering of the Common Stock of the Company (the "Offering")
occurs within six months of the Date of Grant, the Purchase Price shall be
automatically and without further action by the Company amended to equal the
initial public offering price in the Offering, without deducting any
underwriting discounts or commissions.
1. Definitions. As used in this Warrant, the following terms shall mean:
-----------
1.1 "Common Stock" refers to the shares of the Company's common
stock, $0.01 par value.
1.2 "Warrant" shall refer to this Warrant and any warrant delivered
in substitution or exchange therefore as provided herein.
1.3 "Date of Grant" shall mean May 30, 1997.
2. Exercise.
--------
2.1 Time of Exercise. This Warrant may be exercised at the office of
----------------
the Company at any time or from time to time, from and after the Date of Grant
and until 5:00 p.m., Pacific time on May 30, 2002 (the "Expiration Date"), at
which time this Warrant shall expire and be of no further force or effect.
2.2 Mandatory Exercise. Notwithstanding any other provision herein,
------------------
the Purchaser shall be required to exercise
1
<PAGE>
this Warrant in full at such time as the fair market value of the Common Stock
is equal to or greater than three (3) times the Purchase Price (the "Mandatory
Exercise Event"); provided, however, that the Mandatory Exercise Event shall not
occur prior to the third anniversary of the Date of Grant. For purposes of this
Section 2.2, the fair market value of the Common Stock shall be determined, and
any disputes regarding such determination shall be resolved, according to the
procedures set forth in Section 2.3(b) hereof. The Company shall give the
Purchaser written notice of the Mandatory Exercise Event if and when it occurs.
If the Warrant is not exercised in full in accordance with Section 2.3 hereof
within ten (10) days after the receipt of such notice by the Purchaser or, in
the case of a dispute regarding the determination of fair market value, within
ten (10) days after a final determination of fair market value by an independent
appraiser or investment banking institution pursuant to Section 2.3(b) hereof,
the Warrant will terminate and be of no further force or effect.
2.3 Manner of Exercise.
------------------
(a) This Warrant is exercisable, in whole or in part, at the Purchase
Price payable in cash or by wire, cashier's check or other good funds payable to
the order of the Company. Upon surrender of the Warrant together with payment
of the Purchase Price for the Warrant Stock purchased (and any applicable
transfer taxes) to the Company, and delivery of the purchase form attached
hereto, the Purchaser shall be entitled to receive a certificate or certificates
for the Warrant Stock so purchased with any appropriate private placement or
other legends thereon, together with a new Warrant for any portion of this
Warrant not exercised.
(b) With the approval of the Board, which approval shall not be
unreasonably withheld, the Purchaser may elect to (i) pay all or part of the
Purchase Price with securities of the Company (including the unexercised portion
of this Warrant) outstanding prior to the exercise of this Warrant, with such
securities to be credited toward such purchase price at the fair market value of
the securities, in which event the certificates evidencing the securities
delivered shall accompany the notice of exercise and shall be duly endorsed or
accompanied by duly executed stock powers to transfer the same to the Company;
provided, however, that such payment in securities instead of cash or check
shall not be effective and shall be rejected by the Company if the Company is
then prohibited by applicable law from purchasing or acquiring the tendered
securities, or (ii) accept payment of the fair market value of all or part of
the Warrant Stock net of the Purchase Price for such Warrant Stock in
consideration for the cancellation of the corresponding portion of the rights of
Purchaser under this Warrant.
2
<PAGE>
For purposes of this Section 2.3(b), the fair market value of
securities delivered upon exercise of the Warrant shall (i) if "publicly traded"
(as defined below), be valued at either (x) the initial public offering price,
if the Warrant is exercised concurrently with the initial public offering of the
securities, or (y) the average of the closing prices for the securities for the
30-day period immediately preceding the delivery to the Company of the
certificate(s) evidencing such securities, or (ii) if not publicly traded, be
valued in good faith by the Board of Directors of the Company; provided,
however, that if in the good faith judgement of the Purchaser the valuation
established by the Board of Directors under this clause (ii) does not reasonably
reflect the fair market value of the securities to be delivered in exercise of
this Warrant, then the determination of fair market value shall be made by an
independent appraiser or investment banking institution mutually acceptable to
the Company and to the Purchaser (or, if such selection cannot be made by the
Company and the Purchaser, by an independent appraiser or investment banking
firm selected by the American Arbitration Association in accordance with its
rules), with the fees and expenses of such independent appraiser or investment
banking institution to be paid by the Purchaser. For purposes of the preceding
sentence, the "closing prices" shall mean the closing prices of securities of
the class and series of securities delivered as reported with respect to the
market (or the composite of the markets, if more than one) in which such
securities are then traded, or if no such closing prices are reported, the
lowest independent offer quotation reported therefor in Level 2 of Nasdaq for
trading days during the applicable 30-day averaging period. "Publicly traded"
means a security which is listed or admitted to unlisted trading privileges on a
national securities exchange or as to which sales or bid and offer quotations
are reported in the automated quotation system ("Nasdaq") operated by the
National Association of Securities Dealers, Inc.
2.4 Vesting. The Warrant Stock shall be exercisable in equal
-------
installments on December 31, 1997, 1998 and 1999, subject to acceleration upon:
(a) the occurrence of an "event" (as defined below), or
(b) the exercise of the right by the Purchaser, pursuant to the
Registration Rights Agreement by and among the Company and the shareholders set
forth on the signature page thereto (the "Registration Rights Agreement"), to
register the Common Stock underlying the Warrant (the "Registrable Securities"),
but only to the extent (i) such Registrable Securities are actually registered
pursuant to a registration statement prepared under the Act and (ii) the
Purchaser does not own other shares of Common Stock that may be included in the
registration statement pursuant to the Registration Rights
3
<PAGE>
Agreement. In the event that less than all of Purchaser's Warrants are
accelerated under this section 2.4(b) and any comparable provision in other
warrants held by Purchaser, the shares next due to become vested shall be the
first to accelerate.
An "event" is defined as:
(1) Approval by the shareholders of the Company of the dissolution or
liquidation of the Company;
(2) Approval by the shareholders of the Company of an agreement to
merge or consolidate, or otherwise reorganize, with or into one or more entities
other than Subsidiaries, as a result of which less than 50% of the outstanding
voting securities of the surviving or resulting entity are, or are to be, owned
by former shareholders of the Company; or
(3) Approval by the shareholders of the Company of the sale of
substantially all of the Company's business assets to a person or entity which
is not a Subsidiary.
3. Protection Against Dilution.
---------------------------
3.1 Adjustment for Stock Splits and Combinations.
--------------------------------------------
If, while this Warrant is outstanding, the Company effects a
subdivision of the outstanding Common Stock, the Purchase Price then in effect
shall be proportionately decreased and the number of shares of Warrant Stock
issuable on exercise of this Warrant shall be increased in proportion to such
increase of outstanding shares, and conversely, if, during such time, the
Company combines the outstanding shares of Common Stock, the Purchase Price then
in effect shall be proportionately increased and the number of shares of Warrant
Stock issuable on exercise of this Warrant shall be decreased in proportion to
such decrease in outstanding shares. Any adjustment under this Section 3.1
shall become effective as of the record date for such event and if such
subdivision or combination is not consummated in full the Purchase Price shall
be readjusted accordingly. For purposes of this Section 3.1 a stock dividend
shall be considered a stock split.
3.2 Adjustments for Other Dividends and Distributions. If, while
-------------------------------------------------
this Warrant is outstanding, the Company makes a dividend or other distribution
payable in securities of the Company other than shares of Common Stock, then and
in each such event provision shall be made so that the Purchaser shall receive
upon exercise of the Warrant (but only to the extent the Warrant is exercised),
in addition to the Warrant Stock receivable thereupon, the amount of securities
of the Company which the Purchaser would have received had it owned such Warrant
Stock on the date of such event.
4
<PAGE>
3.3 Adjustment for Reclassification, Exchange and Substitution. If
----------------------------------------------------------
the Warrant Stock issuable upon the exercise of this Warrant is changed into the
same or a different number of shares of the same or any other class or classes
of stock, whether by recapitalization, reclassification or otherwise (other than
a subdivision or combination of shares or a merger, consolidation or sale of
assets, provided for elsewhere in this section), then and in any such event
Purchaser shall have the right thereafter, upon exercise of the Warrant to
receive in lieu of Warrant Stock the kind and amount of stock and other
securities and property receivable upon such recapitalization, reclassification
or other change, in an amount equal to the amount that such Purchaser would have
been entitled to had this Warrant been exercised to such extent prior to such
event.
3.4 Reorganizations, Mergers, Consolidations or Sales of Assets. If,
-----------------------------------------------------------
while this Warrant is outstanding, there is a capital reorganization of the
Common Stock (other than as provided for elsewhere in this Section 3) or merger
or consolidation of the Company with or into another corporation, or the sale of
all or substantially all of the Company's properties and assets to any other
person then, as a part of such transaction, the Board of Directors of the
Company may, but shall not be obligated to, make provision so that the Purchaser
shall thereafter be entitled to receive, upon exercise of this Warrant (but only
to the extent the Warrant is exercised), the number of shares of stock or other
securities or property of the Company, or of the successor corporation resulting
from such merger or consolidation or sale, to which a holder of Common Stock
deliverable upon the exercise of this Warrant would have been entitled in such
transaction. If the Board of Directors does not make provision for the
preservation of the purchase rights of the Purchaser, then any Warrant rights
not exercised as of the effective date of the closing of the subject transaction
(the "Effective Date") shall be cancelled and of no further force or effect;
provided that (1) the election of the Board to cause cancellation of the
Warrants shall be evidenced by a resolution of the Board, (2) the holder of this
Warrant shall receive written notice from the Company not less than 30 days
prior to the Effective Date stating (a) the proposed Effective Date, (b) which
of the rights evidenced by this Warrant are proposed to be cancelled, and (c) a
description of the transaction which would result in the full or partial
cancellation of this Warrant, and (3) if the subject transaction does not close
within 120 days of the Effective Date stated in the notice, then the notice of
cancellation, as well as any notices of intended exercise of this Warrant by the
holder, shall be deemed rescinded.
4. Fractional Interests.
--------------------
The Company shall not be required to issue fractional shares of Common
Stock on the exercise of Warrants. If more than
5
<PAGE>
one Warrant shall be presented for exercise in full at the same time by the same
Holder, the number of full shares of Common Stock which shall be issuable upon
the exercise thereof shall be computed on the basis of the aggregate number of
shares of Common Stock represented by the Warrants so presented. If any fraction
of a share would, except for the provisions of this Section 4, be issuable on
the exercise of any Warrant (or specified portion thereof), the Company shall
pay an amount in cash equal to the current fair market value per share of Common
Stock multiplied by such fraction.
5. Transfer of Securities.
----------------------
5.1 Restriction on Transfer. The Purchaser, by its acceptance
-----------------------
hereof, represents, warrants, covenants and agrees that (i) the Purchaser has
knowledge of the business and affairs of the Company, and (ii) this Warrant and
the Warrant Stock issuable upon the exercise of this Warrant are being acquired
for investment for the Purchaser's own account and not with a view to the
distribution hereof, and that absent an effective registration statement under
the Act covering the disposition of this Warrant or the Warrant Stock issued or
issuable upon exercise of this Warrant, they will not be sold, transferred,
assigned, hypothecated or otherwise disposed of without first providing the
Company with evidence satisfactory to the Company, including, at the Company's
discretion, an opinion of counsel, satisfactory to the Company, to the effect
that such sale, transfer, assignment, hypothecation or other disposal will be
exempt from the registration and prospectus delivery requirements, of applicable
Federal and state securities laws and regulations and the Purchaser consents to
the Company making a notation in its records or giving to any transfer agent of
this Warrant or the Warrant Stock an order to implement such restriction on
transferability.
5.2 Transfer. Subject to the terms hereof and the application of any
--------
shareholders' agreement or other agreement that may restrict transferability,
this Warrant and all rights hereunder are transferable, in whole or in part, on
the books of the Company maintained for such purpose by the Purchaser, or by
duly authorized attorney or representative (accompanied by proper evidence of
succession, assignment or authority to transfer), upon surrender of this Warrant
properly endorsed, payment of any necessary transfer tax or other governmental
charge imposed upon such transfer and delivery of the Form of Assignment
attached hereto. Upon any partial transfer, the Company will issue and deliver
to the Purchaser a new Warrant with respect to the Warrant Stock not so
transferred. Each taker and Purchaser of the Warrant, by taking or holding the
same, consents and agrees that the Warrant when endorsed in blank shall be
deemed negotiable and that when the Warrant shall have been so endorsed, the
Purchaser hereof may be treated by the Company and all other
6
<PAGE>
persons dealing with this Warrant, as the absolute owner hereof for all
purposes, any notice to the contrary notwithstanding.
6. Payment of Taxes.
----------------
All Warrant Stock issued upon the exercise of this Warrant shall be
validly issued, fully paid and nonassessable, and the Company shall pay all
taxes and other governmental charges that may be imposed upon the issue or
delivery thereof (but not on income related thereto). The Company shall not be
required, however, to pay any tax or other charge imposed in connection with any
transfer of this Warrant or the issue of any certificate for Warrant Stock in
any name other than that of the Purchaser, and the Company shall not be required
to issue or deliver any stock certificate until such tax or the charge has been
paid or it has been established to the Company's satisfaction that no tax or
other charge is due.
7. Affirmative Duties of the Company.
---------------------------------
7.1 Reservation of Warrant Stock. The Company shall at all times
----------------------------
reserve and keep available out of its authorized but unissued Common Stock,
solely for the purpose of issuance upon the exercise of this Warrant, such
number of shares of Common Stock as shall be issuable upon the exercise hereof.
The Company covenants and agrees that, upon exercise of this Warrant and payment
of the Purchase Price for the Warrant Stock, all shares of Warrant Stock
issuable upon such exercise shall be duly and validly issued, fully paid and
non-assessable.
7.2 No Impairment. The Company will not amend its Certificate of
-------------
Incorporation, reorganize, dissolve, or take any other voluntary action, a
primary purpose of which is to avoid or seek to avoid the observance or
performance of any of the terms of this Warrant.
8. Notice.
------
8.1 Notice to be Given. Nothing contained in this Warrant shall be
------------------
construed as conferring upon the Purchaser the right to vote or to consent or to
receive notice as a shareholder in respect of any meetings of shareholders for
the election of directors or any other matter or as having any rights whatsoever
as a shareholder of the Company. If, however, at any time prior to the
expiration of this Warrant and prior to its exercise, any of the following
events shall occur:
(a) The Company shall take a record of the holders of its shares
of Common Stock for the purpose of entitling them to receive a dividend or
distribution; or
(b) A capital reorganization or reclassification of the Common
Stock, a merger or consolidation of the
7
<PAGE>
Company with any other entity, dissolution, liquidation or winding up of
the Company or a sale of all or substantially all of its property, assets
and business as an entirety shall be proposed;
then the Company shall give written notice of such event to the Purchaser of
this Warrant at least 30 days prior to the date fixed as the record date or the
date of closing the transfer books in connection with such transaction unless
greater notice is required pursuant to the terms of Section 3.4 hereof. Such
notice shall specify such record date or the date of closing the transfer books,
as the case may be. Such notice shall also set forth such facts as shall
indicate the effect of such action (to the extent such effect may be known at
the date of such notice) on the Purchase Price and the kind and amount of the
Common Stock and other securities and property deliverable upon exercise of this
Warrant. Such notice shall also specify the date as of which the holders of the
Common Stock of record shall participate in any such distribution or
subscription rights or shall be entitled to exchange their Common Stock for
securities or other property deliverable upon any such reorganization,
reclassification, sale, consolidation, merger, dissolution, liquidation or
winding up, as the case may be (on which date, in the event of voluntary or
involuntary dissolution, liquidation or winding up of the Company, the right to
exercise this Warrant shall terminate).
9. Addresses. All notices, requests, consents and other communications
---------
hereunder shall be in writing and shall be deemed to have been duly made when
delivered or three days after mailing by registered or certified mail, postage
prepaid, return receipt requested addressed to the parties at the following
addresses or at such other addresses as shall be specified in writing and in
accordance with this Section:
If to the Purchaser: Comerica, Incorporated
Comerica Tower at One Detroit
500 Woodward, MC 3391
Detroit, Michigan 48226
Attn: Mark W. Yonkman,
Assistant Secretary
If to the Company: New Century Financial Corporation
4910 Birch Street, Suite 100
Newport Beach, California 92660
Attn: Mr. Brad A. Morrice
10. Miscellaneous.
-------------
10.1 Replacement of Warrants. Upon receipt of evidence reasonably
-----------------------
satisfactory to the Company of the ownership of and the loss, theft, destruction
or mutilation of this Warrant and upon delivery of an indemnity agreement in an
amount reasonably
8
<PAGE>
satisfactory to the Company, or upon surrender and cancellation of the mutilated
Warrant, the Company will execute and deliver, in lieu thereof, a new Warrant of
like tenor.
10.2 Successors. All the covenants, agreements, representations and
----------
warranties contained in this Warrant shall bind the parties hereto and their
respective heirs, executors, administrators, distributees, successors and
assigns.
10.3 Change; Waiver. Neither this Warrant nor any term hereof may be
--------------
changed, waived, discharged or terminated orally but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought.
10.4 Headings. The section headings in this Warrant are inserted for
--------
purposes of convenience only and shall have no substantive effect.
10.5 Law Governing. This Warrant is deliverable in the State of
-------------
California, but shall for all purposes be construed and enforced in accordance
with, and governed by the internal laws of the State of Delaware, without giving
effect to principles of conflict of laws.
9
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed
by its duly authorized officer effective as of May 30, 1997.
NEW CENTURY FINANCIAL CORPORATION
By: /s/ ROBERT K. COLE
-----------------------------------------
Robert K. Cole, Chief Executive Officer
10
<PAGE>
FORM OF ASSIGNMENT
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED ____________________________________ hereby sells,
assigns and transfers unto _____________________________________________________
________________________________________________________________________________
(Please print name and address of transferee)
_________________________________________________________________ this Warrant
Certificate, together with all right, title and interest therein, and does
hereby irrevocably constitute and appoint _____________________________________
_________________________ Attorney, to transfer the within Warrant Certificate
on the books of the within-named Company, with full power of substitution.
Dated: __________________, 19__
Signature _____________________________________________
NOTICE
The signature to the foregoing Assignment must correspond to the name
as written upon the face of this Warrant Certificate in every particular,
without alteration or enlargement or any change whatsoever.
11
<PAGE>
FORM OF ELECTION TO PURCHASE
(To be executed if holder desires to
exercise the Warrant certificate.)
The undersigned hereby irrevocably elects to exercise ________________
___________________________________________ Warrants represented by this Warrant
Certificate to purchase the shares of Common Stock issuable upon the exercise of
such Warrants and requests that certificates for such shares be issued in the
name of:
Please insert social security
or other identifying number
________________________________________________________________________________
________________________________________________________________________________
(Please print name and address)
If such number of Warrants shall not be all the Warrants evidenced by this
Warrant Certificate, a new Warrant Certificate for the balance remaining of such
Warrants shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
________________________________________________________________________________
________________________________________________________________________________
(Please print name and address)
Dated: ___________________, 19__
Signature __________________________________
(Signature must conform in all respects to
name of holder as specified on the face of
this Warrant Certificate)
12
<PAGE>
EXHIBIT 11.1
NEW CENTURY FINANCIAL CORPORATION
STATEMENT REGARDING COMPUTATION OF PRO FORMA PER SHARE EARNINGS
PRO FORMA PRIMARY EARNINGS PER SHARE
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, MARCH 31,
1996 1997
------------ ----------
<S> <C> <C>
Computation for Statement of Operations:
Net earnings per Statement of Operations used in
Primary Earnings Per Share computation............. $1,335,000 $2,347,000
Adjustment related to revisions in compensation and
incentive compensation plan.......................... (142,000) (88,000)
---------- ----------
Net Earnings as Adjusted.............................. $1,193,000 $2,259,000
========== ==========
Weighted Average Number of Shares Outstanding......... 13,892,373 13,892,373
Shares issuable pursuant to the assumption of the
exercise of warrants and options, as determined by
the application of the Treasury Stock Method......... 638,066 650,834
---------- ----------
Weighted Average Number of Shares Outstanding......... 14,530,439 14,543,207
========== ==========
Pro Forma Primary Earnings Per Share, As Adjusted..... $ 0.08 $ 0.16
</TABLE>
Fully diluted earnings per share were not materially different.
<PAGE>
EXHIBIT 23.1
The Board of Directors of
New Century Financial Corporation:
We consent to the use of our report included herein and to the reference to
our firm under the headings "Selected Consolidated Financial and Other Data"
and "Experts" in the Prospectus.
/s/ KPMG Peat Marwick LLP
-------------------------------------
KPMG Peat Marwick LLP
Orange County, California
May 30, 1997
