<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 18, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
NEW CENTURY FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 6162 33-0683629
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
INCORPORATION OR
ORGANIZATION)
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:
DAVID A. KRINSKY BRUCE R. HALLETT
KAREN K. DREYFUS ROGER M. COHEN
O'MELVENY & MYERS LLP JAMES S. BRENNAN
610 NEWPORT CENTER DRIVE, SUITE BROBECK, PHLEGER & HARRISON LLP
1700 4675 MACARTHUR COURT, SUITE 1000
NEWPORT BEACH, CALIFORNIA 92660 NEWPORT BEACH, CALIFORNIA 92660
(714) 760-9600 (714) 752-7535
---------------
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>
<CAPTION>
PROPOSED
MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE (1) REGISTRATION FEE
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.01 par value.............. $41,860,000 $12,685
</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 APRIL 18, 1997
SHARES
NEW CENTURY FINANCIAL CORPORATION
COMMON STOCK
Of the shares of Common Stock offered hereby (the "Offering"), are
being sold by New Century Financial Corporation ("New Century" or the
"Company") and are being sold by the 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
$ and $ 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 9 FOR A DISCUSSION OF CERTAIN FACTORS
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) See "Underwriting" for information relating to indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the Underwriters a 30-day option to purchase up to
additional shares of Common Stock, and the Selling Stockholder along
with certain other stockholders of New Century have granted the
Underwriters a 30-day option to purchase up to 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 Stockholder and
certain other 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 THE COMPANY'S OFFICES BY
LOCATION AND THE STATES THE COMPANY ORIGINATES AND PURCHASES MORTGAGE LOANS.]
----------------
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 (i) no exercise
of the Underwriters' over-allotment option (see "Underwriting"), (ii) the
conversion of all outstanding shares of Preferred Stock, (iii) the exercise of
warrants to purchase 342,406 shares of Common Stock, (iv) the cashless exercise
of warrants to purchase 4,579,738 shares of Common Stock, resulting in the
issuance of 3,472,156 shares of Common Stock, and (v) the issuance of 360,000
shares of restricted stock to certain executive officers upon the closing of
the Offering, and gives effect to a 2-for-1 stock split effected in September
1996. Information in this Prospectus does not include (i) 2,352,195 shares
reserved for issuance under the Company's 1995 Stock Option Plan (the "Stock
Option Plan") as of the closing of the Offering and (ii) 120,000 shares subject
to options granted to two executive officers of the Company outside the Stock
Option Plan. 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. 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.
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, refinancing activity 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. 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 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.
3
<PAGE>
The Wholesale Division originates loans through independent loan brokers and
accounted for $159.1 million, or 63.5% (excluding loans purchased through the
Company's correspondent program), of the Company's loan production during the
first quarter of 1997. As of March 31, 1997, the Wholesale Division originated
loans through its four regional operating centers located in Southern
California, Northern California, Chicago and Atlanta, and through 17 additional
sales offices located in 12 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.
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.
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 March 31, 1997, the Retail
Division originated loans through a network of 13 sales offices located in
California and 17 sales offices located in 13 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. 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.
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. Furthermore, the Company's
current underwriters have an average of 10 years of subprime mortgage lending
experience. All loans presently require a second approval by certain of the
Company's managers who have an average of 12 years of mortgage banking
experience. 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 to its thorough
underwriting process, the Company maintains strong 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. In February 1997, the Company sold approximately $99.1
million of loans in its first securitization through a public offering which
received ratings of "AAA" from Standard and Poor's Rating Group, a division of
The McGraw-Hill Companies, Inc., and "Aaa" from Moody's Investors Service, Inc.
(collectively, an "AAA/Aaa" rating). The Company intends to sell a majority of
its loans through securitizations 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. 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, 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 may 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.
4
<PAGE>
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 10 retail sales
offices during the first quarter of 1997 and intends to open 25 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 that market. 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 940,000
mailers in March 1997 and intends to increase the number of targeted direct
mail pieces to over 2 million per month by the end of 1997.
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 the Southeast region
surrounding the recently opened Atlanta regional operations center and the
opening of one additional regional operations center, likely in the Northeast,
during 1997. In connection with its expansion, the Company plans to open 10 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 46 as of March 31, 1997 to approximately 80
by the end of 1997.
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.
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.
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 (the
"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.
5
<PAGE>
The Company's headquarters are located at 4910 Birch Street, Suite 100,
Newport Beach, California 92660 and its telephone number is (714) 440-7030.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company............. shares
Common Stock offered by the Selling Stockholder. shares
Common Stock outstanding after the Offering(1).. shares
Use of Proceeds................................. To fund future loan
originations and purchases,
to fund securitization
transaction costs, to repay
amounts outstanding under the
Company's revolving credit
facility and for general
corporate purposes. See "Use
of Proceeds."
Nasdaq Symbol................................... "NCEN"
Risk Factors.................................... See "Risk Factors" for a
description of certain
factors which should be
considered carefully in
evaluating an investment in
the Common Stock offered by
this Prospectus.
</TABLE>
- --------
(1) Excludes (i) 2,352,195 shares reserved for issuance under the Stock Option
Plan as of the closing of the Offering, including options to acquire
512,600 shares which have been granted under the Stock Option Plan, and
1,097,595 shares which will be granted upon the closing of the Offering,
and (ii) options to acquire 120,000 shares which have been granted to two
executive officers of the Company outside the Stock Option Plan.
6
<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.................. $ $ $ $
Pro forma fully diluted
earnings (loss) per
share ................. $ $ $ $
</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
Borrowings under aggregation lines of
credit................................. -- 13,957 44,731 44,731
Residual financing ..................... -- -- 7,248 7,248
Other borrowings........................ -- 1,326 3,119
Total stockholders' equity.............. 3,068 4,403 6,750
</TABLE>
<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):
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>
7
<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.................. $ $ $ $ $
Pro forma fully diluted
earnings (loss) per
share ................. $ $ $ $ $
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(4)
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 4
Total wholesale sales
offices............... 1 1 5 12 17
Total retail sales
offices............... 2 5 8 20 30
</TABLE>
- --------
(1) Adjusted to reflect the sale of shares of Common Stock offered hereby
at an assumed initial public offering price of $ 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) Includes $2.8 million of loans repurchased and resold by the Company in the
first quarter of 1997.
8
<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
Limited History; 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. 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 one securitization of its loans to date and there can be no
assurance that the Company will complete additional securitizations. See "Risk
Factors--Ability to Sustain Growth."
Lack of Loan Performance Data. Prior to its first securitization 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 securitization, 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 securitization 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.
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, 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 Company also plans to
broaden its product offerings to include alternative types of mortgage loans
and other consumer loans. There can be no
9
<PAGE>
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.
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. 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 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 could 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. 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: (i) the
premium advance component, which currently equals up to 105% of the par value
of loans funded, under 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,
10
<PAGE>
whether due to increased volumes of loan production or as a result of a
continued shift towards securitization in its loan sales mix.
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. The Company's current credit facilities include: (i)
the First Bank warehouse line; (ii) the Salomon aggregation facility; (iii)
the Salomon residual financing facility secured by the residual certificates
created through securitization that are owned by the Company; and (iv) $5.0
million of long-term secured and unsecured credit facilities with First Bank.
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 Results of Operations and Financial
Condition--Liquidity and Capital Resources."
DEPENDENCE ON SECURITIZATIONS AND WHOLE LOAN SALES FOR FUTURE EARNINGS
The Company has completed only one securitization 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.
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 could have a material adverse effect on the
Company's results of operations, financial condition and business prospects.
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
11
<PAGE>
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 Company receives cash flows from its residual interests periodically
through distributions from the securitization trust. The documents governing
the Company's February 1997 securitization 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. This retention causes the aggregate
principal amount of the loans in the related pool to exceed the aggregate
principal balance of the outstanding senior certificates. Such excess amounts
serve as credit enhancement for the related senior certificates and are
available to cover losses realized on loans held by such trust. 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. The
entity issuing the guarantee on the related senior certificates pre-determines
the over-collateralization levels, which are a condition for the Company to
obtain an "AAA/Aaa" rating for such senior certificates. Furthermore, over-
collateralization levels could change throughout the life of the
securitization based upon the loss and delinquency experience and other 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.
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
12
<PAGE>
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."
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. 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."
ECONOMIC CONDITIONS
General. 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
loans are prepaid, which would also reduce the amount of cash the Company
13
<PAGE>
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.
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.
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. 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 Government National Mortgage Association. 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.
14
<PAGE>
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 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.
15
<PAGE>
RISKS OF CONTRACTED 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 servicing agreement and a corresponding subservicing
agreement between the Company and Advanta (the "Advanta Securitization
Agreement"). These arrangements allow the Company to increase the volume of
loans it originates and purchases without incurring the overhead investment in
servicing operations. 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.
At some time in the future, the Company may establish in-house servicing
operations to service the loans it originates and purchases. In such event,
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. 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.
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 itself, 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.
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 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
16
<PAGE>
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.
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 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.
17
<PAGE>
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 5,000,000 shares of preferred stock (the "Preferred Stock")
without any further stockholder approval, a provision for a classified Board
of Directors and a provision requiring stockholders to give advance notice
with respect to certain proposals they may wish to present for a stockholder
vote. 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 % of the outstanding
shares of Common Stock (approximately % 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 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.
18
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
shares of Common Stock. The shares of Common Stock offered in the
Offering 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, 2,352,195 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 512,600
shares which have been granted and options to acquire 1,097,595 shares which
will be granted upon the closing of the Offering. In addition, options to
acquire 120,000 shares of Common Stock were granted to two executive officers
of the Company outside the Stock Option Plan. 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 shares ( 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 $
per share in net tangible book value. See "Dilution."
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.
19
<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 $ per
share and after deducting the estimated underwriting discount and expenses
payable by the Company), are estimated to be approximately $ 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; (iii) to repay approximately $1.25 million
outstanding under the Company's revolving line of credit, with an interest
rate as of March 31, 1997 of 10.25%, which matures on May 31, 1998; and (iv)
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."
20
<PAGE>
DILUTION
As of March 31, 1997, the Company had a net tangible book value of $
million, or $ per share of Common Stock, after adjusting the net tangible
book value and number of shares outstanding to reflect (i) the conversion of
all outstanding shares of Preferred Stock, (ii) the exercise of warrants to
purchase 342,406 shares of Common Stock, (iii) the cashless exercise price of
warrants to purchase 4,579,738 shares of Common Stock, resulting in the
issuance of 3,472,156 shares of Common Stock, (iv) the issuance of 360,000
shares of restricted stock to certain executive officers upon the closing of
the Offering, and (v) the 2-for-1 stock split effected in September 1996. 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
$ (after deducting the estimated underwriting discount and offering
expenses), the Company's net tangible book value as of March 31, 1997 would
have been $ million or $ per share of Common Stock. This represents an
immediate increase in net tangible book value of $ per share to existing
stockholders and an immediate dilution of $ 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.................... $
Pro forma net tangible book value per share before the Offering.. $
Increase per share attributable to new investors.................
---
Pro forma net tangible book value per share after the Offering.....
--- ---
Dilution per share to new investors................................ $
===
</TABLE>
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 $ per
share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
Existing stockholders (1). % $ % $
New investors.............
--------- ------ ----------- -------
Total................. 100.0% $ 100.0%
========= ====== =========== =======
</TABLE>
- --------
(1) Sales by the Selling Stockholder in the Offering will reduce the number of
shares held by existing stockholders to shares, or % of the total
shares of Common Stock outstanding ( shares, or % 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 shares, or % of the total shares of Common Stock
outstanding ( shares, or % 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) 2,352,195 shares reserved for issuance
under the Stock Option Plan as of the closing of the Offering, including
outstanding options to acquire 512,600 shares at a weighted average exercise
price of $1.38 per share which have been granted under the Stock Option Plan
and options to acquire 1,097,595 shares which will be granted upon the closing
of the Offering, and (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. To the extent
that any options of the Company are exercised, there will be further dilution
to new investors. See "Management--Stock Option Plan."
21
<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 all outstanding
warrants, the conversion of all outstanding shares of Preferred Stock, and the
issuance of shares of restricted stock upon the closing of this Offering,
including the application of the net proceeds from the exercise of warrants to
reduce borrowings under warehouse and aggregation lines of credit, and as
adjusted to give effect to the issuance of the Common Stock offered hereby at
an assumed public offering price of $ per share and the application of the
net proceeds therefrom (after deducting the estimated underwriting discount
and offering expenses). 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 $
Residual financing...................................... 7,248
Other borrowings........................................ 3,119
-------- ----
Total debt............................................ 120,901
-------- ----
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 shares authorized pro
forma as adjusted; 528,618 shares issued and
outstanding and shares issued and outstanding pro
forma as adjusted(1)................................... 6
Additional paid-in capital.............................. 3,086
Retained earnings, restricted........................... 3,600
-------- ----
Total stockholders' equity............................ 6,750
-------- ----
Total capitalization.................................. $127,651 $
======== ====
</TABLE>
- --------
(1) Excludes (i) 2,352,195 shares reserved for issuance under the Stock Option
Plan as of the closing of the Offering, including outstanding options to
acquire 512,600 shares at a weighted average exercise price of $1.38 per
share which have been granted and options to acquire 1,097,595 shares
which will be granted upon the closing of the Offering, and (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.
22
<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 QUARTER ENDED
-----------------------------
FOR THE
PERIOD FROM INCEPTION
(NOVEMBER 17, 1995) FOR THE
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.................. $ $ $ $
Pro forma fully diluted
earnings (loss) per
share.................. $ $ $ $
</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
Borrowings under aggregation lines of
credit................................. -- 13,957 44,731 44,731
Residual financing...................... -- -- 7,248 7,248
Other borrowings........................ -- 1,326 3,119
Total stockholders' equity.............. 3,068 4,403 6,750
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
AS OF OR FOR THE
QUARTER ENDED
-----------------------------
AS OF OR FOR THE
PERIOD FROM INCEPTION
(NOVEMBER 17, 1995)
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>
24
<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.................. $ $ $ $ $
Pro forma fully diluted
earnings (loss) per
share..................
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(4)
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 4
Total wholesale sales
offices............... 1 1 5 12 17
Total retail sales
offices............... 2 5 8 20 30
</TABLE>
- --------
(1) Adjusted to reflect the sale of shares of Common Stock offered hereby
at an assumed initial public offering price of 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) Includes the $2.8 million of loans repurchased and resold by the Company in
the first quarter of 1997.
25
<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. 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, refinancing activity 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
four regional operating centers located in Southern California, Northern
California, Chicago and Atlanta, and through 17 additional sales offices
located in 12 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. 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.
26
<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.
27
<PAGE>
LOAN SALES AND SECURITIZATIONS
In February 1997, the Company completed its initial sale of loans through
securitization 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. 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 1997
securitization, the Company utilized a discount rate of approximately 16.5%.
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
28
<PAGE>
included in the Company's securitizations. For purposes of calculating the NIR
for its February 1997 securitization, the Company assumed that aggregate
credit losses as a percentage of the original principal balance of the
securitized loan portfolio 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.
29
<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
Lower of cost or market
adjustment............ -- -- (50) (556) (375)
Provision for
repurchase losses..... -- (20) (30) (50) (120)
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
30
<PAGE>
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
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 monitors the loans held for sale quarterly and records a lower
of cost or market adjustment to reflect estimated losses on the disposition of
certain loans held for sale due to delinquency, underwriting deficiencies or
similar factors. The lower of cost or market adjustment, which is charged
against gain on sale of loans, was $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. The lower of cost or market adjustment reflects estimated
losses associated with loan repurchases which resulted from a non-standard
agreement relating to specific loan sales. The Company holds these repurchased
loans for sale and accounts for them at the lower of cost or market.
The Company also maintains an allowance for estimated losses related to
possible off-balance sheet recourse and repurchase provisions for loans which
were previously sold through whole loan sales transactions. This allowance is
charged against gain on sale of loans and credited to other liabilities. The
Company's primary repurchase risk arises when the borrower fails to make the
initial payment. The establishment of a provision for losses of $20,000,
$30,000, $50,000 and $120,000 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.
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
31
<PAGE>
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 15 new sales offices and one regional operations
center in the first quarter of 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. The Company expects
to reach a break-even level of operations on average within two to four months
after opening a wholesale sales office and five to eight months after opening
a retail sales office. 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.
32
<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. 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 will need 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: (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
33
<PAGE>
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 that
would materially and adversely affect the Company's ability to perform its
obligations, (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%. While no significant
financial or operating covenants have been imposed by Salomon in connection
with the aggregation or residual financing facilities, the Company has
committed to provide Salomon with a first right to purchase up to $200 million
in whole loans and to have Salomon lead underwrite the initial $300 million in
loans sold through securitization by the Company. At December 31, 1996, the
Company was committed to sell $66 million in whole loans and $300 million in
securitizations to or through Salomon. At March 31, 1997, the Company had
fulfilled the whole loan sale commitment and had $200.9 million remaining on
the securitization commitment.
The Company has established a $2.5 million long-term borrowing facility with
First Bank secured by the Company's furniture and equipment. Advances under
this facility are made periodically, 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%. This facility is subject to the same
covenants as those described with respect to the warehouse line. No further
borrowings may be made under this facility if the warehouse line is
terminated, but outstanding advances have the maturity date determined at the
time of each advance.
In March 1997, the Company established a $2.5 million unsecured line of
credit with First Bank for working capital purposes. 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 equal to First Bank's "reference rate" plus 1.75%, which, at
March 31, 1997, was 8.5%, and funds may be borrowed
34
<PAGE>
on a revolving basis. The working capital facility is subject to the same
covenants as the 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.
35
<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, refinancing activity 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% (excluding loans purchased through the
Correspondent Program), of the Company's loan production during the first
quarter of 1997. As of March 31, 1997, the Wholesale Division originated loans
through its four regional operating centers located in Southern California,
Northern California, Chicago and Atlanta, and through 17 additional sales
offices located in 12 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
36
<PAGE>
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.
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 March 31, 1997, the Retail
Division originated loans through a network of 13 sales offices located in
California and 17 sales offices located in 13 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 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. All loans
presently require a second approval by certain of the Company's managers who
have an average of 12 years of mortgage banking experience. 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. In February 1997, the Company sold approximately
$99.1 million of loans in its first securitization through a public offering
which received an "AAA/Aaa" rating. The Company intends to sell a majority of
its loans through securitizations while continuing to sell a substantial
portion of its loans through whole loan sale transactions.
37
<PAGE>
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, the Company currently outsources its
servicing to Advanta. This strategy has allowed the Company to focus its 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 may 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.
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 10 retail sales
offices during the first quarter of 1997 and intends to open 25 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 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 940,000 mailers in March 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 the Southeast region surrounding the recently
opened Atlanta regional operations center and the opening of one additional
regional operations center, likely in the Northeast, during 1997. In
connection with its expansion, the Company plans to open 10 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 46 as of March 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 cost effectively 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 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 expects to improve service to
brokers by (i) regionalizing certain wholesale operational support activities,
38
<PAGE>
(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 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.
39
<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 sophisticated 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 940,000 mailers in March 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, participated in trade shows, advertised in broker-
focused publications or undertaken other similar marketing techniques to reach
new brokers, but the Company will utilize some or all of such 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 March 31, 1997, the Wholesale Division was operating through four
regional operating centers located in Southern California, Northern
California, Chicago and Atlanta and through 17 additional sales offices
located in Arizona, California (2), Colorado, Florida, Indiana, Minnesota,
Missouri (2), Nevada, New Mexico (2), Ohio (3), Pennsylvania and Texas,
employing a total of 46
40
<PAGE>
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 March 31, 1997, the Retail Division employed 105 retail
loan officers, located in 30 sales offices in Arizona (3), California (13),
Colorado, Hawaii, Illinois (2), Minnesota, Missouri, Nevada, New Jersey, Ohio
(2), Oregon, Pennsylvania, Utah and Washington. 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
41
<PAGE>
completion of mailings by a third party mailing vendor. All calls or written
inquiries from potential borrowers 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
42
<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 by hiring experienced underwriters and effectively employing its training
program, its underwriters efficiently review and evaluate loan packages while
understanding and adhering to the Company's Underwriting Guidelines.
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 approval by a
43
<PAGE>
manager with underwriting authority. As of March 31, 1997, such managers had
an average of 12 years of mortgage banking experience. The Company believes
that these controls and procedures constitute an important part of the
Company's infrastructure and commitment to loan quality.
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 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%.
44
<PAGE>
No such verification is required under Limited or Stated Income Documentation
programs where the loan-to-value ratio is less than 70%.
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.
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.
45
<PAGE>
UNDERWRITING GUIDELINES(1)
<TABLE>
<CAPTION>
A+ RISK A- RISK B RISK C RISK C- RISK
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Existing mortgage Maximum one Maximum Maximum four Unlimited Unlimited
history................ 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
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
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 42-45% 55% or less 60% or less 60% or less 65% or less
ratio..................
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
46
<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 1997 securitization 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>
47
<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.
Securitizations. In February 1997, the Company completed its initial sale of
loans through securitization 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 other trust
expenses and provided the specified over-collateralization requirements are
met. The Company recognizes gain
48
<PAGE>
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.
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.
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 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.
49
<PAGE>
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 may elect to develop its own servicing
capability in the future in order to manage the relationship with its
borrowers and oversee the performance of its loans more directly.
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 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
50
<PAGE>
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 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
51
<PAGE>
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 sophisticated 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. 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 $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.
52
<PAGE>
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 March 31, 1997, the Company employed 458 full-time employees and four
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 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. These facilities have
an annual aggregate base rental of approximately $990,000. The sales offices
range in size from 100 to 4,968 square feet with lease terms typically ranging
from one to five years. Annual base rents for the sales offices range from
approximately $3,600 to $82,000. The terms of these leases vary as to duration
and rent escalation provisions. In general, the leases expire between May 1997
and March 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.
53
<PAGE>
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.
54
<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)........ 37 Director
Sherman I. Chu(2)......... 32 Director
Harlan W. Smith(1)(2)..... 63 Director
Martin F. Ryan............ 59 Director
Michael M. Sachs(1)(2).... 56 Director
Key Employees:
- --------------
Patrick J. Flanagan....... 32 Executive Vice President and Chief Operating
Officer, New Century Mortgage (3)
Shahid S. Asghar.......... 34 Senior Vice President--Wholesale Lending, New
Century Mortgage (3)
Paul L. Rigdon............ 36 Senior Vice President--Retail Lending, New
Century Mortgage (3)
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
(3) 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 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
55
<PAGE>
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. 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. 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. 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.
56
<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 also was
employed for two years by Banc One Corporation, where he worked in the credit
and international finance departments.
HARLAN W. SMITH has been a director of the Company since November 1995.
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 1984, 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").
Pursuant to certain shareholders and investment agreements among the
Company, Cornerstone and the other founding stockholders of the Company,
Cornerstone had the right to designate five directors of the Company. The
Cornerstone designees were Messrs. Bentley, Chu, Smith, Sachs and Ryan. The
Company anticipates that one of Cornerstone's designees will resign and the
Company will add one additional outside director within 60 days after the
closing of the Offering. In addition, Cornerstone's right to designate
directors will terminate along with the termination of the shareholders and
investment agreements upon the closing of the Offering. 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 Smith,
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 accounting controls. The Compensation
Committee is comprised of Messrs. Bentley, Sachs and Smith. 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 currently reimburses certain of its non-employee directors that
are designees of Cornerstone for all reasonable out-of-pocket expenses
incurred in attending meetings. After the Offering, the Company plans to pay
its non-employee directors an annual retainer of $10,000, an annual retainer
of $3,000 for serving as a
57
<PAGE>
committee chairperson, a fee of $2,000 for each board or committee meeting
attended in person (or $1,000 for each committee meeting held on the same day
as a board meeting) and a fee of $750 for each board or committee meeting
attended by telephone. 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 election to a one, two or
three year term, each non-employee director will be granted an option to
purchase 5,000, 10,000 or 15,000 shares of Common Stock, respectively, subject
to vesting on the first, second and third anniversary of the term, as the case
may be.
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."
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information with respect to
compensation earned by the named executive officers 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 $5,789 paid by the Company to lease an automobile for Mr.
Gotschall.
58
<PAGE>
Option Grants in Fiscal 1996
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------
POTENTIAL REALIZABLE
NUMBER OF PERCENT OF VALUE AT ASSUMED
SECURITIES TOTAL ANNUAL RATES OF STOCK
UNDERLYING OPTIONS PRICE APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM(3)
GRANTED EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME (1)(2) FISCAL 1996 ($/SH) DATE 5% 10%
---- ---------- ------------ -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert K. Cole.......... -- -- -- -- -- --
Brad A. Morrice......... -- -- -- -- -- --
Edward F. Gotschall..... 40,000(4) 8.9% $3.50(5) 12/4/06 $ 88,000 $ 223,200
Steven G. Holder........ 80,000(4) 17.7% 3.50(5) 12/4/06 176,000 446,400
</TABLE>
- --------
(1) All options were granted "at market" on the date of grant.
(2) The options were granted for a term of 10 years, subject to earlier
termination in certain events related to termination of employment.
(3) 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.
(4) Exercisable as to a third of the shares of Common Stock on the first
anniversary of the grant date, with an additional third of the underlying
shares becoming exercisable on each successive anniversary date, and full
vesting on the third anniversary date.
(5) 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
<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.
59
<PAGE>
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, 1998 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 are each currently
receiving a salary of $180,000 for fiscal 1997. Upon the closing of the
Offering the terms of each employment agreement will be extended to December
31, 1999 and each Founding Manager's salary will be increased to $250,000
(retroactive to January 1, 1997), plus a $1,000 per month automobile alowance.
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; (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.
Founding Managers' Incentive Compensation Plan
General. In December 1996, the Company adopted the Founding Managers'
Incentive Compensation Plan (as amended effective upon consummation of the
Offering, 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 of the Board of Directors administers the Incentive
Compensation Plan.
Incentive Compensation Amounts. Each of the four Founding Managers is
entitled to one quarter of amounts payable under the Incentive Compensation
Plan. The amount available for incentive awards (the "Incentive Pool") for
each fiscal year is an amount equal to 5% of the Company's earnings before
income taxes and without deducting amounts payable under the Incentive
Compensation Plan ("Earnings") in excess of 25% of stockholders' equity. If
Earnings exceed 50% of stockholders' equity, the Incentive Pool will include
an additional 2% of Earnings in excess of 50% of stockholders' equity.
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.
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
60
<PAGE>
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.
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.
Restricted Stock Award. In consideration for waiving certain rights under
the Incentive Compensation Plan as in effect prior to the Offering, each of
the Founding Managers is entitled to an award of 17,500 shares of restricted
stock on the closing date of the Offering, of which 17,500, 11,666 and 5,834
shares will be subject to forfeiture until the first, second and third
anniversaries of the date of grant, respectively.
Stock Option Plan
The Company adopted the 1995 Stock Option Plan (the "Stock Option Plan") in
December 1995. The Stock Option Plan is intended to provide a means to attract
and retain key employees of the Company and to promote the success of the
Company.
Under the Stock Option Plan, awards 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 705,402 and will increase to 2,352,195 upon the closing of the
Offering. As of March 31, 1997, the Company had granted options to purchase a
total of 512,600 shares of Common Stock under the Stock Option Plan (of which
22,850 shares were vested) and will grant options to purchase 1,097,595 shares
of Common Stock upon the closing of the Offering. Awards under the Stock
Option Plan may be made to officers and key employees of the Company who have
not served on the Compensation Committee of the Board of Directors and to
consultants of the Company. In addition, directors who are not employees or
officers of the Company ("Non-Employee Directors") may be granted non-
qualified stock options in certain circumstances.
Subject to the closing of the Offering: (i) options to purchase 1,097,595
shares of Common Stock will be granted at the initial public offering price to
certain key executives and employees, including an immediately exercisable
option to purchase 129,699 shares and 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; (ii) a restricted stock award covering
72,500 shares of Common Stock will be granted to each of Messrs. Cole,
Morrice, Gotschall and Holder, of which 72,500, 48,333 and 24,166 shares will
be subject to forfeiture until the first, second and third anniversaries of
the date of grant, respectively; and (iii) options to purchase an aggregate of
45,000 shares of Common Stock will be granted at the initial public offering
price to the Company's five non-employee directors.
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 is empowered to determine the terms
and conditions of each award made under the Stock Option Plan, subject to
certain limitations with respect to incentive stock options, including that
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). Non-qualified stock
options may be granted under the Stock Option Plan with an exercise price
determined by the Compensation Committee. Options granted under the Stock
Option Plan may be exercised as determined by the Compensation Committee, but
in no event after ten years from the date of grant.
61
<PAGE>
Either the Board of Directors or the Compensation Committee may grant a
nonqualified stock option to any person who is not an officer or employee of
the Company when such person becomes a director of the Company. In addition,
each calendar year thereafter, either the Board or the Compensation Committee
may grant an additional nonqualified stock option to each Non-Employee
Director who is reelected or continues to serve as a director of the Company.
The Stock Option Plan provides that the purchase price per share of the Common
Stock covered by such option is the fair market value of the Common Stock on
the date of grant. One third of the covered shares under each option granted
to Non-Employee Directors are exercisable the first, second and third year
after the date of grant, but in no event after ten years of the date of grant.
If a Non-Employee Director's services as a member of the Board of Directors
terminate, unless such termination is due to death or total disability, each
option not then exercisable will terminate and each option then exercisable
will be exercisable for the shorter of three months after the date of such
termination or the balance of the option's term.
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 the date the restricted stock is
awarded. Shares subject to restricted stock awards are nontransferable 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 SARs may provide that
the holder of the SARs may exercise the SARs or the option in whole or in
part. The Compensation Committee may elect to pay SARs in cash or in 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.
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 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 termination of services to or employment with the Company for any
reason, shares of Common Stock subject to the 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 termination of services to or employment with the Company for any
reason, shares of Common Stock subject to the 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 covered by each performance share award will be
issued to the participant.
62
<PAGE>
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 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 have agreed
to exercise these warrants upon the closing of the Offering. 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.
63
<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 March 31, 1997, assuming (i) the
conversion of all outstanding shares of Preferred Stock, (ii) the exercise of
warrants to purchase 342,406 shares of Common Stock, (iii) the cashless
exercise of warrants to purchase 4,579,738 shares of Common Stock, resulting
in the issuance of 3,472,156 shares of Common Stock and (iv) the issuance of
360,000 shares of restrictive stock to certain executive officers of the
Company and as adjusted to reflect the sale of 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 (1)(2) SHARES PERCENT
-------------------- ---------- ------- -------------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Cornerstone(3).......... 4,220,656 40.1%
Brad A. Morrice(4)(5)... 1,249,314 11.9%
Robert K. Cole(4)....... 1,249,314 11.9%
Edward F. Gotschall(4).. 1,134,632 10.8%
Steven G. Holder(4)..... 1,093,334 10.4%
John C. Bentley(6)...... 211,032 2.0%
Sherman I. Chu(6)....... 211,032 2.0%
Harlan W. Smith(7)...... 422,064 4.0%
Martin F. Ryan(8)....... 156,571 1.5%
Michael M. Sachs(9)..... 527,582 5.0%
All directors and execu-
tive officers as a
group (9 persons)(10).. 10,262,228 97.5%
</TABLE>
- --------
* Less than one percent.
(1) Unless otherwise indicated, each of the stockholders named in this table
has sole voting and dispositive power with 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
will sell an additional shares of Common Stock and the number of
shares and the percent of Common Stock to be beneficially owned after the
Offering by Cornerstone will be shares and %, respectively, (ii)
Harlan Smith will sell shares of Common Stock and the number of
shares and the percent of Common Stock to be beneficially owned after the
Offering by Harlan Smith will be shares and %, respectively and
(iii) the number of shares and the percent of Common Stock to be
beneficially owned after the Offering by all directions and executive
officers as a group will be and %, respectively.
(3) Each of such persons may be reached at 5050 N. 40th Street, Suite 310,
Phoenix, Arizona 85018.
(4) Each of such persons may be reached through the Company at 4910 Birch
Street, Suite 100, Newport Beach, California 92660.
(5) 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.
(6) Includes 211,032 shares of Common Stock owned by Cornerstone Equity
Partners, L.L.C., with respect to which Messrs. Bentley and Chu share
voting and dispositive power.
(7) Includes 211,032 shares of Common Stock owned by Harcol Limited
Partnership, of which Mr. Smith is a general partner.
(8) All 156,571 shares of Common Stock are owned by the Martin F. Ryan, Ltd.
Defined Benefit Pension Plan, of which Mr. Ryan is the trustee.
(9) Includes 211,032 shares of Common Stock owned by Westrec Rollover PS
Plan, of which Mr. Sachs is the trustee.
(10) Includes 8,000 shares of Common Stock subject to options exercisable
within 60 days.
64
<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
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 shares of Common
Stock will be entitled to request that the Company file a registration
statement on a Form S-1 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 two 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 two demand registrations on Form S-1, and in all Form S-2,
S-3 and Company registrations.
65
<PAGE>
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 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 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 except to the extent
provided by applicable law for any breach of the director's duty of loyalty to
the Corporation or its stockholders, for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law,
pursuant to Section 174 of the DGCL or for any transaction from which such
director derived an improper personal benefit. 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 Company's
Certificate of Incorporation and 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.
66
<PAGE>
The Bylaws of the Company provide that the Company will indemnify its
directors and officers to the fullest extent permitted by the DGCL, subject to
certain limitations for settlements not approved by the Company, for losses
covered by an insurance policy, for judgments for an accounting of profits
pursuant to Section 16(b) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") and similar laws and where prohibited by applicable law.
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
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.
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.
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, except for nominations for elections to the Board of
Directors, which require, in certain circumstances, either a fifteen or twenty
day advance notice to be given. To be timely, a stockholder's notice must be
delivered to or mailed and received 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 or prior
public disclosure of the date of the meeting is given or made to stockholders,
notice by the stockholder to be timely must be received no later than the
close of business on the fifteenth day following the day on which such notice
of the date of the meeting was mailed or such public disclosure was made and
provided further that any other time period necessary to comply with federal
proxy solicitation rules or regulations shall be deemed to be timely. These
provisions may preclude some stockholders from bringing matters before the
stockholders at an annual or special meeting.
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.
67
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
shares of Common Stock. Of the outstanding shares, 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 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 512,600 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 1,097,595 shares will be granted
upon the closing of the Offering. Options to acquire 120,000 shares of Common
Stock have also been granted to two executive officers of the Company outside
the Stock Option Plan. An additional 742,000 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 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 three 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 1,622,195 shares of Common Stock will be outstanding under the
Stock Option Plan.
68
<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.........................................................
=========
</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 Stockholder, along with certain other
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 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 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.
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 for a period
commencing on the date of this Prospectus and continuing to a date 180 days
after the first date any of the shares of Common Stock offered hereby are
released by the Underwriters for sale to the public. 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, 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
69
<PAGE>
shares of Common Stock offered hereby, (ii) shares of Common Stock issued
pursuant to the exercise of outstanding options and (iii) options to purchase
shares of Common Stock granted 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.
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 certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
70
<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).
71
<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
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)
<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
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>
Revenues:
Gain on sale of loans (note 2).................................. $11,630 $--
Interest income................................................. 2,846 14
Servicing fees.................................................. 29 --
------- ----
Total revenues............................................... 14,505 14
------- ----
Expenses:
Personnel....................................................... 6,083 54
General and administrative (note 11)............................ 2,456 11
Interest........................................................ 1,941 --
Advertising and promotion....................................... 1,169 --
Servicing....................................................... 269 --
Professional services........................................... 282 30
------- ----
Total expenses............................................... 12,200 95
------- ----
Earnings (loss) before income taxes.......................... 2,305 (81)
Income taxes (note 7)............................................ 970 1
------- ----
Net earnings (loss).......................................... $ 1,335 $(82)
======= ====
</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...................................... 100 --
Lower of cost or market adjustment on loans held for sale. 606 --
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 standard
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........................................ $58,307
Net deferred origination costs................................... 289
-------
58,596
Allowance for cost basis in excess of market value............... (606)
-------
$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.
The Company sold loans in September and December 1996 under a nonstandard
agreement to repurchase those loans which were delinquent at a specific date
in December 1996 and January 1997. In accordance with
F-9
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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
Lower of cost or market adjustment.............................. (606)
Provision for losses............................................ (100)
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>
F-10
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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
F-11
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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 up to $66 million in whole loans and to
lead underwrite the initial $300 million in loans sold through securitization
by the Company. 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. At December 31, 1996
and 1995, included in other liabilities are $100,000 and $0, respectively, in
allowances related to possible off-balance sheet recourse and repurchase
agreement provisions.
F-12
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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>
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>
F-13
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 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.
F-14
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Warrants--Each share of Common Stock issued and outstanding as of December
31, 1996 and 1995 has 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 180,802 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 21,
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.......................................... 575,600 1.92
Exercised........................................ -- --
Canceled......................................... (4,000) 0.50
------- -----
Balance at December 31, 1996................... 644,600 $1.77
======= =====
</TABLE>
F-16
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 -- 1.75 154,000 9.75 1.75 -- --
3.50 -- 3.50 208,600 10.00 3.50 -- --
======== ======= ===== ===== ====== =====
</TABLE>
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.
F-17
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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 21,
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 21,
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>
F-19
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1997 1996
------ ----------- ------------
(UNAUDITED)
<S> <C> <C>
Cash and cash equivalents.................................. $ 3,747 $ 3,041
Loans receivable held for sale, net (notes 2 and 4)........ 113,162 57,990
Accrued interest receivable................................ 364 786
Residual interests in securitization (note 3).............. 13,243 --
Office property and equipment.............................. 1,990 1,620
Prepaid expenses and other assets.......................... 1,076 1,201
-------- --------
$133,582 $ 64,638
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Warehouse lines of credit (note 4)......................... $110,534 $ 55,659
Residual financing (note 4)................................ 7,248 --
Notes payable.............................................. 3,119 1,326
Income taxes payable....................................... 131 839
Accounts payable and accrued liabilities................... 4,041 2,283
Deferred income taxes...................................... 1,759 128
-------- --------
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........... 6 6
Additional paid-in capital............................... 3,086 3,086
Retained earnings, restricted............................ 3,600 1,253
-------- --------
Total stockholders' equity........................... 6,750 4,403
-------- --------
$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
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31,
-------------
1997 1996
------- -----
<S> <C> <C>
Revenues
Gain on sale of loans (note 2)................................. $10,012 $ --
Interest income................................................ 2,271 39
Servicing fees................................................. 302 --
------- -----
Total revenues............................................... 12,585 39
------- -----
Expenses:
Personnel...................................................... 3,545 584
General and administrative..................................... 1,954 144
Interest....................................................... 1,808 14
Advertising and promotion...................................... 842 106
Servicing...................................................... 234 --
Professional services.......................................... 156 51
------- -----
Total expenses............................................... 8,539 899
------- -----
Earnings (loss) before income taxes (benefit)................ 4,046 (860)
Income taxes (benefit)........................................... 1,699 (362)
------- -----
Net earnings (loss).......................................... $ 2,347 $(498)
======= =====
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-21
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(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................................. 120 --
Lower of cost or market adjustment on loans held for
sale................................................ 375 --
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.
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.
F-23
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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......................... $113,406 $58,307
Net deferred origination costs.................... 439 289
-------- -------
113,845 58,596
Allowance for cost basis in excess of market
value............................................ (683) (606)
-------- -------
$113,162 $57,990
======== =======
</TABLE>
The Company sold loans in September and December 1996 under a nonstandard
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.
Gain on Sale of Loans--Gain on sale of loans for the quarters 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 --
Lower of cost or market adjustment.................. (375) --
Provision for losses................................ (120) --
Nonrefundable fees.................................. 3,311 --
Premiums, net....................................... (1,803) --
Origination costs................................... (4,171) --
------- ----
$10,012 $--
======= ====
</TABLE>
F-24
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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>
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.
F-25
<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.............................................................. 9
Use of Proceeds........................................................... 20
Dividend Policy........................................................... 20
Dilution.................................................................. 21
Selected Consolidated Financial and Other Data............................ 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 26
Business.................................................................. 36
Management................................................................ 55
Beneficial Ownership of Securities and Selling Stockholders............... 64
Description of Capital Stock.............................................. 65
Shares Eligible for Future Sale........................................... 68
Underwriting.............................................................. 69
Experts................................................................... 71
Available Information..................................................... 71
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SHARES
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..................
NASD filing fee......................................................
Nasdaq listing fee...................................................
Accounting fees and expenses.........................................
Legal fees and expenses..............................................
Blue Sky qualification fees and expenses.............................
Printing and engraving expenses......................................
Transfer agent and registrar fees....................................
Road show expenses...................................................
Miscellaneous........................................................
----
Total.............................................................. $
====
</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 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 except to the extent
provided by applicable law for any breach of the director's duty of loyalty to
the Corporation or its stockholders, for acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law,
pursuant to Section 174 of the Delaware General Corporation Law (the "DGCL")
or for any transaction from which such director derived an improper personal
benefit. 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 Company's Certificate of
Incorporation and 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 (the "Bylaws") provide that the Company will
indemnify its directors and officers to the fullest extent permitted by the
DGCL, subject to certain limitations for settlements not approved by the
Company, for losses covered by an insurance policy, for judgments for an
accounting of profits pursuant to Section 16(b) of the Securities Exchange Act
of 1934 and similar laws and where prohibited by applicable law.
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
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
II-1
<PAGE>
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.
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 in
exchange for services rendered and an option to purchase 80,000 shares of
Common Stock, exercisable at $3.50 per share, to Steve Holder in exchange for
services rendered. With respect to the grant of options to Gotschall and
Holder, 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.
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
II-2
<PAGE>
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). With respect to the grant of warrants in
satisfaction of the stockholders' respective preemptive rights, 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.
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
to be effective concurrent with the Offering
3.3 Bylaws of the Company
* 3.4 First Amended and Restated Bylaws of the Company to be effective
concurrent with the Offering
* 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, by and among the Company and certain
stockholders of the Company, to be effective as of the closing of the
Offering
*10.13 Form of Equalization Option granted to two executive officers of the
Company
*11.1 Statement re: Computation of Proforma 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>
- --------
* To be filed by amendment
II-3
<PAGE>
(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 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 18th day of April, 1997.
NEW CENTURY FINANCIAL CORPORATION
By: /s/ BRAD A. MORRICE
Brad A. Morrice
President
POWER OF ATTORNEY
We, the undersigned directors and officers of New Century Financial
Corporation, do hereby constitute and appoint Robert K. Cole and Brad A.
Morrice, or either of them, our true and lawful attorneys and agents, to do
any and all acts and things in our name and behalf in our capacities as
directors and officers and to execute any and all instruments for us and in
our names in the capacities indicated below, which said attorneys and agents,
or either of them, may deem necessary or advisable to enable said corporation
to comply with the Securities Act of 1933, as amended, and any rules,
regulations, and requirements of the Securities and Exchange Commission, in
connection with this Registration Statement, including specifically, but
without limitation, power and authority to sign for us or any of us in our
names and in the capacities indicated below, any and all amendments (including
post-effective amendments) to this Registration Statement, or any related
registration statement that is to be effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933, as amended; and we do hereby ratify
and confirm all that the said attorneys and agents, or either of them, shall
do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
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>
/s/ ROBERT K. COLE Chairman of the Board, Chief
------------------------ Executive Officer and Director April 18, 1997
Robert K. Cole
/s/ BRAD A. MORRICE Vice Chairman of the Board,
------------------------ President, General Counsel, Secretary April 18, 1997
Brad A. Morrice and Director
/s/ EDWARD F. GOTSCHALL Vice Chairman of the Board, Chief
------------------------ Operating Officer-- April 18, 1997
Edward F. Gotschall Finance/Administration and Director
(Principal Financial and
Accounting Officer)
/s/ STEVEN G. HOLDER Vice Chairman of the Board, Chief
------------------------ Operating Officer--Loan April 18, 1997
Steven G. Holder Production/Operations and Director
/s/ JOHN C. BENTLEY
------------------------ Director April 18, 1997
John C. Bentley
/s/ SHERMAN I. CHU
------------------------ Director April 18, 1997
Sherman I. Chu
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ HARLAN W. SMITH
- ------------------------ April 18, 1997
Harlan W. Smith Director
/s/ MARTIN F. RYAN
- ------------------------ April 18, 1997
Martin F. Ryan Director
/s/ MICHAEL M. SACHS
- ------------------------ April 18, 1997
Michael M. Sachs Director
</TABLE>
II-6
<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 to
be effective concurrent with the Offering
3.3 Bylaws of the Company
* 3.4 First Amended and Restated Bylaws of the Company to be effective
concurrent with the Offering
* 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, by and among the Company and certain
stockholders of the Company, to be effective as of the closing of the
Offering
*10.13 Form of Equalization Option granted to two executive officers of the
Company
*11.1 Statement re: Computation of Proforma 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>
- -------
* To be filed by amendment
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
NEW CENTURY FINANCIAL CORPORATION
Section 1. Name. The name of the corporation is New Century Financial
---------- ----
Corporation (the "Corporation").
Section 2. Registered Office and Agent. The name and address of the
---------- ---------------------------
initial registered office and registered agent of the corporation is Corporation
Service Company, 1013 Centre Road, Wilmington, New Castle County, Delaware
19805.
Section 3. Purpose. The purpose for which this Corporation is organized is
---------- -------
the transaction of any or all lawful activity for which corporations may be
organized under the General Corporation Law of Delaware, as it may be amended
from time to time ("GCL").
Section 4. Authorized Capital. The Corporation shall have the authority
---------- ------------------
to issue 5,731,889, shares of common stock, par value $.01 par value per share
(the "Common Stock"), and 2,910,000 shares of preferred stock, $.01 par value
per share (the "Preferred Stock").
Section 5. Preferred Stock. The rights, preferences, privileges,
---------- ---------------
restrictions and other matters relating to the Preferred Stock are as follows:
Section 5.1 Series. The Board of Directors is authorized, subject to
----------- ------
limitations prescribed by law and this Certificate of Incorporation, to provide
for the issuance of the shares of preferred stock in series, and by filing a
certificate pursuant to the applicable law of the State of Delaware, to
establish from time to time the number of shares to be included in each such
series, and to fix the designation, powers, preferences and rights of the shares
of each such series and the qualifications, limitations or restrictions thereof.
Section 5.2 Rights and Limitations. The authority of the Board of
----------- ----------------------
Directors with respect to each series of preferred stock shall include, without
limitation, determination of the following:
(a) The number of shares constituting that series and the
distinctive designation of that series;
<PAGE>
(b) The dividend rate on the shares of that series, whether
dividends shall be cumulative, and, if so, from which date or dates, and the
relative rights of priority, if any, of payment of dividends on shares of that
series;
(c) Whether that series shall have voting rights, in
addition to the voting rights provided by law, and if so, the terms of such
voting rights;
(d) Whether that series shall have conversion privileges,
and if so, the terms and conditions of such conversion, including provisions for
adjustment of the conversion rate in such events as the Board of Directors shall
determine;
(e) Whether or not the shares of that series shall be
redeemable, and if so, the terms and conditions of such redemption, including
the date or dates upon or after which they shall be redeemable, and the amount
per share payable in case of redemption, which amount may vary under different
conditions and at different redemption dates;
(f) Whether that series shall have a sinking fund for the
redemption or purchase of shares of that series, and if so, the terms and amount
of such sinking fund;
(g) The rights of the shares of that series in the event of
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, and the relative rights of priority, if any, of payment of shares
of that series; and
(h) Any other relative rights, preferences and limitations
of that series.
Section 6. Initial Board of Directors. The initial board of directors
--------- --------------------------
shall consist of one director. The name and address of the person who is to
serve as the director until the first annual meeting of stockholders or until
his successors are elected and qualified is:
Brad A. Morrice
New Century Financial Corporation
2415 Campus Drive, Suite 250
Irvine, California 92715
Section 7. Classification and Terms of Directors. The business and
---------- -------------------------------------
affairs of the Corporation shall be managed by or under the direction of a Board
of Directors consisting of not less than one nor more than nine directors, the
exact number of directors to be determined from time to time by resolution
adopted by the Board of Directors. If determined by vote of the stockholders,
the directors shall be divided into three classes, designated Class I, Class II
and Class III. Each class shall consist, as nearly as may be possible, of one-
third of the total number of directors constituting the entire Board of
Directors. The terms of the initial Class I directors shall terminate at the
first annual stockholders meeting following their designation as Class I
directors; the terms of the initial
2
<PAGE>
Class II directors shall terminate at the second annual stockholders meeting
following their designation as Class II directors; and the terms of the initial
Class III directors shall terminate at the third annual stockholders meeting
following their designation as Class III directors. At each annual meeting of
stockholders beginning one year after the division of the directors into
classes, successors to the class of directors whose term expires at that annual
meeting shall be elected for a three-year term.
If the number of directors is changed, any increase or decrease shall
be apportioned among the classes so as to maintain the number of directors in
each class as nearly equal as possible, and any additional directors of any
class elected to fill a vacancy resulting from an increase in such class shall
hold office for a term that shall coincide with the remaining terms of that
class, but in no case will a decrease in the number of directors shorten the
term of any incumbent director. A director shall hold office until the annual
meeting for the year in which his term expires and until his successor shall be
elected and shall qualify, subject, however, to prior death, resignation,
retirement, disqualification or removal from office. Any vacancy on the Board of
Directors, howsoever resulting (including without limitation newly created
directorships), may be filled by a majority of the directors then in office,
even if less than a quorum, or by a sole remaining director. Any director
elected to fill a vacancy shall hold office for a term that shall coincide with
the term of the class to which such director shall have been elected.
Section 8. Special Voting Requirements.
---------- ---------------------------
Section 8.1 Super-Majority Vote. The affirmative vote of seven-
----------- -------------------
ninths of the directors of the Corporation entitled to vote shall be required
for:
a. Any transfer, sale, lease or other disposition by the
Corporation, or any of its subsidiaries, of all or substantially all of its
assets; or
b. any transaction or any other action which would reduce
the percentage equity ownership of any stockholder of the Corporation who was a
stockholder immediately after consummation of the transactions contemplated by
the Investment Agreement to be entered into after the date hereof, by and among
the Corporation, Cornerstone Fund I, L.L.C., an Arizona limited liability
company, and certain other investors, pursuant to which Cornerstone Fund I,
L.L.C. and such other investors purchased from the Corporation, newly issued
shares of Common Stock and Preferred Stock; or
c. Any amendment to this Section 8.1 of this Certificate of
Incorporation.
Section 9. Liability of Directors. No director of the Corporation
---------- ----------------------
shall have personal liability to the Corporation or its stockholders for
monetary damages for any breach of fiduciary duty by such a director as a
director. Notwithstanding the foregoing sentence, a director shall be liable to
the extent provided by applicable law (i) for any breach of the director's duty
of loyalty to the Corporation or its stockholders, (ii) for acts or omissions
not in good faith or which
3
<PAGE>
involve intentional misconduct or a knowing violation of a law, (iii) pursuant
to Section 174 of the GCL, or (iv) for any transaction from which such director
derived an improper personal benefit. No amendment to or repeal of this Article
11 shall apply to or have an effect on the liability of a director of the
Corporation with respect to any act or omission occurring prior to the time of
such repeal or modification.
Section 10. Amendment of Certificate. Subject to the other terms of
----------- ------------------------
this Certificate of Incorporation, the Corporation reserves the right to amend,
alter, change or repeal any provision contained in this Certificate of
Incorporation, in the manner now or hereafter prescribed by statute and the
Certificate of Incorporation, and all rights conferred on stockholders herein
are granted subject to the reservations in this Article 10; provided, however,
the affirmative vote of the holders of at least seven-ninths of the members of
the Board of Directors of the Corporation entitled to vote thereon shall be
required to alter, amend or adopt any provision inconsistent with or repeal
Article 8, and this Article 10.
Section 11. Compromise of Debts. Whenever a compromise or arrangement
----------- -------------------
is proposed between this Corporation and its creditors or any class of them
and/or between this Corporation and its stockholders or any class of them, any
court of equitable jurisdiction within the State of Delaware may, on the
application in a summary way of this Corporation or of any creditor or
stockholders thereof or on the application of any receiver or receiver appointed
for this Corporation under the provisions of Section 291 of the GCL or on
application of trustees in dissolution or of any receiver or receiver appointed
for this Corporation under the provisions of Section 279 of the GCL, order a
meeting of the creditors or class of creditors, and/or of the stockholders or
class of stockholders of this Corporation, as the case may be, to be summoned in
such manner as the said court directs.
If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, agree to any compromise or arrangement and to
any reorganization of this Corporation as consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the court to which said application has been made, be
binding upon all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders of this Corporation, and also on the
Corporation.
Section 12. Bylaws. In furtherance and not in limitation of the powers
----------- ------
conferred by statute, the Board of Directors expressly is authorized by a
majority vote of the whole Board of Directors to adopt, repeal, alter, amend or
rescind the Bylaws of the Corporation provided that a vote of seven ninths of
the whole Board of Directors shall be required to amend Section 3.9 of the
Bylaws.
4
<PAGE>
Section 13. Incorporator. The name and address of the sole
----------- ------------
incorporator is as follows:
Steven P. Emerick
Quarles & Brady
One East Camelback, Suite 400
Phoenix, Arizona 85012
All powers, duties and responsibilities of the incorporator shall cease at the
time of delivery of this Certificate of Incorporation.
Dated: November 13, 1995.
/s/ Steven P. Emerick
-----------------------------------
Steven P. Emerick, Incorporator
5
<PAGE>
CERTIFICATE OF AMENDMENT
OF
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 Delaware General Corporation Law (the
"Corporation"), does hereby certify that:
1. The Board of Directors of the Corporation has adopted a
resolution setting forth an amendment of the Certificate of Incorporation of the
Corporation. The resolution setting forth the amendment is as follows:
"RESOLVED, that the following amendment of the Certificate of
Incorporation of this Corporation is hereby adopted and approved:
SECTION 4 shall be amended in its entirety to read as follows:
SECTION 4. Authorized Capital. The Corporation is authorized to
--------- ------------------
issue two classes of shares, designated "Preferred Stock" and "Common
Stock". The aggregate number of shares which the Corporation shall have
authority to issue is 20,283,778. The number of shares of Preferred Stock
authorized to be issued is 7,320,000. The shares of Preferred Stock may be
issued from time to time in one or more series. The first series shall be
designated "Series A Preferred Stock" and shall consist of 5,500,000
shares, $0.01 par value per share. The second series shall be designated
"Series B Preferred Stock" and shall consist of 320,000 shares, $0.01 par
value per share. The number of shares of Common Stock authorized to be
issued is 12,963,778, $0.01 par value per share. Upon the filing in the
Office of the Secretary of State of Delaware of this Certificate of
Amendment whereby Section 4 is amended, each issued and outstanding share
of Common Stock, Series A Preferred Stock and Series B Preferred Stock
shall thereby and thereupon be reclassified as and changed into two shares
of Common Stock, Series A Preferred Stock and Series B Preferred Stock,
respectively."
2. Pursuant to the provisions of Section 228 of the Delaware General
Corporation Law, the stockholders of this Corporation consented to the above
amendment.
3. The above amendment was duly adopted in accordance with the
applicable provisions of Sections 228 and 242 of the Delaware General
Corporation Law.
<PAGE>
IN WITNESS WHEREOF, New Century Financial Corporation has caused this
Certificate to be signed by Brad A. Morrice, its President, and attested by Brad
A. Morrice, its Secretary, this 26th day of November, 1996.
NEW CENTURY FINANCIAL CORPORATION
By: /s/ Brad A. Morrice
----------------------------
Brad A. Morrice
President
ATTEST:
By: /s/ Brad A. Morrice
---------------------------
Brad A. Morrice
Secretary
2
<PAGE>
CERTIFICATE OF DESIGNATION
OF
SERIES A AND B PREFERRED STOCK
OF
NEW CENTURY FINANCIAL CORPORATION
Pursuant to Section 151(g) of the Delaware Corporation Law, New Century
Financial Corporation, a Delaware corporation (the "Corporation"), does hereby
certify as follows:
1. The following resolutions were duly adopted by the Board of Directors
of the Corporation on November 20, 1995
RESOLVED, that pursuant to Section 5 of the Certificate of
Incorporation of the Corporation, there be created a series of the
Preferred Stock, par value $.01 per share, of this Corporation consisting
of 2,750,000 shares, to be designed as the Series A Preferred Stock
("Series A Preferred Stock"), and that the holders of such shares shall
have the rights, preferences and privileges set forth on Exhibit A to this
Resolution; and it was further
RESOLVED, that pursuant to Section 5 of the Certificate of
Incorporation of the Corporation, there be created a series of the
Preferred Stock, par value $.01 per share, of this Corporation consisting
of 160,000 shares, to be designated as the Series B Preferred Stock
("Series B Preferred Stock"), and that the holders of such shares shall
have the rights, preferences and privileges set forth on Exhibit B to this
Resolution; and it was further
RESOLVED, that the officers of the Corporation be, and they hereby
are, authorized and empowered to execute and file with the Secretary of
State of the State of Delaware, a certificate of designation setting forth
the rights, preferences and privileges of the holders of the Series A
Preferred Stock and the Series B Preferred Stock.
2. Set forth as Exhibit A to this Certificate of Designation is a true
and correct copy of the rights, preferences and privileges of the holders of the
Series A Preferred Stock.
3. Set forth as Exhibit B to this Certificate of Designation is a true
and correct copy of the rights, preferences and privileges of the holders of the
Series B Preferred Stock.
1
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be
signed by its President and its Secretary this 20th day of November, 1995.
/s/ Brad A. Morrice
----------------------------
Brad A. Morrice, President
ATTEST: /s/ Brad A. Morrice
------------------------------
Brad A. Morrice, Secretary
2
<PAGE>
Exhibit A
The designation of, the number of shares constituting, and the rights,
preferences, privileges and restrictions relating to the Series A Preferred
Stock are as follows:
1. Designation and Number of Shares. The designation of this series of
--------------------------------
2,750,000 shares of Preferred Stock, par value $.01 per share, created by the
Board of Directors of the Corporation pursuant to the authority granted to it by
the Certificate of Incorporation of the Corporation is "Series A Preferred
Stock." In the event that the Corporation does not issue the maximum number of
shares of Series A Preferred Stock, the Corporation may, from time to time, by
resolution of the Board of Directors, reduce the number of shares of Series A
Preferred Stock authorized, provided, that no such reduction shall reduce the
number of authorized shares to a number which is less than the number of shares
of Series A Preferred Stock then issued. The number of shares by which the
Series A Preferred Stock is reduced shall have the status of authorized but
unissued shares of Preferred Stock, without designation as to series until such
stock is once more designated as part of a particular series by the
Corporation's Board of Directors.
2. Dividend Rights. Whenever any dividends shall be paid or set apart
---------------
for payment upon the Common Stock or Series B Preferred Stock, the holders of
shares of the Series A Preferred Stock shall be entitled to receive the same
amount of dividends per share, subject to appropriate adjustments in the event
of any subdivisions or combinations of shares of Series A Preferred Stock,
Series B Preferred Stock or Common Stock after the date of adoption of this
provision. All shares of Series A Preferred Stock shall rank equally and shall
share ratably, in all dividends paid or set aside for payment upon any such
shares.
3. Voting Rights.
-------------
(a) Holders of shares of Series A Preferred Stock shall have no
voting rights in respect thereof except as provided by law or in this Paragraph
3.
(b) If and for so long as there are at least One Million (1,000,000)
shares of Series A Preferred Stock outstanding (as such number may be adjusted
to reflect stock splits, reverse stock splits, stock dividends and similar
events):
(i) the holders of Series A Preferred Stock (voting as a
separate class) shall be entitled to elect 5/9 of the total authorized number of
directors; and
A-1
<PAGE>
(ii) unless the vote of the holders of a greater number of
shares of Series A Preferred Stock shall be then required by law, the consent of
the holders of a majority of the shares of Series A Preferred Stock at the time
outstanding, given in person or by proxy by a vote at a meeting called for such
purpose or given by written consent signed by the holders of the number of
shares of Series A Preferred Stock required for approval, voting or giving
consent as a single class, shall be required in order to: (1) amend the
Corporation's certificate of incorporation or bylaws; (2) consolidate with or
merge into any other corporation or partnership or permit another corporation or
partnership to merge into it, whether in one or a series of transactions; (3)
sell or cause or permit any subsidiary of the Corporation to sell any
substantial assets except in the ordinary course of the Corporation's or such
subsidiary's business; (4) engage in any business (directly or through any
subsidiary or other affiliate) other than consumer financing (which shall
include financing of non-conforming first and second mortgage loans and may also
include financing of boats, autos and home improvements); or (5) liquidate or
recapitalize the Corporation or any subsidiary, or reclassify any of the
Corporation's issued or unissued capital stock.
4. Conversion Rights.
-----------------
(a) (i) Each holder of the Series A Preferred Stock will have the
right at any time to convert any shares of Series A Preferred Stock into shares
of Common Stock at the conversion rate hereinafter defined (the "Conversion
Rate"); provided that all shares held of record by such holder and any Affiliate
of such holder shall be converted if any shares are so converted. An
"Affiliate" of a holder shall mean any person controlling, controlled by or
under common control with such holder.
(ii) The Conversion Rate shall mean the number of shares of Common
Stock issuable upon conversion of one (1) share of Series A Preferred Stock.
The initial Conversion Rate shall be one (1). Conversion of the Series A
Preferred Stock shall be effected by surrender of the certificate representing
the shares of Series A Preferred Stock being converted to the transfer agent for
the Series A Preferred Stock, or, if none shall have been appointed, to the
Corporation, together with the form of notice of election to convert as may be
provided from time to time by the Corporation.
(b) No payment or adjustment shall be made upon any conversion or on
account of any dividends on the Series A Preferred Stock or the Common Stock
issued upon such conversion (except for accrued dividends which shall be paid).
Shares of Series A Preferred Stock shall be deemed to have been converted
immediately prior to the close of business on the day of the surrender for
conversion of the certificate therefor, together with the form of notice of
election provided by the Corporation
A-2
<PAGE>
duly signed by the holder thereof, and the person or persons entitled to receive
shares of Common Stock issuable upon such conversion shall be treated for all
purposes as the record holder of such shares of Common Stock as of such time.
As promptly as practicable on or after the conversion date, the Corporation or
its transfer agent shall issue and shall deliver a certificate or certificates
for the number of full shares of Common Stock issuable upon such conversion,
together with a cash payment in lieu of any fraction of any share, as
hereinafter provided, to the person or persons entitled to receive the same.
(c) The Conversion Rate shall be subject to adjustment as follows:
(i) In case the Corporation shall after the date the first share
of Series A Preferred Stock is issued (the "Initial Issuance Date") (A) pay a
dividend or make a distribution on its shares of Common Stock in shares of
Common Stock, (B) subdivide, split or reclassify its outstanding Common Stock
into a greater number of shares, (C) combine or reclassify its outstanding
Common Stock into a smaller number of shares, or (D) issue any shares by
reclassification of its shares of Common Stock, the Conversion Rate in effect at
the time of the record date for such dividend or distribution or of the
effective date of such subdivision, combination or reclassification shall be
proportionately adjusted so that the holder of the shares of Series A preferred
Stock converted after such date shall be entitled to receive the aggregate
number and kind of shares which, if such shares had been converted immediately
prior to such time, he would have owned upon such conversion and been entitled
to receive upon such dividend, subdivision, combination or reclassification.
Such adjustment shall be made successively whenever any event listed in this
Paragraph 4(c)(i) shall occur.
(ii) In case the Corporation shall, subsequent to the Initial
Issuance Date, issue rights or warrants to all holders of its Common Stock
entitling them to subscribe for or purchase shares of Common Stock (or
securities convertible into Common Stock) at a price (or having a conversion
price) per share less than the then current market price per share of the Common
Stock (as defined in paragraph 4(c)(iv) hereof) on the record date mentioned
below, the Conversion Rate shall be adjusted so that the same shall equal the
price determined by multiplying the Conversion Rate in effect immediately prior
to the date of such issuance by a fraction, of which the numerator shall be the
number of shares of Common Stock outstanding on such record date plus the number
of additional shares of Common Stock offered for subscription or purchased (or
into which the convertible securities so offered as convertible) and of which
the denominator shall be the number of shares of Common Stock outstanding on the
record date mentioned below plus the number of additional shares of Common Stock
which the aggregate offering price of the total number of shares of Common Stock
so offered
A-3
<PAGE>
(or the aggregate conversion price of the convertible securities so offered)
would purchase at such current market price per share of the Common Stock. Such
adjustment shall be made successively whenever such rights or warrants are
issued and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such right or warrants; and to
the extent that shares of Common Stock or securities convertible into Common
Stock are not delivered after the expiration of such rights or warrants, the
Conversion Rate shall be readjusted to the Conversion Rate which would then be
in effect had the adjustments made upon the issuance of such rights or warrants
been made upon the basis of delivery of only the number of shares of Common
Stock (or securities convertible into Common Stock) actually delivered.
(iii) In case the Corporation shall, subsequent to the Initial
Issuance Date, distribute to all holders of Common Stock evidences of its
indebtedness or assets (excluding cash dividends or distributions paid out of
current earnings and dividends or distributions referred to in Paragraph 4(c)(i)
hereof), then in each such case the Conversion Rate in effect thereafter shall
be determined by multiplying the Conversion Rate in effect immediately prior
thereto by a fraction, of which the numerator shall be the total number of
shares of Common Stock outstanding multiplied by such current market price per
share of Common Stock and of which the denominator shall be the total number of
shares of Common Stock outstanding multiplied by the current market price per
share of Common Stock (as defined in Paragraph 4(c)(iv) hereof), less the fair
market value (as determined by the Corporation's Board of Directors) of said
assets or evidences of indebtedness so distributed or of such rights or
warrants. Such adjustment shall be made successively whenever such a record
date is fixed. Such adjustment shall be made whenever any such distribution is
made and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such distribution.
(iv) For the purpose of a computation under Paragraphs 4(c)(ii)
and (iii) hereof, the current market price per share of Common Stock at any date
shall be deemed to be the average of the daily closing prices for five
consecutive business days commencing eight business days before such date. The
closing price for each day shall be the reported last sale price regular way or,
in case no such reported sale takes place on such day, the average of the
reported last bid and asked prices regular way, in either case on the principal
national securities exchange on which the Common Stock is admitted to trading or
listed or on the NASDAQ National Market System, or if not listed or admitted to
trading on such exchange or such National Market System, the average of the
reported highest bid and reported lowest asked prices as reported by NASDAQ, or
other similar organization if NASDAQ is no longer reporting such information,
A-4
<PAGE>
or if not so available, the fair market price as determined by the Board of
Directors.
(v) No adjustment in the Conversion Rate pursuant to Paragraph
4(c)(ii) or (iii) hereof shall be required unless such adjustment would require
an increase or decrease of at least one percent (1%); provided, however, that
any adjustments which by reason of this Paragraph (c)(v) are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Paragraph 4(c) shall be made to the
nearest one-hundredth (1/100) of a share.
(vi) The Corporation may retain a firm of independent public
accountants of recognized standing selected by the Board of Directors (who may
be the regular accounts employed by the Corporation) to make any computation
required by this Paragraph 4(c), and a certificate signed by such firm shall be
conclusive evidence of the correctness of such adjustment.
(vii) In the event that at any time, as a result of an
adjustment made pursuant to this Paragraph 4(c), the holder of shares of Series
A preferred Stock thereafter shall become entitled to receive any shares of the
Corporation, other than Common Stock, thereafter the number of such other shares
so receivable upon conversion of shares of Series A Preferred Stock shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Common Stock
contained in this Paragraph 4(c).
(viii) In addition to the adjustments provided for in this
Paragraph 4(c), the Corporation may modify the Conversion Rate in a manner which
will increase the number of shares of Common Stock issuable upon conversion of
the Series A Preferred Stock if the Corporation believes that such adjustment is
necessary or desirable in order to avoid adverse federal income tax consequences
to the holders of the Common Stock.
(d) Whenever the Conversion Rate shall be adjusted as required by the
provisions of Paragraph 4(c) hereof, the Corporation shall forthwith file in the
custody of its Secretary or an Assistant Secretary at its principal office and
with its stock transfer agent, if any, an officer's certificate showing the
adjusted Conversion Rate, setting forth in reasonable detail the facts requiring
such adjustment. Each such officer's certificate shall be made available at all
reasonable times for inspection by any holder of shares of Series A Preferred
Stock, and the Corporation shall, forthwith after each such adjustment, mail a
copy of such certificate by first class mail to the holders of Series A
Preferred Stock at such holders' addresses set forth in the Corporation's books
and records.
(e) In case:
A-5
<PAGE>
(i) the Corporation shall pay any dividend or make any
distribution upon Common Stock (other than a regular cash dividend payable out
of retained earnings or cash supplies); or
(ii) the Corporation shall offer to the holders of Common Stock
for subscription or purchase by them any share of any class or any other rights;
or
(iii) of any reclassification of the capital stock of the
Corporation, consolidation or merger of the Corporation with or into another
corporation, sale, lease or transfer of all or substantially all of the property
and assets of the Corporation to another corporation, or voluntary or
involuntary dissolution, liquidation or winding up of the Corporation shall be
effected; then in any such case, the Corporation shall cause to be mailed by
first class mail to the record holders of Series A Preferred Stock at least
fifteen (15) days prior to the date specified in (A) and (B) below, as the case
may be, a notice containing a brief description of the proposed action and
stating the date on which (A) a record is to be taken for the purpose of such
dividend, distribution or rights, or (B) such reclassification, consolidation,
merger, conveyance, lease, dissolution, liquidation or winding up is to take
place and the date, if any is to be fixed, as of which the holders of Common
Stock or other securities shall receive cash or other property deliverable upon
such reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation or winding up.
(f) In case of any reclassification, capital reorganization or other
change of outstanding shares of Common Stock of the Corporation, or in case of
any consolidation or merger of the Corporation into another corporation (other
than a merger with a subsidiary in which merger the Corporation is the
continuing corporation and which does not result in any reclassification,
capital reorganization or other change of outstanding shares of Series A
Preferred Stock) or in case of any sale, lease or conveyance to another
corporation of the property of the Corporation as an entirety, the Corporation
shall, as a condition precedent to such transaction, cause effective provisions
to be made so that the holders of the Series A Preferred Stock shall have the
right thereafter by converting the Series A Preferred Stock, to receive the kind
and amount of shares of stock and other securities and property receivable upon
such reclassification, capital reorganization and other change, consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
which might have been received upon conversion of the Series A Preferred Stock
immediately prior to such reclassification, change, consolidation, merger, sale
or conveyance. Any such provision shall include provision for adjustments which
shall be as nearly equivalent as may be practicable to the adjustments provided
for herein. The
A-6
<PAGE>
foregoing provisions of this Paragraph 4(f) shall similarly apply to successive
reclassification, capital reorganizations and changes of shares of Common Stock
and to successive consolidations, mergers, sales or conveyances. In the event
that in connection with any such capital reorganization or reclassification,
consolidation, merger, sale or conveyance, additional shares of Common Stock
shall be issued in exchange, conversion, substitution or payment, in whole or in
part, for a security of the Corporation other than Common Stock, any such issue
shall be treated as an issue of Common Stock covered by the provisions of
Paragraph 4(c)(ii) hereof.
(g) No fractional shares or script representing fractional shares
shall be issued upon the conversion of shares of Series A Preferred Stock. If,
upon conversion of any shares of Series A Preferred Stock as an entirety, the
holder would, except for the provisions of this Paragraph 4(g), be entitled to
receive a fractional share of Common Stock, then an amount equal to such
fractional share multiplied by the fair market value per share of the
Corporation's Common Stock on the last business day prior to the date of
conversion, as determined in good faith by the Corporation's Board of Directors,
shall be paid by the Corporation in cash to such holder.
(h) The Corporation shall at all times reserve and keep available,
free from preemptive rights, out of its authorized but unissued Common Stock,
for the purpose of effecting the conversion of the shares of Series A Preferred
Stock, the full number of shares of Common Stock then deliverable upon the
conversion of all shares of Series A Preferred Stock then outstanding.
(i) The Common Stock issuable upon conversion of the Series A
Preferred Stock shall, when so issued, be duly and validly authorized and
issued, fully paid and nonassessable.
5. Liquidation Rights.
------------------
(a) In the event of the liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, holders of the Series A Preferred
Stock shall be entitled to receive out of the assets of the Corporation an
amount per share equal to the product of One Dollar ($1.00) per share times
1.12/n/, where /n/ = the period of time in years from the Initial Issuance Date
to the date of the payment, rounded up to the next higher whole number, plus a
sum equal to all dividends (whether or not earned or declared) on such shares
accrued and unpaid thereon to the date of final payment or distribution, before
any payment or distribution upon dissolution, liquidation or winding up shall be
made on any series or class of capital stock ranking junior to Series A
Preferred Stock as to such payment or distribution.
A-7
<PAGE>
(b) After the payment in cash to the holders of Series A Preferred
Stock of the full preferential amounts in the amounts which have been fixed
hereby for the shares of Series A Preferred Stock, such holders as such shall
have no right or claim to any of the remaining assets of the Corporation.
(c) In the event the assets of the Corporation available for
distribution to the holders of shares of Series A Preferred Stock upon
dissolution, liquidation or winding up of the Corporation, whether voluntary or
involuntary, shall be insufficient to pay in full all amounts to which such
holders are entitled pursuant to Paragraph 5(a) hereof, no such distribution
shall be made on account of any shares of any other class or series of capital
stock of the Corporation ranking on a parity with the shares of Series A
Preferred Stock upon such dissolution, liquidation or winding up unless
proportionate distributive amount shall be paid on account of the shares of
Series A Preferred Stock, ratably, in proportion to the full distributable
amounts for which holders of all such parity shares are respectively entitled
upon such dissolution, liquidation or winding up.
6. Rank of Series. For purposes of this Certificate of Designation, all
--------------
stock of any series or class of the Corporation, including without limitation,
Common Stock and Series B Preferred, shall be deemed to rank junior to shares of
Series A Preferred Stock upon liquidation, dissolution or winding up, as the
case may be.
7. No Preemptive Rights. No holder of the Series A Preferred Stock
--------------------
shall, as such holder, be entitled as of right to purchase or subscribe for any
shares of stock of the Corporation of any class or any series now or hereafter
authorized or any securities convertible into or exchangeable for any shares or
any warrants, options, rights or other instruments evidencing rights to
subscribe for or purchase any such shares, whether such shares, securities,
warrants, options, rights or other instruments be unissued or issued and
thereafter acquired by the Corporation.
8. Transfer Agent and Registrar. The Corporation may appoint a transfer
----------------------------
agent and registrar for the issuance, transfer and conversion of the Series A
Preferred Stock and for the payment of dividends to the holders of the Series A
Preferred Stock.
A-8
<PAGE>
Exhibit B
The designation of, the number of shares constituting, and the rights,
preferences, privileges and restrictions relating to the Series B Preferred
Stock are as follows:
1. Designation and Number of Shares. The designation of this series of
--------------------------------
160,000 shares of Preferred Stock, par value $.01 per share, created by the
Board of Directors of the Corporation pursuant to the authority granted to it by
the Certificate of Incorporation of the Corporation is "Series B Preferred
Stock." In the event that the Corporation does not issue the maximum number of
shares of Series B Preferred Stock, the Corporation may, from time to time, by
resolution of the Board of Directors, reduce the number of shares of Series B
Preferred Stock authorized, provided, that no such reduction shall reduce the
number of authorized shares to a number which is less than the number of shares
of Series B Preferred Stock then issued. The number of shares by which the
Series B Preferred Stock is reduced shall have the status of authorized but
unissued shares of Preferred Stock, without designation as to series until such
stock is once more designed as part of a particular series by the Corporation's
Board of Directors.
2. Dividend Rights. Whenever any dividends shall be paid or set apart
---------------
for payment upon the Common Stock or Series A Preferred Stock, the holders of
shares of the Series B Preferred Stock shall be entitled to receive the same
amount of dividends per share, subject to appropriate adjustments in the event
of any subdivisions or combinations of shares of Series B Preferred Stock,
Series A Preferred Stock or Common Stock after the date of adoption of this
provision. All shares of Series B Preferred Stock shall rank equally and shall
share ratably, in all dividends paid or set aside for payment upon any such
shares.
3. Voting Rights. Holders of shares of Series B Preferred Stock shall
-------------
have no voting rights as a class but shall vote with the holders of Common Stock
on all matters as a single class. Each share of Series B Preferred shall be
entitled to one vote on each matter to be voted on by holders of Common Stock.
4. Conversion Rights.
-----------------
(a) (i) Each holder of the Series B Preferred Stock will have the
right at any time to convert any shares of Series B Preferred Stock into shares
of Common Stock at the conversion rate hereinafter defined (the "Conversion
Rate"); provided that (1) all shares held of record by such holder and any
Affiliate of such holder shall be converted if any shares are so converted and
(2) all shares of Series B Preferred Stock shall be converted automatically
without any action by the Corporation or any holder of Series B Preferred Stock
in the event that shares of Series A Preferred Stock are converted such that
after such conversion
B-1
<PAGE>
fewer than 1,000,000 shares of Series A Preferred Stock remain outstanding. An
"Affiliate" of a holder shall mean any person controlling, controlled by or
under common control with such holder.
(ii) The Conversion Rate shall mean the number of shares of
Common Stock issuable upon conversion of one (1) share of Series B Preferred
Stock. The initial Conversion Rate shall be one (1). Conversion of the Series B
Preferred Stock shall be effected by surrender of the certificate representing
the shares of Series B Preferred Stock being converted to the transfer agent for
the Series B Preferred Stock, or, if none shall have been appointed, to the
Corporation, together with the form of notice of election to convert as may be
provided from time to time by the Corporation.
(b) No payment or adjustment shall be made upon any conversion or on
account of any dividends on the Series B Preferred Stock or the Common Stock
issued upon such conversion (except for accrued dividends which shall be paid).
Shares of Series B Preferred Stock shall be deemed to have been converted
immediately prior to the close of business on the day of the surrender for
conversion of the certificate therefor, together with the form of notice of
election provided by the Corporation duly signed by the holder thereof, and the
person or persons entitled to receive shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder of such shares
of Common Stock as of such time. As promptly as practicable on or after the
conversion date, the Corporation or its transfer agent shall issue and shall
deliver a certificate or certificates for the number of full shares of Common
Stock issuable upon such conversion, together with a cash payment in lieu of any
fraction of any share, as hereinafter provided, to the person or persons
entitled to receive the same.
(c) The Conversion Rate shall be subject to adjustment as follows:
(i) In case the Corporation shall after the date the first share
of Series B Preferred Stock is issued (the "Initial Issuance Date ") (A) pay a
dividend or make a distribution on its shares of Common Stock in shares of
Common Stock, (B) subdivide, split or reclassify its outstanding Common Stock
into a greater number of shares, (C) combine or reclassify its outstanding
Common Stock into a smaller number of shares, or (D) issue any shares by
reclassification of its shares of Common Stock, the Conversion Rate in effect at
the time of the record date for such dividend or distribution or of the
effective date of such subdivision, combination or reclassification shall be
proportionately adjusted so that the holder of the shares of Series B Preferred
Stock converted after such date shall be entitled to receive the aggregate
number and kind of shares which, if such shares had been converted immediately
prior to
B-2
<PAGE>
such time, he would have owned upon such conversion and been entitled to receive
upon such dividend, subdivision, combination or reclassification. Such
adjustment shall be made successively whenever any event listed in this
Paragraph 4(c)(i) shall occur.
(ii) In case the Corporation shall, subsequent to the Initial
Issuance Date, issue rights or warrants to all holders of its Common Stock
entitling them to subscribe for or purchase shares of Common Stock (or
securities convertible into Common Stock) at a price (or having a conversion
price) per share less than the then current market price per share of the Common
Stock (as defined in paragraph 4(c)(iv) hereof) on the record date mentioned
below, the Conversion Rate shall be adjusted so that the same shall equal the
price determined by multiplying the Conversion Rate in effect immediately prior
to the date of such issuance by a fraction, of which the numerator shall be the
number of shares of Common Stock outstanding on such record date plus the number
of additional shares of Common Stock offered for subscription or purchased (or
into which the convertible securities so offered are convertible) and of which
the denominator shall be the number of shares of Common Stock outstanding on the
record date mentioned below plus the number of additional shares of Common Stock
which the aggregate offering price of the total number of shares of Common Stock
so offered (or the aggregate conversion price of the convertible securities so
offered) would purchase at such current market price per share of the Common
Stock. Such adjustment shall be made successively whenever such rights or
warrants are issued and shall become effective immediately after the record date
for the determination of stockholders entitled to receive such rights or
warrants; and to the extent that shares of Common Stock or securities
convertible into Common Stock are not delivered after the expiration of such
rights or warrants, the Conversion Rate shall be readjusted to the Conversion
Rate which would then be in effect had the adjustments made upon the issuance of
such rights or warrants been made upon the basis of delivery of only the number
of shares of Common Stock (or securities convertible into Common Stock) actually
delivered.
(iii) In case the Corporation shall, subsequent to the initial
Issuance Date, distribute to all holders of Common Stock evidences of its
indebtedness or assets (excluding cash dividends or distributions paid out of
current earnings and dividends or distributions referred to in Paragraph 4(c)(i)
hereof), then in each such case the Conversion Rate in effect thereafter shall
be determined by multiplying the Conversion Rate in effect immediately prior
thereto by a fraction, of which the numerator shall be the total number of
shares of Common Stock outstanding multiplied by such current market price per
share of Common Stock and of which the denominator shall be the total number of
shares of Common Stock outstanding multiplied by the current market price per
share of Common Stock (as defined in Paragraph 4(c)(iv) hereof), less the fair
market value (as
B-3
<PAGE>
determined by the Corporation's Board of Directors) of said assets or evidences
of indebtedness so distributed or of such rights or warrants. Such adjustment
shall be made successively whenever such a record date is fixed. Such
adjustment shall be made whenever any such distribution is made and shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such distribution.
(iv) For the purpose of a computation under Paragraphs 4(c)(ii)
and (iii) hereof, the current market price per share of Common Stock at any date
shall be deemed to be the average of the daily closing prices for five
consecutive business days commencing eight business days before such date. The
closing price for each day shall be the reported last sale price regular way or,
in case no such reported sale takes place on such day, the average of the
reported last bid and asked prices regular way, in either case on the principal
national securities exchange on which the Common Stock is admitted to trading or
listed or on the NASDAQ National Market System, or if not listed or admitted to
trading on such exchange or such National Market System, the average of the
reported highest bid and reported lowest asked prices as reported by NASDAQ, or
other similar organization if NASDAQ is no longer reporting such information, or
if not so available, the fair market price as determined by the Board of
Directors.
(v) No adjustment in the Conversion Rate pursuant to Paragraph
4(c)(ii) or (iii) hereof shall be required unless such adjustment would require
an increase or decrease of at least one percent (1%); provided, however, that
any adjustments which by reason of this Paragraph (c)(v) are not required to be
made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Paragraph 4(c) shall be made to the
nearest one-hundredth (1/100) of a share.
(vi) The Corporation may retain a firm of independent public
accountants of recognized standing selected by the Board of Directors (who may
be the regular accounts employed by the Corporation) to make any computation
required by this Paragraph 4(c), and a certificate signed by such firm shall be
conclusive evidence of the correctness of such adjustment.
(vii) In the event that at any time, as a result of an
adjustment made pursuant this Paragraph 4(c), the holder of shares of Series B
Preferred Stock thereafter shall become entitled to receive any shares of the
Corporation, other than Common Stock, thereafter the number of such other shares
so receivable upon conversion of shares of Series B Preferred Stock shall be
subject to adjustment from time to time in a manner and on terms as nearly
equivalent as practicable to the provisions with respect to the Common Stock
contained in this Paragraph 4(c).
B-4
<PAGE>
(viii) In addition to the adjustments provided for in this
Paragraph 4(c), the Corporation may modify the Conversion Rate in a manner which
will increase the number of shares of Common Stock issuable upon conversion of
the Series B Preferred Stock if the Corporation believes that such adjustment is
necessary or desirable in order to avoid adverse federal income tax consequences
to the holders of the Common Stock.
(d) Whenever the Conversion Rate shall be adjusted as required by the
provisions of Paragraph 4(c) hereof, the Corporation shall forthwith file in the
custody of its Secretary or an Assistant Secretary at its principal office and
with its stock transfer agent, if any, an officer's certificate showing the
adjusted Conversion Rate, setting forth in reasonable detail the facts requiring
such adjustment. Each such officer's certificate shall be made available at all
reasonable times for inspection by any holder of shares of Series B Preferred
Stock, and the Corporation shall, forthwith after each such adjustment, mail a
copy of such certificate by first class mail to the holders of Series B
Preferred Stock at such holders' addresses set forth in the Corporation's books
and records.
(e) In case:
(i) the Corporation shall pay any dividend or make any
distribution upon Common Stock (other than a regular cash dividend payable out
of retained earnings or cash supplies); or
(ii) the Corporation shall offer to the holders of Common Stock
for subscription or purchase by them any share of any class or any other rights;
or
(iii) of any reclassification of the capital stock of the
Corporation, consolidation or merger of the Corporation with or into another
corporation, sale, lease or transfer of all or substantially all of the property
and assets of the Corporation to another corporation, or voluntary or
involuntary dissolution, liquidation or winding up of the Corporation shall be
effected; then in any such case, the Corporation shall cause to be mailed by
first class mail to the record holders of Series B Preferred Stock at least
fifteen (15) days prior to the date specified in (A) and (B) below, as the case
may be, a notice containing a brief description of the proposed action and
stating the date on which (A) a record is to be taken for the purpose of such
dividend, distribution or rights, or (B) such reclassification, consolidation,
merger, conveyance, lease, dissolution, liquidation or winding up is to take
place and the date, if any is to be fixed, as of which the holders of Common
Stock or other securities shall receive cash or other property deliverable upon
such reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation or winding up.
B-5
<PAGE>
(f) In case of any reclassification, capital reorganization or other
change of outstanding shares of Common Stock of the Corporation, or in case of
any consolidation or merger of the Corporation into another corporation (other
than a merger with a subsidiary in which merger the Corporation is the
continuing corporation and which does not result in any reclassification,
capital reorganization or other change of outstanding shares of Series B
Preferred Stock) or in case of any sale, lease or conveyance to another
corporation of the property of the Corporation as an entirety, the Corporation
shall, as a condition precedent to such transaction, cause effective provisions
to be made so that the holders of the Series B Preferred Stock shall have the
right thereafter by converting the Series B Preferred Stock, to receive the kind
and amount of shares of stock and other securities and property receivable upon
such reclassification, capital reorganization and other change, consolidation,
merger, sale or conveyance by a holder of the number of shares of Common Stock
which might have been received upon conversion of the Series B Preferred Stock
immediately prior to such reclassification, change, consolidation, merger, sale
or conveyance. Any such provision shall include provision for adjustments which
shall be as nearly equivalent as may be practicable to the adjustments provided
for in this Certificate of Designation. The foregoing provisions of this
Paragraph 4(f) shall similarly apply to successive reclassification, capital
reorganizations and changes of shares of Common Stock and to successive
consolidations, mergers, sales or conveyances. In the event that in connection
with any such capital reorganization or reclassification, consolidation, merger,
sale or conveyance, additional shares of Common Stock shall be issued in
exchange, conversion, substitution or payment, in whole or in part, for a
security of the Corporation other than Common Stock, any such issue shall be
treated as an issue of Common Stock covered by the provisions of Paragraph
4(c)(ii) hereof.
(g) No fractional shares or scrip representing fractional shares shall
be issued upon the conversion of shares of Series B Preferred Stock. If, upon
conversion of any shares of Series B Preferred Stock as an entirety, the holder
would, except for the provisions of this Paragraph 4(g), be entitled to receive
a fractional share of Common Stock, then an amount equal to such fractional
share multiplied by the fair market value per share of the Corporation's Common
Stock on the last business day prior to the date of conversion, as determined in
good faith by the Corporation's Board of Directors, shall be paid by the
Corporation in cash to such holder.
(h) The Corporation shall at all times reserve and keep available,
free from preemptive rights, out of its authorized but unissued Common Stock,
for the purpose of effecting the conversion of the shares of Series B Preferred
Stock, the full number of shares of Common Stock then deliverable
B-6
<PAGE>
upon the conversion of all shares of Series B Preferred Stock then outstanding.
(i) The Common Stock issuable upon conversion of the Series B
Preferred Stock shall, when so issued, be duly and validly authorized and
issued, fully paid and nonassessable.
5. Liquidation Rights.
------------------
(a) In the event of the liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, holders of the Series B Preferred
Stock shall be entitled to receive out of the assets of the Corporation an
amount per share equal to the product of one dollar ($1.00) per share times
1.06/n/ where /n/ = the period of time in years from the Initial Issuance Date
to the date of the payment, rounded up to the next higher whole number, plus a
sum equal to all dividends (whether or not earned or declared) on such shares
accrued and unpaid thereon to the date of final payment or distribution, before
any payment or distribution upon dissolution, liquidation or winding up shall be
made on the Common Stock or any series or class of capital stock ranking junior
to Series B Preferred Stock as to such payment or distribution.
(b) After the payment in cash to the holders of Series B Preferred
Stock of the full preferential amounts in the amounts which have been fixed
hereby for the shares of Series B Preferred Stock, such holders as such shall
have no right or claim to any of the remaining assets of the Corporation.
(c) In the event the assets of the Corporation available for
distribution to the holders of shares of Series B Preferred Stock upon
dissolution, liquidation or winding up of the Corporation, whether voluntary or
involuntary, shall be insufficient to pay in full all amounts to which such
holders are entitled pursuant to Paragraph 5(a) hereof, no such distribution
shall be made on account of any shares of any other class or series of capital
stock of the Corporation ranking on a parity with the shares of Series B
Preferred Stock upon such dissolution, liquidation or winding up unless
proportionate distributive amount shall be paid on account of the shares of
Series B Preferred Stock, ratably, in proportion to the full distributable
amounts for which holders of all such parity shares are respectively entitled
upon such dissolution, liquidation or winding up.
6. Rank of Series. For purposes of this Certificate of Designation, the
--------------
Series B Preferred shall be deemed to rank junior to shares of Series A
Preferred Stock upon liquidation, dissolution or winding up, as the case may be,
but shall rank senior to the Common Stock upon liquidation, dissolution or
winding up, as the case may be.
B-7
<PAGE>
7. No Preemptive Rights. No holder of the Series B Preferred Stock
--------------------
shall, as such holder, be entitled as of right to purchase or subscribe for any
shares of stock of the Corporation of any class or any series now or hereafter
authorized or any securities convertible into or exchangeable for any shares or
any warrants, options, rights or other instruments evidencing rights to
subscribe for or purpose any such shares, whether such shares, securities,
warrants, options, rights or other instruments be unissued or issued and
thereafter acquired by the Corporation.
8. Transfer Agent and Registrar. The Corporation may appoint a transfer
----------------------------
agent and registrar for the issuance, transfer and conversion of the Series B
Preferred Stock and for the payment of dividends to the holders of the Series B
Preferred Stock.
B-8
<PAGE>
CERTIFICATE OF AMENDMENT
OF
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 Delaware General Corporation Law (the
"Corporation"), does hereby certify that:
1. The Board of Directors of the Corporation has adopted a
resolution setting forth an amendment of the Certificate of Incorporation of the
Corporation. The resolution setting forth the amendment is as follows:
"RESOLVED, that the following amendment of the Certificate of
Incorporation of this Corporation is hereby adopted and approved:
SECTION 4 shall be amended in its entirety to read as follows:
SECTION 4. Authorized Capital. The Corporation is authorized to
--------- ------------------
issue two classes of shares, designated "Preferred Stock" and "Common
Stock". The aggregate number of shares which the Corporation shall have
authority to issue is 20,282,778. The number of shares of Preferred Stock
authorized to be issued is 7,320,000. The shares of Preferred Stock may be
issued from time to time in one or more series. The first series shall be
designated "Series A Preferred Stock" and shall consist of 5,500,000
shares, $0.01 par value per share. The second series shall be designated
"Series B Preferred Stock" and shall consist of 320,000 shares, $0.01 par
value per share. The number of shares of Common Stock authorized to be
issued is 12,962,778, $0.01 par value per share.
2. Pursuant to the provisions of Section 228 of the Delaware General
Corporation Law, the stockholders of this Corporation consented to the above
amendment.
3. The above amendment was duly adopted in accordance with the
applicable provisions of Sections 228 and 242 of the Delaware General
Corporation Law.
<PAGE>
IN WITNESS WHEREOF, New Century Financial Corporation has caused this
Certificate to be signed by Brad A. Morrice, its President, and attested by Brad
A. Morrice, its Secretary, this 19th day of September, 1996.
NEW CENTURY FINANCIAL CORPORATION
By: /s/ Brad A. Morrice
----------------------------
Brad A. Morrice
President
ATTEST:
By: /s/ Brad A. Morrice
---------------------------
Brad A. Morrice
Secretary
2
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
NEW CENTURY FINANCIAL CORPORATION
(As adopted November 20, 1995)
ARTICLE I
OFFICES
1.1. Registered Office. The registered office of the Corporation in the
-----------------
State of Delaware shall be in the City of Wilmington, County of New Castle,
State of Delaware.
1.2. Other Offices. The Corporation also may have offices at such other
-------------
places both within and without the State of Delaware as the Board of Directors
may from time to time determine or the business of the Corporation may require.
ARTICLE II
STOCKHOLDERS
2.1. Stockholder Meetings.
--------------------
(a) Time and Place of Meetings. Meetings of the stockholders shall
--------------------------
be held at such times and places, either within or without the State of
Delaware, as may from time to time be fixed by the Board of Directors and stated
in the notices or waivers of notice of such meetings.
(b) Annual Meeting. Annual meetings of stockholders shall be held on
--------------
the first Tuesday of June or at such other date and time as may be set and
stated in the notice of the meeting. At the annual meeting, stockholders shall
elect a board of directors and transact such other business as properly may be
brought before the annual meeting.
(c) Special Meetings. Special meetings of the shareholders of the
----------------
Corporation for any purpose or purposes may be called at any time only by the
President, or the Board of Directors pursuant to a resolution approved by a
majority of the whole Board of Directors, or at the request in writing of
shareholders owning at least 10% of the capital stock issued and
<PAGE>
outstanding and entitled to vote. Business transacted at any special meeting of
the shareholders shall be limited to the purposes stated in the notice of such
meeting.
(d) Notice of Meetings. Except as otherwise provided by law, the
------------------
Certificate of Incorporation or these Bylaws, written notice of each meeting of
the stockholders shall be given not less than ten days nor more than sixty days
before the date of such meeting to each stockholder entitled to vote thereat,
directed to such stockholder's address as it appears upon the books of the
Corporation, such notice to specify the place, date, hour and purpose or
purposes of such meeting. If mailed, such notice shall be deemed to be given
when deposited in the United States mail, postage prepaid, addressed to the
stockholder at his address as it appears on the stock ledger of the Corporation.
When a meeting of the stockholders is adjourned to another time and/or place,
notice need not be given of such adjourned meeting if the time and place thereof
are announced at the meeting of the stockholders at which the adjournment is
taken, unless the adjournment is for more than thirty days or unless after the
adjournment a new record date is fixed for such adjourned meeting, in which
event a notice of such adjourned meeting shall be given to each stockholder of
record entitled to vote thereat. Notice of the time, place and purpose of any
meeting of the stockholders may be waived in writing either before or after such
meeting and will be waived by any stockholder by such stockholder's attendance
thereat in person or by proxy. Any stockholder so waiving notice of such a
meeting shall be bound by the proceedings of any such meeting in all respects as
if due notice thereof had been given.
(e) Quorum. Except as otherwise required by law, the Certificate of
------
Incorporation or these Bylaws, the holders of not less than a majority of the
shares entitled to vote at any meeting of the stockholders, present in person or
by proxy, shall constitute a quorum and the affirmative vote of the majority of
such quorum shall be deemed the act of the stockholders. If a quorum shall fail
to attend any meeting of the stockholders, the presiding officer of such meeting
may adjourn such meeting from time to time to another place, date or time,
without notice other than announcement at such meeting, until a quorum is
present or represented. At such adjourned meeting at which a quorum is present
or represented, any business may be transacted that might have been transacted
at the meeting of the stockholders as originally noticed. The foregoing
notwithstanding, if a notice of any adjourned special meeting of the
stockholders is sent to all stockholders entitled to vote thereat which states
that such adjourned special meeting will be held with those present in person or
by proxy constituting a quorum, then, except as otherwise required by law, those
present at such adjourned special meeting of the stockholders shall constitute a
quorum and all matters shall be determined by a majority of the votes cast at
such special meeting.
2.2. Determination of Stockholders Entitled to Notice and to Vote. To
------------------------------------------------------------
determine the stockholders entitled to notice of any meeting of the stockholders
or to vote thereat, the Board of Directors may fix in advance a record date as
provided in Article VII, Section 7.1 of these Bylaws, or if no record date is
fixed by the Board of Directors, a record date shall be determined as provided
by law.
2
<PAGE>
2.3. Voting.
------
(a) Except as otherwise required by law, the Certificate of
Incorporation or these Bylaws, each stockholder present in person or by proxy at
a meeting of the stockholders shall be entitled to one vote for each full share
of stock registered in the name of such stockholder at the time fixed by the
Board of Directors or by law at the record date of the determination of
stockholders entitled to vote at such meeting.
(b) Every stockholder entitled to vote at a meeting of the
stockholders may do so either (i) in person or (ii) by one or more agents
authorized by a written proxy executed by the person or such stockholder's duly
authorized agent, whether by manual signature, typewriting, telegraphic
transmission or otherwise as permitted by law. No proxy shall be voted on after
three years from its date, unless the proxy provides for a longer period.
(c) Voting may be by voice or by ballot as the presiding officer of
the meeting of the stockholders shall determine. On a vote by ballot, each
ballot shall be signed by the stockholder voting, or by such stockholder's
proxy, and shall state the number of shares voted.
(d) In advance of or at any meeting of the stockholders, the
Chairman of the Board or President may appoint one or more persons as inspectors
of election (the "Inspectors") to act at such meeting. Such Inspectors shall
take charge of the ballots at such meeting. After the balloting on any question,
the Inspectors shall count the ballots cast and make a written report to the
secretary of such meeting of the results. Subject to the direction of the
chairman of the meeting, the duties of such Inspectors may further include
without limitation: determining the number of shares outstanding and the voting
power of each; the shares represented at the meeting; the existence of a quorum;
the authenticity, validity, and effect of proxies; receiving votes, ballots, or
consents; hearing and determining all challenges and questions in any way
arising in connection with the right to vote; counting and tabulating all votes
of consents and determining when the polls shall close; determining the result;
and doing such acts as may be proper to conduct the election or vote with
fairness to all stockholders. An Inspector need not be a stockholder of the
Corporation and any officer of the Corporation may be an Inspector on any
question other than a vote for or against such officer's election to any
position with the Corporation or on any other questions in which such officer
may be directly interested. If there are three or more Inspectors, the
determination, report or certificate of a majority of such Inspectors shall be
effective as if unanimously made by all Inspectors.
2.4. List of Stockholders. The officer who has charge of the stock ledger
--------------------
of the Corporation shall prepare and make available, at least ten days before
every meeting of stockholders, a complete list of the stockholders entitled to
vote thereat, arranged in alphabetical order, showing the address of and the
number of shares registered in the name of each such stockholder. Such list
shall be open to the examination of any stockholder, for any purpose germane to
such meeting, either at a place within the city where such meeting is to be held
and which place shall be specified in the notice of such meeting, or, if not so
specified, at the place
3
<PAGE>
where such meeting is to be held. The list also shall be produced and kept at
the time and place of the meeting of the stockholders during the whole time
thereof, and may be inspected by any stockholder who is present.
2.5. Action by Consent of Stockholders. A resolution in writing, signed
---------------------------------
the Stockholders, representing a majority of those shares entitled to vote shall
be deemed to be the action of the Stockholders to the effect therein expressed
with the same force and effect as if the same had been duly passed by the same
vote at a duly convened meeting, and it shall be the duty of the Secretary of
the Corporation to record such Resolution in the Minute Book of the Corporation
under its proper date.
If stockholder action is taken without a meeting by less than unanimous
written consent, prompt notice shall be given to those stockholders who have not
consented in writing.
2.6. Conduct of Meetings. The chairman of the meeting shall have full and
-------------------
complete authority to determine the agenda, to set the procedures and order the
conduct of meetings, all as deemed appropriate by such person in his sole
discretion with due regard to the orderly conduct of business.
2.7. Notice of Agenda Matters. If a stockholder wishes to present to the
------------------------
Chairman of the Board or the President an item for consideration as an agenda
item for a meeting of stockholders, he must give timely notice to the Secretary
of the Corporation and give a brief description of the business desired to be
brought before the meeting. To be timely, a stockholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation, not less than sixty days nor more than ninety days prior to the
meeting; provided, however, that in the event that less than seventy days'
notice or prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the fifteenth day following the date on
which such notice of the date of the meeting was mailed or such public
disclosure was made and provided further that any other time period necessary to
comply with federal proxy solicitation rules or other regulations shall be
deemed to be timely.
ARTICLE III
BOARD OF DIRECTORS
3.1. General Powers. Unless otherwise restricted by law, the Certificate
--------------
of Incorporation or these Bylaws as to action which shall be authorized or
approved by the stockholders, and subject to the duties of directors as
prescribed by these Bylaws, all corporate powers shall be exercised by or under
the authority of, and the business and affairs of the Corporation shall be
controlled by, the Board of Directors.
4
<PAGE>
3.2. Election of Directors.
---------------------
(a) Number, Qualification and Term of Office. The authorized number
----------------------------------------
of directors of the Corporation shall be fixed from time to time by the Board of
Directors, but shall not be less than one nor more than nine. The exact number
of directors shall be determined from time to time by a resolution duly adopted
by a majority of the whole Board of Directors. Directors need not be
stockholders.
(b) Resignation. Any director may resign from the Board of Directors
-----------
at any time by giving written notice to the Secretary of the Corporation. Any
such resignation shall take effect at the time specified therein, or if the time
when such resignation shall become effective shall not be so specified, then
such resignation shall take effect immediately upon its receipt by the
Secretary; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
(c) Nomination of Directors. Candidates for director of the
-----------------------
Corporation shall be nominated only either by:
(i) the Board of Directors or a committee appointed by the
Board of Directors, or
(ii) nomination at any stockholders' meeting by or on behalf
of any stockholder entitled to vote thereat; provided, that written notice
of such stockholder's intent to make such nomination or nominations shall
have been given, either by personal delivery or by United States certified
mail, postage prepaid, to the Secretary of the Corporation not later than
(l) with respect to an election to be held at an annual meeting of the
stockholders, twenty days in advance of such annual meeting, and (2) with
respect to an election to be held at a special meeting of the stockholders
for the election of directors, the close of business on the fifteenth day
following the date on which notice of such special meeting is first given
to the stockholders entitled to vote thereat. Each such notice by a
stockholder shall set forth: (l) the name and address of the (A)
stockholder who intends to make the nomination and (B) person or persons to
be nominated; (2) a representation that the stockholder is a holder of
record of stock of the Corporation entitled to vote at such meeting and
intends to appear in person or by proxy at the meeting to nominate the
person or persons specified in the notice; (3) a description of all
arrangements or understandings between the stockholder and each nominee and
any other person or persons (naming such person or persons) pursuant to
which the nomination or nominations are to be made by the stockholder; (4)
such other information regarding each nominee proposed by such stockholder
as would be required to be included in a proxy or information statement
filed with the Securities and Exchange Commission pursuant to the proxy
rules promulgated under the Securities Exchange Act of 1934, as amended,
5
<PAGE>
or any successor statute thereto, had the nominee been nominated, or
intended to be nominated, by the Board of Directors; and (5) the manually
signed consent of each nominee to serve as a director of the Corporation if
so elected. The presiding officer of the meeting of the stockholders may
refuse to acknowledge the nominee of any person not made in compliance with
the foregoing procedure.
(d) Vacancies. Vacancies and new directorships resulting from an
---------
increase in the authorized number of directors may be filled by a majority of
the directors then in office, though less than a quorum, or by the sole
remaining director. Directors so chosen shall hold office until their
successors are duly elected at the annual meeting and qualified. If no
directors are in office, an election may be held as provided by statute.
3.3. Meetings of the Board of Directors.
----------------------------------
(a) Regular Meetings. Regular meetings of the Board of Directors
----------------
shall be held without call at the following times:
(i) at such times as the Board of Directors shall from time to
time by resolution determine; and
(ii) one-half hour prior to any special meeting of the
stockholders and immediately following the adjournment of any annual or
special meeting of the stockholders.
Notice of all such regular meetings hereby is dispensed with.
(b) Special Meetings. Special meetings of the Board of Directors may
----------------
be called by the Chairman, the President, or the Board of Directors pursuant to
a resolution approved by a majority of the whole Board of Directors. Notice of
the time and place of special meetings of the Board of Directors shall be given
by the Secretary or an Assistant Secretary of the Corporation, or by any other
officer authorized by the Board of Directors. Such notice shall be given to each
director personally or by mail, messenger, telephone or telegraph at such
director's business or residence address. Notice by mail shall be deposited in
the United States mail, postage prepaid, not later than the fifth day prior to
the date fixed for such special meeting. Notice by telephone or telegraph shall
be sent, and notice given personally or by messenger shall be delivered, at
least twenty-four hours prior to the time set for such special meeting. Notice
of a special meeting of the Board of Directors need not contain a statement of
the purpose of such special meeting.
(c) Adjourned Meetings. A majority of directors present at any
------------------
regular or special meeting of the Board of Directors or any committee thereof,
whether or not constituting a quorum, may adjourn any meeting from time to time
until a quorum is present or otherwise.
6
<PAGE>
Notice of the time and place of holding any adjourned meeting shall not be
required if the time and place are fixed at the meeting adjourned.
(d) Place of Meetings. Meetings of the Board of Directors, both
-----------------
regular and special, may be held either within or without the State of Delaware.
(e) Participation by Telephone. Members of the Board of Directors or
--------------------------
any committee may participate in any meeting of the Board of Directors or
committee through the use of conference telephone or similar communications
equipment, so long as all members participating in such meeting can hear one
another, and such participation shall constitute presence in person at such
meeting.
(f) Quorum. At all meetings of the Board of Directors or any
------
committee thereof, a majority of the total number of directors of the entire
then authorized Board of Directors or such committee shall constitute a quorum
for the transaction of business and the act of a majority of the directors
present at any such meeting at which there is a quorum shall be the act of the
Board of Directors or any committee, except as may be otherwise specifically
provided by law, the Certificate of Incorporation or these Bylaws. A meeting of
the Board of Directors or any committee at which a quorum initially is present
may continue to transact business notwithstanding the withdrawal of directors so
long as any action is approved by at least a majority of the required quorum for
such meeting.
(g) Waiver of Notice. The transactions of any meeting of the Board
----------------
of Directors or any committee, however called and noticed or wherever held,
shall be as valid as though had at a meeting duly held after regular call and
notice, if a quorum be present and if, either before or after the meeting, each
of the directors not present signs a written waiver of notice, or a consent to
hold such meeting, or an approval of the minutes thereof. All such waivers,
consents or approvals shall be filed with the corporate records or made a part
of the minutes of the meeting.
3.5. Action Without Meeting. Any action required or permitted to be taken
----------------------
by the Board of Directors at any meeting or at any meeting of a committee may be
taken without a meeting if all members of the Board of Directors or such
committee consent in writing and the writing or writings are filed with the
minutes of the proceedings of the Board of Directors or such committee.
3.6. Compensation of Directors. Unless otherwise restricted by law, the
-------------------------
Certificate of Incorporation or these Bylaws, the Board of Directors shall have
the authority to fix the compensation of directors. The directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors
and may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary as director. No such payment shall preclude any
director from serving the Corporation in any other capacity and receiving
compensation
7
<PAGE>
therefor. Members of committees of the Board of Directors may be allowed like
compensation for attending committee meetings.
3.7. Committees of the Board.
-----------------------
(a) Committees. The Board of Directors may, by resolution adopted by
----------
a majority of the Board of Directors, designate one or more committees of the
Board of Directors, each committee to consist of one or more directors. Each
such committee, to the extent permitted by law, the Certificate of Incorporation
and these Bylaws, shall have and may exercise such of the powers of the Board of
Directors in the management and affairs of the Corporation as may be prescribed
by the resolutions creating such committee. Such committee or committees shall
have such name or names as may be determined from time to time by resolution
adopted by the Board of Directors. The Board of Directors 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. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the Board of
Directors to act at the meeting in the place of any such absent or disqualified
member. The Board of Directors shall have the power, at any time for any reason,
to change the members of any such committee, to fill vacancies, and to
discontinue any such committee.
(b) Minutes of Meetings. Each committee shall keep regular minutes
-------------------
of its meetings and report the same to the Board of Directors when required.
(c) Audit Committee. The Board of Directors may appoint an Audit
---------------
Committee consisting of at least three directors, a majority of which shall not
be employees of the Corporation. The Audit Committee shall review the financial
affairs and procedures of the Corporation from time to time with management and
meet with the auditors of the Corporation to review the financial statements and
procedures.
(d) Executive Committee. There may be an executive committee
-------------------
consisting of at least three members of the Board of Directors elected by the
whole Board. Members of the executive committee shall serve at the pleasure of
the Board of Directors and each member of the executive committee may be removed
with or without cause at any time by the Board of Directors. Vacancies shall be
filled by the Board of Directors. The executive committee may exercise the
powers of the Board of Directors and the management of the business and affairs
of the corporation, but shall not possess any authority prohibited to it by law.
(e) Compensation Committee. The Board of Directors shall appoint a
----------------------
Compensation Committee consisting of at least three directors, a majority of
which shall not be employees of the Corporation. The Compensation Committee
shall have exclusive responsibility for establishing the compensation and other
benefits payable to Robert K. Cole, Brad A. Morrice, Edward F. Gotschall and
Steven G. Holder.
8
<PAGE>
3.8. Interested Directors. In addition to the statutory and corporate
--------------------
common law of Delaware, 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 their votes are counted for such purpose
if (i) the material facts as to his or their relationship or interest and as to
the contract or transaction are disclosed or are known to the Board of Directors
or the committee, and the Board of Directors or committee in good faith
authorizes the contract or transaction by the affirmative votes of a majority of
the disinterested directors, even though the disinterested directors be less
than a quorum; or (ii) the material facts as to his or their 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 vote of the stockholders; or (iii) the
contract or transaction is fair as to the Corporation as of the time it is
authorized, approved or ratified, by the Board of Directors, a committee thereof
or the stockholders. Common or interested directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
3.9 Super-Majority Vote. The affirmative vote of seven-ninths of the
-------------------
directors of the Corporation entitled to vote shall be required for:
a. any transfer, sale, lease or other disposition by the
Corporation, or any of its subsidiaries, of all or substantially all of its
assets;
b. any transaction or any other action which would reduce
the percentage equity ownership of any stockholder of the Corporation who was a
stockholder immediately after consummation of the transactions contemplated by
the Investment Agreement (including any Additional Investors purchasing Series A
Preferred Stock pursuant to Section 2.4 thereof), by and among the Company,
Cornerstone Fund I, L.L.C., Robert K. Cole, Brad A. Morrice, Edward F.
Gotschall, Steven G. Holder and certain other investors named on Schedule 1
thereto, provided that the closing date of such transactions occurs on or before
December 31, 1995; or
c. any amendment to this Section 3.9 of these Bylaws.
9
<PAGE>
ARTICLE IV
OFFICERS
4.1. Officers.
--------
(a) Number. The officers of the Corporation shall be chosen by the
------
Board of Directors and may include a Chairman of the Board of Directors (who
must be a director as chosen by the Board of Directors) and shall include a
President, a Vice President, a Secretary and a Treasurer. The Board of Directors
also may appoint one or more Assistant Secretaries or Assistant Treasurers and
such other officers and agents with such powers and duties as it shall deem
necessary. Any Vice President may be given such specific designation as may be
determined from time to time by the Board of Directors. Any number of offices
may be held by the same person, unless otherwise required by law, the
Certificate of Incorporation or these Bylaws. The Board of Directors may
delegate to any other officer of the Corporation the power to choose such other
officers and to prescribe their respective duties and powers.
(b) Election and Term of Office. The officers shall be elected
---------------------------
annually by the Board of Directors at its regular meeting following the annual
meeting of the stockholders and each officer shall hold office until the next
annual election of officers and until such officer's successor is elected and
qualified, or until such officer's death, resignation or removal. Any officer
may be removed at any time, with or without cause, by a vote of the majority of
the whole Board of Directors. Any vacancy occurring in any office may be filled
by the Board of Directors.
(c) Salaries. The salaries of the President, each Executive Vice
--------
President and all other senior executive officers of the Corporation shall be
fixed by the Board of Directors or a committee thereof from time to time,
subject to the exclusive responsibilities of the Compensation Committee set
forth in Section 3.7(e) hereof.
4.2. Chairman of the Board of Directors. The Chairman of the Board of
----------------------------------
Directors, if there be a Chairman, shall preside at all meetings of the
stockholders and the Board of Directors and shall have such other power and
authority as may from time to time be assigned by the Board of Directors.
4.3. President. The President shall be the chief executive officer of the
---------
Corporation, and in the absence of the Chairman of the Board, shall preside at
all meetings of the stockholders and the Board of Directors (if a Chairman of
the Board has not been elected), and shall see that all orders and resolutions
of the Board of Directors are carried into effect. Subject to the provisions of
these Bylaws and to the direction of the Board of Directors, the President shall
have the general and active management of the business of the Corporation, may
execute all contracts and any mortgages, conveyances or other legal instruments
in the name of and on
10
<PAGE>
behalf of the Corporation, but this provision shall not prohibit the delegation
of such powers by the Board of Directors to some other officer, agent or
attorney-in-fact of the Corporation.
4.4. Vice Presidents. In the absence or disability of the President, the
---------------
Vice Presidents in order of their rank as fixed by the Board of Directors, or if
not ranked, the Vice President designated by the Board of Directors, shall
perform all the duties of the President, and when so acting shall have all the
powers of, and be subject to all the restrictions upon, the President. The Vice
Presidents shall have such other powers and perform such other duties as from
time to time may be prescribed for them, respectively, by the Board of Directors
or these Bylaws.
4.5. Secretary and Assistant Secretaries. The Secretary shall record or
-----------------------------------
cause to be recorded, in books provided for the purpose, minutes of the meetings
of the stockholders, the Board of Directors and all committees of the Board of
Directors; see that all notices are duly given in accordance with the provisions
of these Bylaws as required by law; be custodian of all corporate records (other
than financial) and of the seal of the Corporation, and have authority to affix
the seal to all documents requiring it and attest to the same; give, or cause to
be given, notice of all meetings of the stockholders and special meetings of the
Board of Directors; and, in general, shall perform all duties incident to the
office of Secretary and such other duties as may, from time to time, be assigned
to him by the Board of Directors or by the President. At the request of the
Secretary, or in the Secretary's absence or disability, any Assistant Secretary
shall perform any of the duties of the Secretary and, when so acting, shall have
all the powers of, and be subject to all the restrictions upon, the Secretary.
4.6. Treasurer and Assistant Treasurers. The Treasurer shall keep or cause
----------------------------------
to be kept the books of account of the Corporation and shall render statements
of the financial affairs of the Corporation in such form and as often as
required by the Board of Directors or the President. The Treasurer, subject to
the order of the Board of Directors, shall have custody of all funds and
securities of the Corporation and shall deposit all moneys and other valuable
effects in the name and to the credit of the Corporation in such depositories as
may be designated by the Board of Directors. He shall disburse the funds of the
Corporation as may be ordered by the Board of Directors, taking proper vouchers
for such disbursements. The Treasurer shall perform all other duties commonly
incident to his office and shall perform such other duties and have such other
powers as the Board of Directors or the President shall designate from time to
time. At the request of the Treasurer, or in the Treasurer's absence or
disability, any Assistant Treasurer may perform any of the duties of the
Treasurer and, when so acting, shall have all the powers of, and be subject to
all the restrictions upon, the Treasurer. Except where by law the signature of
the Treasurer is required, each of the Assistant Treasurers shall possess the
same power as the Treasurer to sign all certificates, contracts, obligations and
other instruments of the Corporation.
11
<PAGE>
ARTICLE V
INDEMNIFICATION AND INSURANCE
5.1. Right to Indemnification. Subject to the terms and conditions of this
------------------------
Article V, each officer or director of the Corporation who was or is made a
party or witness or is threatened to be made a party or witness to or is
otherwise involved in any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding"), by reason of the fact that he or she is or was a
director or officer of the Corporation or is or was serving at the request of
the Corporation as a director, officer, employee or agent of another corporation
or of a partnership, joint venture, trust or other enterprise, including service
with respect to employee benefit plans (hereinafter an "indemnitee"), whether
the basis of such proceeding is alleged action or inaction in an official
capacity while serving as a director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law ("DGCL"), as the same exists
or may hereafter be amended (but, in the case of any such amendment, only to the
extent that such amendment permits the Corporation to provide broader
indemnification rights than such law permitted the Corporation to provide prior
to such amendment), against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid in settlement) reasonably incurred or suffered by such indemnitee in
connection therewith and such indemnification shall continue as to an indemnitee
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the indemnitee's heirs, executors and administrators; provided,
however, that, except as provided in Section 5 hereof with respect to
proceedings to enforce rights to indemnification, the Corporation shall
indemnify any such indemnitee in connection with a proceeding (or part thereof)
initiated by such indemnitee only if such proceeding (or part thereof) was
authorized by the Board of Directors of the Corporation. The right to
indemnification conferred in this Section shall include the right to be paid by
the Corporation the expenses incurred in defending any such proceeding in
advance of its final disposition (hereinafter an "advancement of expenses");
provided, however, that, if the DGCL requires, an advancement of expenses
incurred by an indemnitee shall be made only upon delivery to the Corporation of
an undertaking in the form then required by the DGCL (if any), by or on behalf
of such indemnitee, with respect to the repayment of amounts so advanced
(hereinafter an "undertaking").
5.2. Right of Indemnitee to Bring Suit. If a claim under Section 5.1 of
---------------------------------
this Article is not paid in full by the Corporation within sixty days after a
written claim has been received by the Corporation, except in the case of a
claim for an advancement of expenses, in which case the applicable period shall
be twenty days, the indemnitee may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim. If successful in whole or
in part in any such suit or in a suit brought by the Corporation to recover an
advancement of expenses pursuant to the terms of an undertaking, the indemnitee
shall be entitled to be paid also the expenses of prosecuting or defending such
suit. In (i) any suit brought by the indemnitee
12
<PAGE>
to enforce a right to indemnification hereunder (but not in a suit brought by
the indemnitee to enforce a right to an advancement of expenses) it shall be a
defense that, and (ii) any suit by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking the Corporation shall be
entitled to recover such expenses upon a final adjudication that, the indemnitee
has not met the applicable standard of conduct set forth in the DGCL. Neither
the failure of the Corporation (including its Board of Directors, independent
legal counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in the DGCL, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel or its
stockholders) that the indemnitee has not met such applicable standard of
conduct, shall create a presumption that the indemnitee has not met the
applicable standard or conduct or, in the case of such a suit brought by the
indemnitee, be a defense to such suit. In any suit brought by the indemnitee to
enforce a right hereunder, or by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified or to such advancement of expenses
under this Section or otherwise shall be on the Corporation.
5.3. Specific Limitations on Indemnification. Notwithstanding anything in
---------------------------------------
this Article to the contrary, the Corporation shall not be obligated to make any
payment to any indemnitee with respect to any proceeding (i) to the extent that
payment is actually made to the indemnitee under any insurance policy, or is
made to indemnitee by the Corporation or an affiliate thereof otherwise than
pursuant to this Article, (ii) for any expense, liability or loss in connection
with a proceeding settled without the Corporation's written consent, which
consent, however, shall not be unreasonably withheld, (iii) for an accounting of
profits made from the purchase or sale by the indemnitee of securities of the
Corporation within the meaning of Section 16(b) of the Securities Exchange Act
of 1934, as amended, or similar provisions of any state statutory or common law,
or (iv) where prohibited by applicable law.
5.4. Contract. The provisions of this Article shall be deemed to be a
--------
contract between the Corporation and each director and officer who serves in
such capacity at any time while such Section is in effect, and any repeal or
modification thereof shall not affect any rights or obligations then existing
with respect to any state of facts then or theretofore existing or any action,
suit or proceeding theretofore or thereafter based in whole or in part upon any
such state of facts.
5.5. Partial Indemnity. If the indemnitee is entitled under any
-----------------
provision of this Article to indemnification by the Corporation for some or a
portion of the expenses, liabilities or losses incurred in connection with a
proceeding but not, however, for all of the total amount thereof, the
Corporation shall nevertheless indemnify the indemnitee for the portion thereof
to which the indemnitee is entitled. Moreover, notwithstanding any other
provision of this Article, to the extent that the indemnitee has been successful
on the merits or otherwise in defense of any or all claims relating in whole or
in part to a proceeding or in defense of any issue or matter
13
<PAGE>
therein, including dismissal without prejudice, the indemnitee shall be
indemnified against all loss, expense and liability incurred in connection with
the portion of the proceeding with respect to which indemnitee was successful on
the merits or otherwise.
5.6. Non-Exclusivity of Rights. The rights to indemnification and to the
-------------------------
advancement of expenses conferred in this Article shall not be exclusive of any
other right which any person may have or hereafter acquire under any statute,
the Certificate of Incorporation, bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.
5.7. Insurance. The Corporation may maintain insurance, at its expense, to
---------
protect itself and any director, officer, employee or agent of the Corporation
or another corporation, partnership, joint venture, trust or other enterprise
against any expense, liability or loss, whether or not the Corporation would
have the power to indemnify such person against such expense, liability or loss
under the DGCL.
5.8. Indemnification of Employees and Agents of the Corporation. The
----------------------------------------------------------
Corporation may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification and to the advancement of expenses,
to any employee or agent of the Corporation to the fullest extent of the
provisions of this Article with respect to the indemnification and advancement
of expenses of directors and officers of the Corporation, or to such lesser
extent as may be determined by the Board of Directors.
5.9. Notice by Indemnitee and Defense of Claim. The indemnitee shall
-----------------------------------------
promptly notify the Corporation in writing upon being served with any summons,
citation, subpoena, complaint, indictment, information or other document
relating to any matter, whether civil, criminal, administrative or
investigative, but the omission so to notify the Corporation will not relieve it
from any liability which it may have to the indemnitee if such omission does not
prejudice the Corporation's rights. If such omission does prejudice the
Corporation's rights, the Corporation will be relieved from liability only to
the extent of such prejudice; nor will such omission relieve the Corporation
from any liability which is may have to the indemnitee otherwise than under this
Article VII. With respect to any proceedings as to which the indemnitee
notifies the Corporation of the commencement thereof:
(a) The Corporation will be entitled to participate therein at its
own expense; and
(b) The Corporation will be entitled to assume the defense thereof,
with counsel reasonably satisfactory to the indemnitee; provided, however, that
the Corporation shall not be entitled to assume the defense of any proceeding
(and this Section 5.9 shall be inapplicable to such proceeding) if the
indemnitee shall have reasonably concluded that there may be a conflict of
interest between the Corporation and the indemnitee with respect to such
proceeding. After notice from the Corporation to the indemnitee of its election
to assume the defense thereof, the Corporation will not be liable to the
indemnitee under this Article V for any
14
<PAGE>
expenses subsequently incurred by the indemnitee in connection with the defense
thereof, other than reasonable costs of investigation or as otherwise provided
below. The indemnitee shall have the right to employ its own counsel in such
proceeding but the fees and expenses of such counsel incurred after notice from
the Corporation of its assumption of the defense thereof shall be at the expense
of the indemnitee unless:
(i) The employment of counsel by the indemnitee has been
authorized by the Corporation in writing; or
(ii) The Corporation shall not have employed counsel to assume
the defense in such proceeding or shall not have assumed such defense and
be acting in connection therewith with reasonable diligence;
in each of which cases the fees and expenses of such counsel shall be at the
expense of the Corporation.
(c) The Corporation shall not settle any proceeding in any manner
which would impose any penalty or limitation on the indemnitee without the
indemnitee's written consent; provided, however, that the indemnitee will not
unreasonably withhold his consent to any proposed settlement.
ARTICLE VI
CERTIFICATES FOR SHARES AND THEIR TRANSFER
6.1. Certificates for Shares. Unless otherwise provided by a resolution of
-----------------------
the Board of Directors, the shares of the Corporation shall be represented by a
certificate. The certificates of stock of the Corporation shall be numbered and
shall be entered in the books of the Corporation as they are issued. They shall
exhibit the holder's name and number of shares and shall be signed by or in the
name of the Corporation by (a) the Chairman of the Board of Directors, the
President or any Vice President and (b) the Treasurer, any Assistant Treasurer,
the Secretary or any Assistant Secretary. Any or all of the signatures on a
certificate may be facsimile. In case any officer of the Corporation, transfer
agent or registrar who has signed, or whose facsimile signature has been placed
upon such certificate, shall have ceased to be such officer, transfer agent or
registrar before such certificate is issued, such certificate may nevertheless
be issued by the Corporation with the same effect as if he were such officer,
transfer agent or registrar at the date of issuance.
6.2. Classes of Stock.
----------------
(a) If the Corporation shall be authorized to issue more than one
class of stock or more than one series of any class, the powers, designations,
preferences and relative participating, optional or other special rights of each
class of stock or series thereof and the
15
<PAGE>
qualification, limitations, or restrictions of such preferences or rights shall
be set forth in full or summarized on the face or back of the certificate that
the Corporation shall issue to represent such class or series of stock;
provided, that, except as otherwise provided in Section 202 of the General
Corporation Law of the State of Delaware, in lieu of the foregoing requirements,
there may be set forth on the face or back of the certificate that the
Corporation shall issue to represent such class or series of stock, a statement
that the Corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences or rights.
(b) Within a reasonable time after the issuance or transfer of
uncertificated stock, the Corporation shall send to the registered owner thereof
a written notice containing the information required to be set forth or stated
on certificates pursuant to applicable law (including Sections 151, 156, 202(a),
or 218(a) of the General Corporation Law of the State of Delaware) or a
statement that the Corporation will furnish without charge to each stockholder
who so requests the powers, designations, preferences and relative
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
or rights.
6.3. Transfer. Upon surrender to the Corporation or the transfer agent of
--------
the Corporation of a certificate for shares duly endorsed or accompanied by
proper evidence of succession, assignation or authority to transfer, it shall be
the duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
Upon receipt of proper transfer instructions from the registered owner of
uncertificated shares, such uncertificated shares shall be cancelled, issuance
of new equivalent uncertificated shares or certificated shares shall be made to
the person entitled thereto and the transaction shall be recorded upon the books
of the Corporation.
6.4. Record Owner. The Corporation shall be entitled to treat the holder
------------
of record of any share or shares of stock as the holder in fact thereof, and,
accordingly, shall not be bound to recognize any equitable or other claim to or
interest in such share on the part of any other person, whether or not it shall
have express or other notice thereof, save as expressly provided by the laws of
the State of Delaware.
6.5. Lost Certificates. The Board of Directors may direct a new
-----------------
certificate or certificates or uncertificated shares to be issued in place of
any certificate or certificates theretofore issued by the Corporation alleged to
have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming the certificate of stock to be lost, stolen or
destroyed. When authorizing such issue of a new certificate or certificates or
uncertificated shares, the Board of Directors may, in its discretion and as a
condition precedent to the issuance thereof, require the owner of such lost,
stolen or destroyed certificate or certificates, or his legal representative, to
advertise the same in such manner as the Board of Directors shall require and to
give the Corporation a bond in such sum as it may direct as
16
<PAGE>
indemnity against any claim that may be made against the Corporation with
respect to the certificate alleged to have been lost, stolen or destroyed.
ARTICLE VII
MISCELLANEOUS
7.1. Record Date.
-----------
(a) In order that the Corporation may determine the stockholders
entitled to notice of or to vote at any meeting of the stockholders or any
adjournment thereof, or entitled to receive payment of any dividend or other
distribution or allotment of any rights or entitled to exercise any rights in
respect of any 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 prior to the date of
such meeting nor more than sixty days prior to any other action. If not fixed by
the Board of Directors, the record date shall be determined as provided by law.
(b) A determination of stockholders of record entitled to notice of
or to vote at a meeting of the stockholders shall apply to any adjournments of
the meeting, unless the Board of Directors fixes a new record date for the
adjourned meeting.
(c) Holders of stock on the record date are entitled to notice and
to vote or to receive the dividend, distribution or allotment of rights or to
exercise the rights, as the case may be, notwithstanding any transfer of the
shares on the books of the Corporation after the record date, except as
otherwise provided by agreement or by law, the Certificate of Incorporation or
these Bylaws.
7.2. Execution of Instruments. The Board of Directors may, in its
------------------------
discretion, determine the method and designate the signatory officer or
officers, or other persons, to execute any corporate instrument or document or
to sign the corporate name without limitation, except where otherwise provided
by law, the Certificate of Incorporation or these Bylaws. Such designation may
be general or confined to specific instances.
7.3. Voting of Securities Owned by the Corporation. All stock and other
---------------------------------------------
securities of other corporations held by the Corporation shall be voted, and all
proxies with respect thereto shall be executed, by the person so authorized by
resolution of the Board of Directors, or, in the absence of such authorization,
by the President.
7.4. Corporate Seal. A corporate seal shall not be requisite to the
--------------
validity of any instrument executed by or on behalf of the Corporation. If a
corporate seal is used, the same shall be at the pleasure of the officer
affixing seal either (a) a circle having on the circumference
17
<PAGE>
thereof the words "NEW CENTURY FINANCIAL CORPORATION" and in the center
"Incorporated -1995, Delaware," or (b) a seal containing the words "Corporate
Seal" in the center thereof.
7.5. Construction and Definitions. Unless the context requires otherwise,
----------------------------
the general provisions, rules of construction and definitions in the General
Corporation Law of the State of Delaware and the Certificate of Incorporation
shall govern the construction of these Bylaws.
7.6. Amendments. These Bylaws may be altered, amended or repealed as set
----------
forth in the Certificate of Incorporation.
18
<PAGE>
EXHIBIT 10.2
NEW CENTURY FINANCIAL CORPORATION
1995 STOCK OPTION PLAN
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 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.
1.4 Shares Available Under the Plan.
-------------------------------
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 amount of Common Stock
that may be issued or transferred pursuant to Awards granted under this Plan
shall not exceed the sum of 352,701 shares, subject to adjustment as set forth
in 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.
2
<PAGE>
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 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, including without limitation Rule 16b-3 (or any successor rule)
promulgated by the Commission pursuant to the Exchange Act.
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.
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
3
<PAGE>
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 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) If an Option awarded to a Director, Officer or "beneficial owner"
of the Company as defined by Rule 13d-3 under the Exchange Act is exercised
within six months after the Award Date, any stock issued pursuant to the
exercise of the Option may not be disposed of until six months after the Award
Date.
4
<PAGE>
(c) 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.
(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
422A 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.
5
<PAGE>
(b) Option Grants. When any person who is not then an officer or
-------------
employee of the Company becomes a director of the Company, the Board or the
Committee may grant a Nonqualified Stock Option (the grant or award date of
which shall be the date such person takes office) to such person to purchase a
specified number of shares of Common Stock.
(c) Subsequent Annual Options. In each calendar year during the term
-------------------------
of the Plan, commencing in 1997, the Board or the Committee may grant an
additional Nonqualified Stock Option to purchase a specified number of shares of
Common Stock to each Non-Employee Director who is re-elected as a director of
the Company or who continues as a director (the grant date or award date of
which shall be the date of the annual meeting of shareholders in each such
year).
(d) 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.
(e) 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.
(f) Exercise of Options. Except as otherwise provided in Sections
-------------------
2.6(f) and 2.6(g), each Option granted under this Section 2.6 shall become
exercisable as to one-third of the covered shares twelve months after the Award
Date, as to an additional one-third of the covered shares twenty-four months
after the Award Date, and as to all covered shares thirty-six months after the
Award Date.
(g) 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) or (c) 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
6
<PAGE>
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 three months after the date of such termination or the balance
of such Option's term, whichever period is shorter.
(h) 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) or (c) hereof shall become
exercisable in full.
(i) Limitation on Amendments and Authority. Notwithstanding any
--------------------------------------
other provision of this Plan, the provisions of this Section 2.6 shall not be
amended more than once every six months, other than as may be necessary to
conform with any applicable changes in the Code, the Employee Retirement Income
Security Act of 1974, as amended, or the applicable rules thereunder.
(j) Transfer and Other Restrictions Under Rule 16b-3. The provisions
------------------------------------------------
of Section 6.12 are incorporated herein by this reference, except that each time
the words "Participant" and "Participants" appear in such section they shall be
replaced with the words "Non-Employee Director Participant" and "Non-Employee
Director Participants," respectively.
(k) Adjustments. The specific numbers of shares stated in the
-----------
foregoing provisions of Section 2.6(b) and (c) 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.
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.
7
<PAGE>
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 422A 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. If a Stock
Appreciation Right is awarded to a Director, Officer or "beneficial owner" of
the Company as defined by Rule 13d-3 under the Exchange Act, any stock issued in
connection with the Stock Appreciation Right may not be disposed of until six
months elapse from the Award Date.
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
8
<PAGE>
(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.
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.
9
<PAGE>
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).
V. PERFORMANCE SHARE AWARDS.
5.1 Grants.
------
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 subject to the Performance Share Award, the price, if any, to be paid for
such shares by the Participant and the conditions upon which issuance to the
Participant shall be based, which issuance shall not be earlier than six months
after the Award Date.
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
10
<PAGE>
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) Amounts payable pursuant to an Award shall be paid only 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 Total Disability, to the
Participant's Personal Representative or, if there is none, to the Participant.
Other than by will or the laws of descent and distribution, no benefit payable
under, or interest in, this Plan or in any Award shall be subject in any manner
to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance or
charge and any such attempted action shall be void and no such benefit or
interest shall be, in any manner, liable for, or subject to, debts, contracts,
liabilities, engagements or torts of any Eligible Employee, Participant or
Beneficiary. The Committee shall disregard any attempted transfer, assignment
or other alienation prohibited by the preceding sentence and shall pay or
deliver such cash or shares of Common Stock in accordance with the provisions of
this Plan. The designation of a Beneficiary hereunder shall not constitute a
transfer for these purposes.
(d) 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 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
11
<PAGE>
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 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.
12
<PAGE>
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 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.
13
<PAGE>
(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 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.
----------------------
Unless prior to an Event the Board determines that, upon its
occurrence, there shall be no acceleration of
14
<PAGE>
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 Rule 16b-3 promulgated by the Commission pursuant
to the Exchange Act and Section 422A of the Code. For purposes of this section
only, the Board shall mean the Board as constituted immediately prior to the
Event.
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 all applicable federal and state laws, rules and
regulations and to such approvals by any regulatory or governmental agency
(including without limitation "no action" positions of the Commission) which
may, in the opinion of counsel for the Company, be necessary or advisable in
connection therewith. Without limiting the generality of the foregoing, no
Awards may be granted under this Plan, and no shares shall be issued by the
Company, pursuant to or in connection with any such Award, unless and until, in
each such case, all legal requirements applicable to the issuance or payment
have, in the opinion of counsel to the Company, been complied with. In
connection with any stock issuance or transfer, the person acquiring the shares
shall, if requested by the Company, give assurances and representations
satisfactory to counsel to the Company in respect of such matters as the Company
may deem desirable to assure compliance with all applicable legal requirements.
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 422A 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 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
15
<PAGE>
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;
provided, the Committee may impose such conditions on the payment of any
withholding obligation as may be required to satisfy applicable regulatory
requirements, including, without limitation, Rule 16b-3 promulgated by the
Commission pursuant to the Exchange Act.
(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.
(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 Rule 16b-3 under the Exchange Act, Section 425 of
the Code or any successor provisions, rules or statutes thereto, by a majority
of the shareholders.
16
<PAGE>
(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; Nondistributive Intent.
-----------------------------------------------------
A Participant shall not be entitled to the privilege of stock
ownership as to any shares of Common Stock not actually issued to him or her.
Upon the issuance and transfer of shares to the Participant, unless a
registration statement is in effect under the Securities Act and applicable
state securities law, relating to such issued and transferred Common Stock and
there is available for delivery a prospectus meeting the requirements of Section
10 of the Securities Act, the Common Stock may be issued and transferred to the
Participant only if he or she represents and warrants in writing to the Company
that the shares are being acquired for investment and not with a view to the
resale or distribution thereof. No shares shall be issued and transferred
unless and until there shall have been full compliance with any then applicable
regulatory requirements (including those of exchanges upon which any Common
Stock of the Company may be listed).
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.
17
<PAGE>
6.12 Transfer and Other Restrictions under Rule 16b-3.
------------------------------------------------
Any Option, similar right (including Stock Appreciation Rights) or
other Award that would constitute a derivative security (as such phrase is
defined in Rule 16a-1 under the Exchange Act and used in Rule 16b-3 thereunder)
and that is issued under this Plan shall not be transferable by the Participant
other than by will, the laws of descent and distribution or pursuant to a QDRO.
The designation of beneficiary by an officer or director of the Company shall
not be deemed to constitute a transfer under this Plan.
It is the intent of the Company that the Plan satisfy and be
interpreted in a manner that in the case of Participants who are or may be
subject to Section 16 of the Exchange Act satisfies the applicable requirements
of the applicable Rule 16b-3 so that such persons will be entitled to the
benefits of such rule or other exemptive rules under Section 16 of the Exchange
Act and will not be subjected to avoidable liability thereunder in respect of
benefits intended by the Plan. In furtherance of such intent and the Company's
intent to satisfy any applicable state securities laws, the Awards granted under
all of the provisions of the Plan, in the discretion of the Committee, may be
deemed granted under a separate plan if so required, notwithstanding the
designation of this document as a single plan for convenience of reference and
to establish certain provisions and limitations applicable to all authorized
Awards. 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 and deemed amended so as to avoid such conflict,
but to the extent of any remaining irreconcilable conflict with such intent as
to such persons in the circumstances, such provision shall be deemed void.
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, a Restricted Stock Award or Performance Share Award, in each case granted
under this Plan.
18
<PAGE>
(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.
(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) "Code" means the Internal Revenue Code of 1986, as amended from
----
time to time.
(g) "Commission" means the Securities and Exchange Commission.
----------
(h) "Committee" means the Compensation Committee appointed by the
---------
Board and consisting of two or more Board members or such greater number as may
be required under applicable law, each of whom, during such time as one or more
Participants may be subject to Section 16 of the Exchange Act, shall be a
Disinterested Director; provided however, that the minimum number of members of
the Committee may be reduced by the Board to the minimum number required by Rule
16b-3 promulgated by the Commission pursuant to the Exchange Act, as then in
effect.
(i) "Common Stock" means the Common Stock of the Company.
------------
(j) "Company" means New Century Financial Corporation, a Delaware
-------
corporation, and its successors.
(k) "Director" means member of the board of Directors of the Company
--------
or any person performing similar functions with respect to the Company.
(l) "Disinterested Director" means a member of the Board who was not,
----------------------
during the year prior to being appointed to the Committee, or during the period
of service as an administrator hereunder, granted or awarded equity securities
pursuant to the Plan or pursuant to any other plan of the Company or its
affiliates, except to the extent consistent with the disinterested plan
administration requirements under Rule 16b-3.
19
<PAGE>
(m) "Eligible Employee" means an officer or key employee of the
-----------------
Company who has not served on the Committee within the preceding twelve months
and consultants to the Company whether or not such consultants are employees.
(n) "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.
(o) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(p) "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.
20
<PAGE>
(q) "Incentive Stock Option" means an option which is designated as
----------------------
an incentive stock option within the meaning of Section 422A of the Code, the
award of which contains such provisions as are necessary to comply with that
section.
(r) "Non-Employee Director" means a member of the Board who is not an
---------------------
officer or employee of the Company.
(s) "Non-Employee Director Participant" means a Non-Employee Director
---------------------------------
who has been granted an Option under Section 2.6.
(t) "Nonqualified Stock Option" means an option which is designated
-------------------------
as a Nonqualified Stock Option.
(u) "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.
(v) "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.
(w) "Participant" means an Eligible Employee who has been granted an
-----------
Award.
(x) "Performance Share Award" means an award of shares of cash or
-----------------------
Common Stock, the issuance of which is contingent upon attainment of performance
objectives specified by the Committee.
(y) "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.
(z) "Plan" means the New Century Financial Corporation 1995 Stock
----
Option Plan.
(aa) "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.
21
<PAGE>
(bb) "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.
(cc) "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.
(dd) "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.
(ee) "Rule 16b-3" means Rule 16b-3 as promulgated by the Commission
----------
pursuant to the Exchange Act as amended from time to time.
(ff) "Securities Act" means the Securities Act of 1933, as amended.
--------------
(gg) "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).
(hh) "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.
(ii) "Total Disability" means a "permanent and total disability"
----------------
within the meaning of Section 22(e)(3) of the Code.
22
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
1995 STOCK OPTION PLAN
DECEMBER 19, 1995
<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
II. OPTIONS............................................ 3
2.1 Grants....................................... 3
2.2 Option Price................................. 3
2.3 Option Period................................ 4
2.4 Exercise of Options.......................... 4
2.5 Limitations on Grant of Incentive Stock
Options...................................... 5
2.6 Non-Employee Director Awards................. 5
III. STOCK APPRECIATION RIGHTS.......................... 7
3.1 Grants....................................... 7
3.2 Exercise of Stock Appreciation Rights........ 8
3.3 Payment...................................... 8
IV. RESTRICTED STOCK AWARDS............................ 9
4.1 Grants....................................... 9
4.2 Restrictions................................. 10
V. PERFORMANCE SHARE AWARDS........................... 10
5.1 Grants....................................... 10
VI. OTHER PROVISIONS................................... 10
6.1 Rights of Eligible Employees, Participants
and Beneficiaries............................ 10
6.2 Adjustments Upon Changes in Capitalization... 11
6.3 Termination of Employment.................... 13
6.4 Acceleration of Awards....................... 14
6.5 Government Regulations....................... 15
6.6 Tax Withholding.............................. 15
6.7 Amendment, Termination and Suspension........ 16
6.8 Privileges of Stock Ownership;
Nondistributive Intent....................... 17
6.9 Effective Date of the Plan................... 17
6.10 Term of the Plan............................. 17
6.11 Governing Law................................ 17
6.12 Transfer and Other Restrictions under
Rule 16b-3................................... 18
6.13 Non-Exclusivity of Plan...................... 18
VII. DEFINITIONS........................................ 18
7.1 Definitions.................................. 18
</TABLE>
i
<PAGE>
ii
<PAGE>
EXHIBIT 10.4
NEW CENTURY MORTGAGE CORPORATION
OWNER
AND
ADVANTA MORTGAGE CORP. USA
SERVICER
LOAN SERVICING AGREEMENT
Dated as of
April 4, 1996
Fixed and Adjustable Rate Non-Conforming Mortgage Loans
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I DEFINITIONS....................................................... 1
Section 1.1 Definition of Terms....................................... 1
ARTICLE 11 DELIVERY OF MORTGAGE LOAN FILES & SERVICING
STANDARDS.......................................................... 5
Section 2.1 Transfer of Mortgage Loan Files................... 5
Section 2.2 Agreement to Service Mortgage Loans............... 5
Section 2.3 Sub-Servicers..................................... 6
ARTICLE III REPRESENTATIONS AND WARRANTIES............................... 6
Section 3.1 Representations and Warranties of the Servicer.... 6
Section 3.2 Representations and Warranties of the Owner....... 7
ARTICLE IV ACCOUNTING AND REPORTING...................................... 9
Section 4.1 Collection of Mortgage Loan Payments.............. 9
Section 4.2 Interest Calculations............................. 9
Section 4.3 Application of Mortgage Loan Payments............. 9
Section 4.4 Establishment of Collection Account;
Deposits in Collection Account.................... 10
Section 4.5 Withdrawals from the Collection Account........... 11
Section 4.6 Establishment of Escrow Account;
Deposits in Escrow Account........................ 11
Section 4.7 Withdrawals From Escrow Account................... 12
Section 4.8 Servicing Advances................................ 13
Section 4.9 Monthly Remittance Reports........................ 13
Section 4.10 Servicing Compensation............................ 14
ARTICLE V ADMINISTRATION AND SERVICING OF MORTGAGE LOANS................. 14
Section 5.1 Enforcement of Due-On-Sale Clause; Assumption..... 14
Section 5.2 Maintenance of Insurance.......................... 15
Section 5.3 Cancellation of Mortgage Insurance................ 16
Section 5.4 Reserved For Future Use........................... 16
Section 5.5 Liquidation of Defaulted Mortgage Loans........... 16
Section 5.6 Deed-in-Lieu of Foreclosure....................... 17
Section 5.7 Real Estate Owned................................. 17
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
ARTICLE VI MISCELLANEOUS PROVISIONS.......................................... 18
Section 6.1 Owner to Cooperate.................................... 18
Section 6.2 Assignment of Agreement............................... 19
Section 6.3 Access to Certain Documentation Regarding the Loans... 19
Section 6.4 Default By Servicer................................... 19
Section 6.5 Default by Owner...................................... 20
Section 6.6 Reserved for Future Use............................... 21
Section 6.7 Indemnification By Owner.............................. 21
Section 6.8 Fidelity Bond and Errors and Omissions................ 21
Section 6.9 Indemnification by Servicer........................... 22
Section 6.10 Amendment............................................. 22
Section 6.11 Governing Law......................................... 22
Section 6.12 Notices............................................... 22
Section 6.13 Severability of Provisions............................ 23
Section 6.14 Document Deficiencies................................. 23
Section 6.15 Termination........................................... 23
Section 6.16 Attorneys' Fees....................................... 23
Section 6.17 No Solicitation....................................... 24
Section 6.18 Counterparts.......................................... 24
Section 6.19 Execution; Successors and Assigns..................... 24
Section 6.20 Third-Party Beneficiary............................... 24
</TABLE>
ii
<PAGE>
This Servicing Agreement, dated as of March 22, 1996, is entered into by and
between New Century Mortgage Corporation, as owner of the Mortgage Loans that
are referred to herein (the "Owner") and Advanta Mortgage Corp. USA, as Servicer
(together with its permitted successors and assigns, the "Servicer").
WHEREAS, the Owner is the owner of certain first and second lien, fixed and
adjustable rate, non-conforming residential mortgage loans; and
WHEREAS, the Owner desires to deliver to Servicer certain Mortgage Loans,
from time to time, to be serviced by Servicer in accordance with the terms and
conditions of the Mortgage Loans and this Agreement and to extend the benefit of
certain of the terms and conditions of this Agreement to any designated Third
Party Beneficiary; and
WHEREAS, it is the intent of the parties that certain Mortgage Loans,
described in Exhibit A attached hereto, are to be delivered for servicing
concurrent with this Agreement and thereafter Owner may deliver additional
Mortgage Loans for Servicing lawsuit to the terms hereof, and
NOW, THEREFORE, in consideration of the foregoing and mutual agreements
contained herein, the parties hereby agree as follows:
ARTICLE I
---------
DEFINITIONS
-----------
Section 1.1 Definition of Terms
- ----------- -------------------
Whenever used herein, the following words and phrases, unless the context
otherwise requires, shall have the following meanings:
"Accepted Servicing Practices": Procedures and practices (including collection
- -------------------------------
procedures) that the Servicer customarily employs and exercises in servicing and
administering mortgage loans for its own account.
"Additional Servicing Compensation": Incidental fees or charges provided for in
- ------------------------------------
the applicable Note and/or Mortgage that are customarily charged by the Servicer
in the ordinary course of performing its obligations herein including but not
limited to late payment charges, assumption processing charges and assumption
fees, modification charges, demand fees, insufficient funds fees and
reconveyance charges. Additional Servicing Compensation shall not refer to
prepayment charges/penalties.
"Agreement": This Servicing Agreement, including all exhibits hereto, and all
- -----------
amendments hereof and supplements hereto.
"Borrower": The individual or individuals obligated to repay the Mortgage Loan.
- -----------
<PAGE>
"Business Day": Any day other than (i) a Saturday or Sunday, or (ii) a day in
- ---------------
which banking or savings and loan institutions in San Diego, California or
Wilmington, Delaware are authorized or obligated by law or executive order to be
closed.
"Collection Account": The trust account or accounts which are created and
- ---------------------
maintained by Servicer specifically for the collection of principal and
interest, Insurance Proceeds, Liquidation Proceeds and other amounts received
with respect to the Mortgage Loans.
"Errors and Omissions Policy:" An insurance policy insuring against losses
- ------------------------------
caused by errors and omissions of the Servicer and its personnel, including, but
not limited to, losses caused by the failure to pay insurance premiums or taxes
to record or perfect liens, or to properly service Mortgage Loans in accordance
with this Agreement.
"Escrow Account": For each Mortgage Loan, an account maintained by the Servicer
- -----------------
specifically for the payment of real estate tax assessments and insurance
premiums against Mortgaged Property.
"Escrow Payments": All funds collected by the Servicer to cover expenses of the
- ------------------
Borrower required to be paid under the Mortgage Loan Documents, including Hazard
Insurance and Flood Insurance, tax assessments and Mortgage Insurance Premiums.
"Event of Default": Any one of the conditions or circumstances enumerated in
- -------------------
Sections 6.4 and 6.5.
"Fidelity Bond": An insurance policy insuring against losses caused by
- ----------------
negligent or unlawful acts of the Servicer's personnel.
"Flood Insurance Policy": An insurance policy insuring against flood damage to
- -------------------------
a Mortgaged Premises, required by loan originators for Mortgaged Premises
located in "flood hazard" areas identified by the Secretary of HUD or the
Director of the Federal Emergency Management Agency.
"Flood Zone Service Contract": A transferable contract maintained for the
- ------------------------------
Mortgaged Property with a nationally recognized flood zone service provider for
the purpose of obtaining the current flood zone status relating to such
Mortgaged Property.
"Hazard Insurance Policy": A fire and casualty extended coverage insurance
- --------------------------
policy insuring against loss or damage from fire and other perils covered within
the scope of standard extended hazard coverage, together with all riders and
endorsements thereto.
"Insurance Policy": Any insurance policy for a Mortgage Loan referred to in
- -------------------
this Agreement, including Mortgage Insurance Policy, Hazard Insurance Policy,
Flood Insurance Policy, and Title Insurance Policy, including all riders and
endorsements thereto.
2
<PAGE>
"Liquidation Proceeds": Cash received in connection with the liquidation of a
- -----------------------
defaulted Mortgage Loan, whether through the sale or assignment of the Mortgage
Loan, trustee's sale, foreclosure sale, sale of the Mortgaged Property or
otherwise.
"Mortgage Insurance Policy": Insurance which insures the holder of the Note
- ----------------------------
against covered losses in the event the Borrower defaults under the Note or the
Security Instrument, including all riders and endorsements thereto.
"Mortgage Insurer": A mortgage guaranty insurance company that has issued a
- -------------------
Mortgage Insurance Policy in respect of a Mortgage Loan,
"Mortgage Loan Documents": Any and all documents related to a Mortgage Loan,
- --------------------------
including the Note, Security Instrument and insurance policies.
"Mortgage Loan Schedule": The schedule of Mortgage Loans in the form of Exhibit
- -------------------------
A, attached hereto, delivered to Servicer on each Transfer Date, such schedule
setting forth the information as to each Mortgage Loan in form and substance
agreed to by the Servicer and the Owner.
"Mortgage Loan": The individual mortgage loan which is the subject of this
- ----------------
Agreement delivered from time to time being identified by a Mortgage Loan
Schedule. To the extent applicable and as the context so permits; any and all
references to "Mortgage Loan" or "Mortgage Loans" herein shall be deemed to
include any Mortgage Loan that has become an REO Property.
"Mortgaged Property": The property securing a Note and subject to the lien of
- ---------------------
the related Security Instrument, which property consists of a single parcel of
real property on which is located a one-to four-family detached residential
dwelling, condominium or attached townhouse or rowhouse.
"Nonrecoverable Advance": Any previously made or proposed servicing advance, in
- -------------------------
the Servicer's good faith determination, that will not or would not be
ultimately recoverable from the related insurance proceeds or Liquidation
Proceeds.
"Note": A manually executed written instrument evidencing the Borrower's
- -------
promise to repay a stated sum of money, plus interest, to the noteholder by a
specific date according to a schedule of principal and interest payments.
"Owner": New Century Mortgage Corporation.
- --------
"Permitted Investments": Any one or more of the investments detailed on Exhibit
- ------------------------
B attached hereto.
3
<PAGE>
"Principal Prepayment": Any payment or other recovery of principal on a
- -----------------------
Mortgage Loan which is received in advance of its scheduled due date, net of any
prepayment penalty or premium thereon which is retained by the Servicer, and is
not accompanied by an amount of interest representing scheduled interest due on
any date or dates in any month or months subsequent to the month of prepayment.
"Remittance Date": The date each month on which Servicer distributes to the
- ------------------
Owner the Owner's portion of the collections on the Mortgage Loans. The
Remittance Date shall be the twenty-fifth (25th) day of each calendar month, or
the next succeeding Business Day if the twenty-fifth (25th) day of the month is
not a Business Day.
"Remittance Reports": Those monthly reports specified in Section 4.9.
- ---------------------
"REO Property": Mortgaged Premises the title to which is acquired on behalf of
- ---------------
the Owner through foreclosure or deed-in-lieu of foreclosure.
"Security Instrument": A written instrument creating a valid lien on the
- ----------------------
Mortgaged Premises. A Security Instrument may be in the form of a mortgage,
deed of trust, deed to secure debt or security deed, including any riders and
addenda thereto.
"Servicer": Advanta Mortgage Corp. USA, or its successor in interest to the
- -----------
Servicer under this Agreement.
"Servicing Advance": All customary, reasonable and necessary "out of pocket"
- --------------------
costs and expenses incurred in the performance by the Servicer of its servicing
obligations and not part of the Servicer's general and administrative expenses,
including but not limited to, the cost of (a) the preservation, restoration and
protection of the Mortgaged Property, (b) any enforcement or judicial
proceedings, including foreclosures, relating to Mortgage Loans or Mortgaged
Properties (c) the management and liquidation of the Mortgaged Property if the
Mortgaged Property is acquired in satisfaction of the Mortgage, and (d) the
maintenance of hazard insurance, payment of property taxes (including tax
penalties) or mortgage insurance premiums.
"Servicing Fee": For each Mortgage Loan, the compensation due the Servicer each
- ----------------
month.
"Servicing File": With respect to each Mortgage Loan, documents delivered to
- -----------------
the Servicer, in the form of Exhibit C, attached hereto, including photocopies
of the Note and Security Instrument and any other documents necessary for the
Servicer to service the Mortgage Loans in accordance with the terms of this
Agreement.
"Tax Service Contract": A transferable contract maintained for the Mortgaged
- -----------------------
Property with a tax servicer provider for the purpose of obtaining current
information from local taxing authorities relating to such Mortgaged Property.
4
<PAGE>
"Title Insurance Policy": An American Land Title Association (ALTA) mortgage
- -------------------------
loan title policy form 1970, or other form of lender's title insurance policy,
insuring the lien priority of the Security Instrument on the Mortgaged Premises.
"Transfer Date": For each Mortgage Loan, the date on which such Mortgage Loan is
- ----------------
delivered to Servicer for servicing hereunder.
"Third Party Beneficiary" : Any party named by Owner from time to time during
- -------------------------
the term of this Agreement as designated in writing in the form of Exhibit D
attached hereto.
ARTICLE II
----------
DELIVERY OF MORTGAGE LOAN FILES SERVICING STANDARDS
---------------------------------------------------
Section 2.1 Transfer of Mortgage Loan Files (Reserved for Future Use)
- ----------- ---------------------------------------------------------
Section 2.2 Agreement to Service Mortgage Loans
- ----------- -----------------------------------
(a) Servicer agrees to service and administer the Mortgage Loans on the
Owner's behalf, in accordance with the terms of this Agreement, the Mortgage
Loans and Accepted Servicing Practices, giving due consideration to customary
and usual standards of practice of prudent institutional residential mortgage
loan servicers of comparable Mortgage Loans and with a view to the maximization
of timely recovery of principal and interest on the Mortgage Loans, but without
regard to: (i) any relationship that Servicer or any of its affiliates may have
with any Borrower or affiliate or manager thereof, (ii) Servicer's obligations
to make advances or to incur servicing expenses with respect to the Mortgage
Loans, or (iii) Servicer's right to receive compensation for its services
hereunder.
(b) Subject to the provisions of Section 2.2(a), above, Servicer shall
have full power and authority to do or cause to be done any and all things in
connection with such servicing and administration which Servicer may deem
necessary or desirable. In accordance with this Agreement, the Owner will
provide Servicer upon request with any powers of attorney necessary to undertake
the duties of Servicer. Servicer agrees to use its best efforts to service and
administer the Mortgage Loans in accordance with applicable state and federal
law.
(c) Without limiting the generality of the foregoing, the Servicer shall
and is hereby authorized and empowered by the Owner to: (i) execute and deliver,
on behalf of the Owner, any and all instruments of satisfaction or cancellation,
or of partial or full release or discharge, with respect to the Mortgage Loans
and with respect to the related Mortgaged Property, (ii) consent to any
modification of the terms of the Note if the effect of any such modification
will not materially or adversely affect the security afforded by the related
Mortgaged Property, (iii) institute foreclosure proceedings or obtain a deed-in-
lieu of foreclosure on behalf of the Owner,
5
<PAGE>
and (iv) take title in the name of the Owner to any Mortgaged Property upon such
foreclosure or delivery of deed in lieu of foreclosure.
Section 2.3 Sub-Servicers
- ----------- -------------
The Servicer may perform its servicing responsibilities through agents or
independent contractors acting as sub-servicers, but shall not thereby be
released from any of its responsibilities hereunder, and the Servicer shall
diligently pursue all of its rights against such subservicer. Notwithstanding
any agreement with a sub-servicer, any of the provisions of this Agreement
relating to agreements or arrangements between the Servicer and a sub-servicer
or reference to actions taken through a sub-servicer or otherwise, the Servicer
shall remain obligated and liable to the Owner for the servicing and
administering of the Mortgage Loans in accordance with the provisions of this
Agreement without diminution of such obligation or liability by virtue of such
Sub-Servicing Agreements or arrangements or by virtue of indemnification from
the subservicer for any acts and omissions and to the same extent and under the
same terms and conditions as if the Servicer alone were servicing and
administering the Mortgage Loans and any other transactions or services relating
to the Mortgage Loans involving the sub-servicer shall be deemed to be between
the sub-servicer and the Servicer alone and the Owner shall have no obligations,
duties or liabilities with respect to the sub-servicer including no obligation,
duty or liability of the Owner to pay sub-servicer's fees and expenses. For
purposes of this Agreement, the Servicer shall be deemed to have received
payments on Mortgage Loans when the subservicer has received such payments. The
Servicer shall pay all fees and expenses of the subservicer from its own funds,
the Servicing Fee or other amounts permitted to be retained by or reimbursed to
the Servicer hereunder.
ARTICLE III
-----------
REPRESENTATIONS AND WARRANTIES
------------------------------
Section 3.1 Representations and Warranties of the Servicer
- ----------- ----------------------------------------------
Servicer represents and warrants to, and covenants with, the Owner that:
(a) Servicer is, and throughout the term of this Agreement will remain (i)
a corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware and (ii) duly qualified and in good standing to
transact any and all of its business, including the duties under this Agreement;
(b) The execution, delivery and performance of this Agreement have been
duly authorized by all necessary corporate action and the execution and delivery
of this Agreement by Servicer in the manner contemplated and the performance of
and compliance with the terms will not violate, contravene or create a default
under any applicable federal, state or local laws, licenses or permits;
6
<PAGE>
(c) The execution and delivery of this Agreement by Servicer and the
performance of and compliance with its obligations and covenants do not require
the consent or approval of any governmental authority or, if such consent or
approval is required, it has been or will be obtained prior to such becoming
required;
(d) Assuming the due authorization and valid execution and delivery of
this Agreement by Owner, this Agreement, when executed and delivered by
Servicer, will constitute a valid, legal and binding obligation of Servicer,
enforceable against Servicer in accordance with its terms, except as the
enforcement thereof may be limited by applicable debtor relief laws and except
as certain equitable remedies may not be available regardless of whether
enforcement is sought in equity or law; and
(e) There is no litigation pending or, to Servicer's knowledge threatened,
which, if determined adversely to Servicer, would adversely affect the
execution, delivery or enforceability of this Agreement or Servicer's ability to
perform its obligations hereunder.
Section 3.2 Representations and Warranties of the Owner
- ----------- -------------------------------------------
As of the date of this Agreement and each Transfer Date, Owner represents
and warrants to, and covenants with, the Servicer that:
(a) The Owner owns, without limitation, (i) all right, title and interest
in the Mortgage Loans (including, without limitation, the security interest
created thereby), (ii) all the rights as a lender under any Insurance Policy
relating to a Mortgaged Property securing a Mortgage Loan for the benefit of the
owner of such Mortgage Loan, and (iii) all proceeds derived from any of the
foregoing;
(b) Owner is, and throughout the term of this Agreement will remain (i) a
corporation duly organized, validly existing and in good standing under the laws
of the state of its incorporations and (ii) duly qualified and in good standing
to transact any and all of its business;
(c) The execution, delivery and performance of this Agreement have been
duly authorized by all necessary corporate action and the execution and delivery
of this Agreement by Owner in the manner contemplated and the performance of and
compliance with the terms hereof by it will not violate, contravene or create a
default under any charter document or bylaw of the Owner or any contract,
agreement, or instrument to which the Owner is a party or by which Owner or any
of its property is bound;
(d) The execution and delivery of this Agreement by Owner and the
performance of and compliance with its obligations and covenants do not require
the consent or approval of any governmental authority or, if such consent or
approval is required, it has been or will be obtained prior to such becoming
required;
7
<PAGE>
(e) Assuming the due authorization and valid execution and delivery of
this Agreement by Servicer, this Agreement, when executed and delivered by
Owner, will constitute a valid, legal and binding obligation of Owner,
enforceable against Owner in accordance with its terms, except as the
enforcement may be limited by applicable debtor relief laws and except as
certain equitable remedies may not be available regardless of whether
enforcement is sought in equity or law;
(f) There is no litigation pending or, to Owner's knowledge, threatened,
which, if determined adversely by Owner, would adversely affect the execution,
delivery or enforceability of this Agreement or Owner's ability to perform its
obligations;
(g) Owner holds legal right, title and interest to the Mortgage Loans and
no other party has the right to collect payments with respect thereto and the
Owner has the full power and authority to assign the servicing functions to
Servicer;
(h) All information provided to Servicer by Owners, including any copies
of Mortgage Loan Documents, information relating to the origination of such
Mortgage Loan, the prior servicing experience and any and all of the Mortgage
Loan balances and identification of any litigation affecting a contract or the
servicing thereof is true, correct and complete in all material respects;
(i) The information set forth in each Mortgage Loan Schedule is true and
correct in all material respects as of each Transfer Date;
(j) Each Security Instrument is a valid lien on the related Mortgaged
Property;
(k) To the Owner's best knowledge, no Mortgage Loan is subject to any
offset, defense or counterclaim;
(l) To the Owner's best knowledge, the physical property subject to each
Security Instrument is free of material damage;
(m) Each Mortgage Loan at the time it was made complied in all material
respects with applicable state and federal laws and regulations, including,
without limitation, usury, equal credit opportunity and disclosure laws and
regulations;
(n) The Owner has not received a written notice of default of any senior
mortgage loan related to a Mortgage Loan which has not been cured by a party
other than such Owner;
(o) To the Owner's best knowledge, no Mortgage Loan is subject to (i) any
mechanics lien or claim for work, labor or material of which the Owner has
received written notice and that is or may be a lien prior to, or equal or
coordinate with, the lien of the related Security Instrument, (ii) any
delinquent tax or assessment lien against the related Mortgage Loan;
8
<PAGE>
(p) A lender's title insurance policy or binder, or other assurance of
title customary in the relevant jurisdiction, is in full force and effect with
respect to each Mortgage Loan;
(q) Each Mortgage Loan is covered by appropriate Hazard Insurance and/or
Flood Insurance; and
(r) Each Mortgage Loan is covered by a Tax Service Contract which is
assignable to Servicer or for each Mortgage Loan not covered by such Tax Service
Contract the Owner agrees to purchase such Tax Service Contract.
(s) Each Mortgage Loan is covered by a Flood Zone Service Contract which
is assignable to Servicer or for each Mortgage Loan not covered by such Flood
Zone Service Contract.
ARTICLE IV
----------
ACCOUNTING AND REPORTING
------------------------
Section 4.1 Collection of Mortgage Loan Payments
(a) Continuously from the date hereof until the principal and interest on
the Mortgage Loans is paid in full, Servicer agrees to proceed diligently to
collect all payments called for under the terms and provisions of the Mortgage
Loans, and shall follow such collection procedures with respect to mortgage
loans comparable to the Mortgage Loans held in its own portfolio, to the extent
such procedures are consistent with this Agreement and the terms of any
Insurance Policy and in accordance with Accepted Servicing Practices.
(b) The Servicer may in its sole discretion (i) waive late payment
charges, assumption fees, charges for checks returned insufficient funds or
other fees which may be collected in the ordinary course of servicing the
Mortgage Loans, (ii) if a Borrower is in default (as defined in the Mortgage
Loan), arrange with the Borrower a schedule for the payment of delinquent
payments due on the related Mortgage Loan.
Section 4.2 Interest Calculations
- ----------- ---------------------
Monthly interest calculations for periods of a full month must be based on
a 30-day month and 300-day year, if permitted by the Note or by the law.
Interest calculations for periods of less than a full month (such as for a
Liquidation) must be calculated on the basis of actual days elapsed in a month
and a 365-day year unless otherwise provided by applicable federal or state law.
Section 4.3 Application of Mortgage Loan Payments
- ----------- -------------------------------------
9
<PAGE>
A payment from the Borrower will normally consist of interest, principal,
deposits for insurance and taxes and late charges, if applicable. Payments
received from Borrowers shall be applied in the following order unless otherwise
required by, the Mortgage Loan Documents, applicable state and federal
requirements or by a Mortgage Insurer:
(a) Deposits for taxes and insurance; and
(b) Required monthly interest; and
(c) Required monthly principal; and
(d) All other fees or penalties.
Section 4.4 Establishment of Collection Account, Deposits in Collection
- ----------- -----------------------------------------------------------
Account
-------
(a) The Servicer shall establish and maintain a Collection Account, (the
"Collection Account"), in the form of a time deposit or demand account, which
may be interest bearing, titled "Advanta Mortgage Corp. USA" in trust for the
Owner. Such Collection Account shall be established with a commercial bank, a
savings bank or a savings and loan association by the Servicer.
(b) The Servicer shall deposit in the Collection Account within two (2)
Business Days of receipt, and retain therein the following payments and
collections received or made with respect to the Mortgage Loans:
(i) all principal collections, including Principal Prepayments and
prepayment charges/penalties;
(ii) all interest collections,
(iii) all Liquidation Proceeds net of expenses;
(iv) all proceeds received by the Servicer under any Insurance
Policy, other than proceeds to be held in the Escrow Account and applied to
the restoration or repair of the Mortgaged Property or released to the
Borrower in accordance with Accepted Servicing Procedures; and
(v) all awards or settlements in respect of condemnation
proceedings or eminent domain affecting any Mortgaged Property which are
not released to the Borrower in accordance with Accepted Servicing
Practices.
(c) The Servicer may invest all or a portion of the funds in the
Collection Account in Permitted Investments in the name of the Servicer. The
Servicer shall receive as Additional
10
<PAGE>
Servicing Compensation all income and gain realized from any such Permitted
Investment. If any principal losses are incurred in respect of any Permitted
Investments, Servicer shall reimburse and restore to the Collection Account the
amount of any such principal losses out of Servicer's own funds immediately as
realized. Notwithstanding the foregoing, Servicer's right to invest funds in
the Collection Account shall in no way limit the rights of Servicer to be
compensated for its services as provided in this Agreement.
(d) The requirements in this Section 4.4 for deposit in the Collection
Account shall be exclusive, it being understood and agreed that, without
limiting the generality of the foregoing, payments in the nature of late payment
charges, assumption processing charges, modification charges, demand fees,
insufficient funds fees and reconveyance fees need not be deposited by the
Servicer in the Collection Account.
Section 4.5 Withdrawals from the Collection Account
- ----------- ---------------------------------------
The Servicer shall, from time to time, withdraw funds from the Collection
Account for the following purposes:
(a) to reimburse itself for unreimbursed Servicing Advances, and for
accrued and unpaid Servicing Fees, the Servicer's right to reimburse itself
pursuant to this subclause (a) with respect to any Mortgage Loan being limited
to related Liquidation Proceeds, condemnation proceeds, REO Disposition
Proceeds, amounts representing proceeds of any Insurance Policy related to a
Mortgage Loan and such other amounts as may be collected by the Servicer from
the Borrower or otherwise relating to the Mortgage Loan, it being understood
that, in the case of any such reimbursement, the Servicer's right thereto shall
be prior to the rights of Owner;
(b) to reimburse itself for expenses incurred by and reimbursable to it
pursuant to Sections 4.10, 6.7 and 6.15;
(c) to pay to itself any interest earned on funds deposited in the
Collection Account;
(d) to withdraw any amounts inadvertently deposited in the Collection
Account or not required to be deposited therein;
(e) to make payments to the Owner in the amounts and in the manner provided
herein; and
(f) to clear and terminate the Collection Account upon the termination of
this Agreement.
If after receipt and application of Liquidation Proceeds in accordance with
the foregoing, the Servicer has sustained an unrecovered loss in connection with
a Servicing Advance, the amount of unrecovered loss shall be reimbursed to the
Servicer, first, from amounts in the
11
<PAGE>
Collection Account, or if such funds are insufficient, by payment to the
Servicer by the Owner within ten (10) Business Days of the receipt of notice by
such Owner of such amount.
The Servicer shall distribute that portion of collections on the Mortgage
Loans due to the Owner in the amounts and in the manner provided herein on each
Remittance Date.
Section 4.6 Establishment of Escrow Account, Deposits in Escrow Account
- ----------- -----------------------------------------------------------
(a) The Servicer shall establish and maintain an Escrow Account, in the
form of a time deposit or demand account, which may be interest bearing, titled,
with respect to Escrow Payments actually held by the Servicer, "Advanta Mortgage
Corp. USA in trust for Borrower's Escrow Payments." Such Escrow Account shall be
established with a commercial bank, a savings bank or a savings and loan
association. The Escrow Account shall be drawable upon by the Servicer as
provided herein.
(b) The Servicer shall deposit in the Escrow Account within two (2)
Business Days of receipt or earlier if so required by law and retain therein:
(i) all Escrow Payments collected on account of the Mortgage Loans, for the
purpose of effecting timely payment of any such items as required under the
terms of this Agreement, and (ii) all amounts representing proceeds of any
Insurance Policy which are to be applied to the restoration or repair of any
Mortgaged Property. To the extent required by law, the Servicer shall pay
interest on escrowed funds to the Borrower notwithstanding that the Escrow
Account may not bear interest.
(c) The Servicer may invest the funds in an Escrow Account in Permitted
Investments which shall be in the name of the Servicer in the trust capacity in
which the related Escrow Account is held or its nominee. The Servicer shall
receive as Additional Servicing Compensation an amount equal to all income and
gain realized from any such Permitted Investment, but only to the extent such
gain to Servicer is (1) not prohibited by applicable law and (ii) in excess of
amounts necessary to make any interest payments required by the Mortgage Loan
Documents or applicable law to be made to the applicable Borrower. If any
losses are incurred in respect of any Permitted Investments, Servicer shall
immediately reimburse and restore to the applicable Escrow Account the amount of
any such losses out of Servicer's own funds as realized. Notwithstanding the
foregoing, Servicer's right to invest funds in the Collection Account shall in
no way limit the rights of Servicer to be compensated for its services as
provided in this Agreement.
Section 4.7 Withdrawals From Escrow Account
- ----------- -------------------------------
Withdrawals from the Escrow Account shall be made by the Servicer, only
(a) to effect timely payment of taxes, mortgage insurance premiums, flood,
fire and hazard insurance premiums or other items constituting Escrow Payments
for the related Mortgage Loan;
12
<PAGE>
(b) to reimburse the Servicer for any Servicing Advance made by the
Servicer to effect the payment of taxes or insurance required under the terms of
the related Mortgage Loan, but only from amounts received on the related
Mortgage Loan which represent late payments or collections of Escrow Payments
thereunder;
(c) to refund to any Borrower any funds found to be in excess of the
amounts required under the terms of the related Mortgage Loan;
(d) for application to restoration or repair of the Mortgaged Property
(e) to pay to the Borrower, to the extent required by law, any interest
paid on the funds deposited in the Escrow Account;
(f) to pay to itself any interest earned on funds deposited in the Escrow
Account;
(g) to remove any deposits made in error; or
(h) to clear and terminate the Escrow Account upon termination of this
Agreement;
Section 4.8 Servicing Advances
- ----------- ------------------
As required, Servicer agrees to make Servicing Advances for the
preservation of any Mortgaged Property, including the payment of accrued and
unpaid taxes, forced placed hazard insurance, repayment of senior liens. It is
understood that Servicer's obligation to make such Servicing Advances shall
continue until (i) the payment in full of the Mortgage Loan or (ii) the date on
which the Mortgaged Property is liquidated; provided however, Servicer shall
have no obligation to make Servicing Advances if, in the sole determination of
Servicer, such Servicing Advance would constitute a Nonrecoverable Advance.
Section 4.9 Monthly Remittance Reports
- ----------- --------------------------
(a) The Servicer shall service the Mortgage Loans on an actual/actual
remittance basis with the accounting cutoff with respect to each Remittance Date
of the last day of the month immediately preceding such Remittance Date.
(b) Not later than the fifteenth (15/th/) day of each calendar month, or
the succeeding business day should the fifteenth not be a business day, the
Servicer shall prepare and deliver to both the Owner and the Third Party
Beneficiary the following reports with respect to activity for the most recently
ended prior calendar month:
(i) a trial balance report including all Mortgage Loans;
(ii) a monthly remittance report;
13
<PAGE>
(iii) a report setting forth any Mortgage Loans added or deleted;
(iv) a report setting forth curtailment or prepayments; and
(v) reports setting forth delinquency detail (including bankruptcy,
foreclosure and REO status).
Section 4.10 Servicing Compensation
- -----------------------------------
(a) As compensation for its activities hereunder, the Servicer shall be
entitled to retain as to each Mortgage Loan, a Servicing Fee of .40% (40 basis
points) per annum which shall be retained by Servicer from the interest portion
of the Mortgage Loan payments as received from a Borrower and from Liquidation
Proceeds, as applicable.
(b) Servicer shall be entitled to retain the Additional Servicing
Compensation.
(c) In addition, Owner shall pay Servicer a set-up fee of $30.00 per
Mortgage Loan for each Mortgage Loan transferred to Servicer and serviced
hereunder. Furthermore, in the event no "lifetime" tax contracts are presently
in force which are assignable to Servicer, Owner agrees to reimburse Servicer
the cost of purchasing a tax contract for each Mortgage Loan in this category.
Servicer shall furnish Owner, with a monthly statement detailing the Mortgage
Loan set-up fees incurred and/or tax contracts purchased during the immediately
preceding month. Servicer shall have the right to withdraw on a monthly basis
from the Collection Account all accrued and unpaid set-up fees and tax contract
charges incurred in the prior month.
ARTICLE V
---------
ADMINISTRATION AND SERVICING OF MORTGAGE LOANS
----------------------------------------------
Section 5.1 Enforcement of Due-On-Sale Clause, Assumption
- ----------- ---------------------------------------------
The Servicer is required to enforce any due-on-sale clause in the Note or
Security Instrument to the extent permitted by applicable law upon the transfer
of title to the Mortgaged Property unless (i) the Mortgage Loan Documents,
including riders or addenda permit such a transfer or (ii) enforcement of the
due-on-sale clause will jeopardize the Mortgage Insurance coverage, if any, on
such Mortgage Loan. In all circumstances of unapproved transfer initiated by
the Borrower, the Servicer is required to promptly notify the Mortgage Insurer
of such transfer and obtain written approval from the Mortgage Insurer (if
required under the applicable Mortgage Insurance Policy) before initiating
enforcement proceedings.
14
<PAGE>
Notwithstanding the preceding paragraph, Owner authorizes Servicer, to
waive, in the sole discretion of Servicer, the enforcement of a due-on-sale
clause on any Mortgage Loan and permit the assumption of such Mortgage Loan,
subject to the following conditions:
(a) No material term of the Note, including, but not limited to, the rate
of interest on the Note and the remaining term to maturity, may be changed in
connection with such assumption, provided however, such limitation shall not
apply to interest rate, payment or amortization changes otherwise provided for
under the terms of the Note. such as in the case of an adjustable rate mortgage.
(b) The Servicer has performed a credit review of the new borrower and
determined that the new borrower is a prudent credit risk in the sole opinion of
the Servicer. Owner hereby authorizes, Servicer to apply more liberal credit
standards and underwriting in connection with a request for an assumption of a
Mortgage Loan than Servicer would apply for comparable new loans which
Servicer's is then originating for its own account, if Servicer in its sole
discretion, reasonably believes there is a risk of foreclosure on the Mortgage
Loan in the event the assumption is denied,
(c) The Mortgage Insurer has approved in writing the assumption of the
Mortgage Loan by the new borrower and such Mortgage Loan will continue to be
insured by such Mortgage Insurer;
(d) The new borrower executes documents assuming all the obligations of the
Borrower under the Mortgage Loan Documents;
(e) The Mortgage Loan will continue to be secured, and insured with a Title
Insurance Policy, if any, by a valid security interest upon the Mortgaged
Property of the same lien priority as existed immediately prior to such
assumption; provided however, if Servicer has not been delivered a Title
Insurance Policy on the Transfer Date for any such Mortgage Loan, Servicer shall
have no obligation to inquire into or obtain any title insurance in connection
with any assumption of such a Mortgage Loan; and
(f) The Servicer has determined that the estimated net realizable value of
the Mortgaged Property, in the sole judgment of the Servicer, is less than the
then unpaid principal balance of the related Note, plus accrued interest to the
estimated date of the closing of the sale of Mortgaged Property to the new
borrower.
(g) The Servicer shall provide the Owner the original assumption agreement
following execution thereof.
Subject to the terms of the Note and Security Instrument, and applicable
law or regulation, the Servicer may charge a reasonable and customary assumption
fee, and the Servicer may retain such fee as Additional Servicing Compensation.
15
<PAGE>
Section 5.2 Maintenance of Insurance
- ----------- ------------------------
(a) The Servicer shall cause to be maintained with respect to each Mortgage
Loan a Hazard Insurance Policy with a generally acceptable carrier that provides
for fire and extended coverage, and for a recovery of any insurance proceeds
relating to such Mortgage Loan by the Servicer on behalf of the Owner.
(b) If the Mortgage Loan relates to a Mortgaged Property identified at
origination in the Federal Register by the Federal Emergency Management Agency
as having a special flood hazard, the Servicer will cause to be maintained with
respect thereto a Flood Insurance Policy with a generally acceptable carrier
which provides for a recovery of any insurance proceeds relating to such
Mortgage Loan by the Servicer on behalf of the Owner.
(c) With respect to each Mortgage Loan that provides for the collection of
escrow funds for the payment of fire and hazard insurance or flood insurance,
the Servicer shall effect the payment thereof prior to the applicable policy
termination date employing for such purpose deposits in the Escrow Account which
shall have been estimated and accumulated by the Servicer in the amounts
sufficient for such purposes. To the extent a Mortgage Loan does not provide
for escrow payments and the Borrower fails to maintain any required insurance
coverage, the Servicer shall by a Servicing Advance make the payment required to
effect the applicable in-force policy for the related Mortgaged Property.
(d) Notwithstanding the proceeding paragraphs, the Servicer at its option
may obtain and maintain, with respect to all or any portion of the Mortgage
Loans a blanket insurance policy with extended coverage insuring against fire,
hazard and flood, as applicable. The Servicer shall be deemed conclusively to
have satisfied its obligations with respect to Hazard Insurance and Flood
Insurance coverage under this Section if such blanket policy names the Servicer
as "Loss Payee" and provides coverage in an amount equal to the aggregate unpaid
principal balance of the Mortgage Loans without co-insurance.
Section 5.3 Cancellation of Mortgage Insurance
- ----------- ----------------------------------
If a Borrower requests cancellation of the Mortgage Insurance Policy, the
Servicer shall ensure that the FNMA guidelines governing cancellation are
followed in connection with any cancellation.
Section 5.4 Reserved For Future Use
- ----------- -----------------------
Section 5.5 Liquidation of Defaulted Mortgage Loans
- ----------- ---------------------------------------
16
<PAGE>
(a) The Servicer, on behalf of the Owner, shall foreclose upon or otherwise
take title, in the name of Owner, to Mortgaged Property (such as by a deed in
lieu of foreclosure) for any Mortgage Loan which is in default and as to which
no satisfactory arrangements, in the sole reasonable opinion of Servicer, can be
made for collection of delinquent payments. In connection with such foreclosure
or other transfer of title, the Servicer shall exercise the rights and powers
vested in it hereunder, and use the same degree of care and skill in such
exercise or use, as prudent servicers would exercise or use under similar
circumstances in the conduct of their own affairs, including, but not limited
to, making Servicing Advances for the payment of taxes, amounts due with respect
to senior liens, and insurance premiums.
(b) In determining whether or not to foreclose upon or otherwise comparably
transfer title to such Mortgaged Property, the Servicer shall take into account
the existence of any condition upon or impacting the Mortgaged Property in the
nature of hazardous substances, hazardous wastes, infectious waste, toxic
substance, solid wastes and so forth, as such terms now or in the future are
defined or listed in, or otherwise classified pursuant to, or regulated by, any
applicable Environmental Laws, including but not limited to all present and
future federal, state or local laws, ordinances, rules, regulations, decisions
and other requirements of governmental authorities relating to the environment
or to any Hazardous Substance.
Section 5.6 Deed-in-Lieu of Foreclosure
- ----------- ---------------------------
If the Owner and, if applicable, the Mortgage Insurer have approved the
liquidation of a Mortgage Loan by accepting a deed-in-lieu of foreclosure, the
Servicer may accept such deed provided that:
(a) Marketable title, as evidenced by a Title Insurance Policy, can be
conveyed to and acquired by the Owner or its designee;
(b) The transaction complies with all requirements of each Mortgage
Insurer, if any, and does not and will not violate or contravene any restriction
or prohibition of any Mortgage Insurance Policy, if any, or otherwise result in
any loss of or reduction in coverage of benefits under such policies;
(c) No cash consideration is paid to the Borrower;
(d) The Mortgaged Properties are vacant at the time of the Borrower's
conveyance thereof, unless occupancy has been approved by each Mortgage Insurer,
if any; and
(e) The Servicer has obtained from the Borrower a written acknowledgment
that the deed is being accepted as an accommodation to the Borrower and on the
condition that the Mortgaged Properties will be transferred to the Owner that
owns such Mortgage Loan free and
17
<PAGE>
clear of all claims, liens, encumbrances, attachments, reservations or
restrictions except for those to which the Mortgaged Properties were subject at
the time the Mortgaged Properties became subject to the lien of the Security
Instrument.
Upon acquisition of the Mortgaged Properties, the Servicer shall promptly
advise the Owner and each Mortgage Insurer by letter, indicating the details of
the transaction and reasons for the conveyance and providing such other
information as is required by each Mortgage Insurer. Title shall be conveyed
directly from the Borrower to the Owner, or to such other Person designated by
the Owner.
Section 5.7 Real Estate Owned
- ----------- -----------------
Title, Management and Disposition of REO Property. In the event that title
-------------------------------------------------
to the Mortgaged Property is acquired in foreclosure or by deed in lieu of
foreclosure, the deed or certificate of sale shall be taken in the name of the
Owner. The Owner agrees to cooperate with Servicer and take such actions as
shall be necessary for the Servicer to take title to the Mortgaged Property in
the name of the Owner.
Notwithstanding the generality of the foregoing provisions, the Servicer
shall manage, conserve, protect and operate each REO Property for the Owners
solely for the purpose of its prompt disposition and sale. Pursuant to its
efforts to sell such REO Property, the Servicer shall either itself or through
an agent selected by the Servicer protect and conserve such REO Property in the
same manner and to such extent as is customary in the locality where such REO
Property is located and may, but shall not be obligated to, incident to its
conservation and protection of the interests of the Owners, rent the same, or
any part thereof, as the Servicer deems to be in the best interests of the
Owners for the period prior to the sale of such REO Property. The Servicer
shall attempt to sell the same on such terms and conditions as the Servicer
deems to be in the best interest of the Owner.
The Servicer shall cause to be deposited within two (2) Business Days of
receipt in the Collection Account all revenues received with respect to the
conservation and disposition of each REO Property and shall be permitted to
retain from such revenues funds necessary for the proper operation, management
and maintenance of the REO Property, including reimbursement for its Servicing
Advances and fees of any managing agent acting on behalf of the Servicer.
Possession of Mortgage Files by Servicer. From time to time in connection
----------------------------------------
with the servicing of the Mortgage Loans hereunder, the Servicer may take
possession of all or a portion of the documents relating to the Mortgage Loans
as may be held by the Owner or the Custodian. Such documents shall be held in
trust by the Servicer for the benefit of the Owner as the owner thereof and the
Servicer's possession of such document or documents is at the will of the Owner
for the sole purpose of servicing the related Mortgage Loan, and such retention
and possession by the Servicer is in a custodial capacity only.
18
<PAGE>
ARTICLE VI
----------
MISCELLANEOUS PROVISIONS
------------------------
Section 6.1 Custodian to Cooperate
- ----------- ----------------------
From time to time and as appropriate in the servicing of any Mortgage Loan,
including without limitation, the payment in full of any Mortgage Loan,
notification that payment in full will be escrowed, foreclosure or other
comparable conversion of a Mortgage or collection under any applicable Insurance
Policy, the Custodian, upon request of the Servicer shall release or cause the
release and delivery of the related Mortgage Loan Documents to the Servicer.
Section 6.2 Assignment of Agreement
- ----------- -----------------------
Servicer agrees not to sell, transfer, pledge or otherwise dispose of its
right to receive all or any portion of the Servicing Fees, and any such
attempted sale, transfer, pledge or disposition shall be void, unless such
transfer is made to a successor servicer with the prior written consent of the
Owner.
Section 6.3 Access to Certain Documentation Regarding the Loans
- ----------- ---------------------------------------------------
Upon reasonable advance notice, Servicer shall provide reasonable access
during normal business hours at its offices to the Owner, or any agents or
representatives thereof, to any reports and to information and documentation
regarding the Mortgage Loans.
Section 6.4 Default By Servicer
- ----------- -------------------
Owner may terminate this Agreement upon the happening of any one or more of
the following events:
(a) Falsity in any material respect of any representation of warranty of
Servicer contained in this Agreement and failure of Servicer to cure the
condition or event causing any such representation or warranty to be false
within sixty (60) days after the Servicer's receipt of written notice from Owner
specifying such falsity and requesting that it be cured or corrected;
(b) Failure of Servicer to duly observe or perform in any material respect
any other covenant, condition, or agreement in this Agreement for a period of
sixty (60) days after receipt of written notice by Servicer from Owner,
specifying such failure and requesting that it be remedied; provided, however,
if the failure stated in the notice cannot be corrected within the applicable
period, Owner shall consent to a reasonable extension of time if corrective
action is instituted by Servicer within the applicable period and is diligently
pursued until corrected;
19
<PAGE>
(c) Decree or order of a court, agency or supervisory authority having
jurisdiction in the premises appointing a trustee, conservator, receiver or
liquidator in any insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceeding affecting Servicer or any of its properties
utilized in connection with the performance of servicing, or for resolving the
liquidation of the affairs of Servicer, if such decree or order shall have
remained in force undischarged or unstayed for a period of ninety (90) days;
(d) Commencement by Servicer as debtor of any case or proceeding under any
bankruptcy, insolvency, reorganization, liquidation, dissolution or similar law;
(e) Consent by Servicer to the appointment of a trustee, conservator,
receiver or liquidator in any insolvency, readjustment of debt, marshaling of
assets and liabilities, or similar proceeding affecting Servicer or
substantially all of its properties; or
(f) Admission in writing by Servicer of its inability to pay debts
generally as they mature, or the making of an assignment for the benefit of
creditors.
If any of the events specified in (c) through (f) above shall occur,
Servicer shall give written notice of such occurrence to Owner within ten (10)
days of the happening of such event. Any such termination shall be effective as
of the date stated in a written notice delivered to Servicer.
Section 6.5 Default by Owner
- ----------- ----------------
Servicer may terminate this Agreement upon the happening of any one or more
of the following events:
(a) Falsity in any material respect of any representation or warranty of
Owner contained in this Agreement and failure of Owner to cure the condition or
event causing such representation or warranty to be false within sixty (60) days
after Owner's receipt of written notice from Servicer specifying such falsity
and requesting that it be cured or corrected;
(b) Such other breach of this Agreement by Owner which materially and
adversely affects Servicer, which breach shall continue for a period of sixty
(60) days after receipt of written notice by Owner from Servicer, specifying
such breach and requesting that it be remedied; provided, however, if the breach
stated in the notice cannot be remedied within the applicable period, Servicer
shall consent to a reasonable extension of time if corrective action is
instituted by Owner within the applicable period and is diligently pursued until
corrected;
20
<PAGE>
(c) Decree or order of a court, agency or supervisory authority having
jurisdiction in the premises appointing a trustee, conservator, receiver or
liquidator in any insolvency, readjustment of debt, marshaling of assets and
liabilities or similar proceeding affecting Owner or any of its properties
utilized in connection with the performance of Servicer's duties hereunder, or
the winding up or liquidation of the affairs of Owner, if such decree or order
shall have remained in force undischarged or unstayed for a period of ninety
(90) days;
(d) Commencement by Owner as debtor of any case of proceeding under any
bankruptcy, insolvency, reorganization, liquidation, dissolution or similar law;
(e) Consent by Owner to the appointment of a trustee, conservator, receiver
or liquidator in any insolvency, readjustment of debt, marshaling of assets and
liabilities, or similar proceeding affecting Owner or substantially all of its
properties; or
(f) Admission in writing by Owner of its inability to pay debts generally
as they mature, or the making of an assignment for the benefit of creditors.
If any of the events specified in (c) through (f) above shall occur, Owner
shall give written notice of such occurrence to Servicer within ten (10) days of
the happening of such event. Any such termination shall be effective as of the
date stated in a written notice delivered to Owner.
Section 6.6 Reserved for Future Use
- ----------- -----------------------
Section 6.7 Indemnification By Owner
- ----------- ------------------------
Owner shall indemnify and hold Servicer harmless from and shall reimburse
Servicer for any losses, damages, deficiencies, claims, penalties, forfeitures,
causes of action or expenses of any nature (including reasonable attorneys'
fees) incurred by Servicer which arise out of or result from:
(a) The inaccuracy of any representation of Owner contained in this
Agreement or material breach of any warranty, covenant or agreement made or to
be performed by Owner pursuant to this Agreement;
(b) the failure of the originator of any Mortgage Loan to originate such
Mortgage Loan in accordance with applicable law;
(c) the failure of any prior servicer to service the Mortgage Loan in
accordance with any applicable law;
(d) any matters that occurred prior to the Transfer Date for the Mortgage
Loan involved or any incomplete or incorrect Mortgage Loan data, records or
information provided in connection with the origination or prior servicing of
any Mortgage Loan;
21
<PAGE>
(e) Owner's failure to fulfill the Servicing responsibilities not assumed
by Servicer of otherwise result from Owner preventing, hampering or impeding
Servicer's performance of its duties and responsibilities under this Agreement;
or
(f) Any litigation or claim with respect to the Mortgage Loans not arising
out of, or resulting from, Servicer's failure to observe the terms and covenants
of the Mortgage Loans or this Agreement including specifically any litigation
relating to ARM Loans.
The Servicer shall promptly notify the Owner if a claim is made by a third
party with respect to this Agreement or the Mortgage Loans, and the Servicer at
its option may assume the defense of any such claim. The Owner shall, within
ten (10) Business Days of receiving a statement of amounts advanced by the
Servicer in connection with the defense of any such claim, reimburse the
Servicer for all amounts advanced by it pursuant to this Section 6.7, except to
the extent that such claim is not caused by the Servicer's failure to service
the Mortgage Loans in compliance with the terms of this Agreement.
Section 6.8 Fidelity Bond and Errors Omissions
- ----------- ----------------------------------
Servicer agrees to obtain and maintain at its expense and shall keep in
full force and effect throughout the term of this Agreement, a blanket fidelity
bond and an errors and omissions insurance policy covering its officers and
employees and other persons acting on its behalf in connection with the
servicing activities hereunder. The amount of coverage shall be at least equal
to the coverage that prudent mortgage loan servicers having servicing portfolios
of a similar size. In the event that any such bond or policy ceases to be in
effect, Servicer agrees to obtain a comparable replacement bond or policy with
equivalent coverage. No provision of this Section shall operate to diminish or
restrict or otherwise impair the Servicer's responsibilities and obligations set
forth in this Agreement.
Section 6.9 Indemnification by Servicer
- ----------- ---------------------------
Servicer shall indemnify and hold Owner harmless from and shall reimburse
Owner for any losses, damages, deficiencies, claims, causes of action or
expenses of any nature (including reasonable attorneys' fees) incurred by Owner
which arise out of or result from:
(a) The inaccuracy of any representation of Servicer contained in this
Agreement or material breach of any warranty, covenant or agreement made or to
be performed by Servicer pursuant to this Agreement;
(b) Any litigation or claim arising out of, or resulting from, Servicer's
failure to observe the terms and covenants of this Agreement.
(c) The failure of the Servicer to service such Mortgage Loan in accordance
with applicable law.
22
<PAGE>
Section 6.10 Amendment
- ------------ ---------
This Agreement may be amended from time to time by the Owner and the
Servicer by written Agreement signed by the Owner and the Servicer.
Section 6.11 Governing Law
- ------------ -------------
This Agreement shall be construed in accordance with the laws of the State
of California, without regard to the conflict of laws or rules thereof, and the
obligations, rights and remedies of the parties hereunder shall be determined in
accordance with such laws.
Section 6.12 Notices
- ------------ -------
(a) All demands, notices and communications hereunder shall be in writing
and shall be deemed to have been duly given if personally delivered at or mailed
by registered mail, postage prepaid, to (i) in case of the Servicer, Advanta
Mortgage Corp. USA, 16875 West Bernardo Drive, San Diego, California 92127,
Attention: SVP Loan Servicing; and (ii) in the case of the Owner, New Century
Mortgage Corporation, 4910 Birch Street, Suite 100, Newport Beach, CA 92660,
Attention: Chief Operating Officer or such other addressee as the Owner or the
Servicer may hereafter furnish; and (iii) in the case of the Third Party
Beneficiary. the address provided to Servicer by Owner from time to time and in
the format of Exhibit D.
(b) Any party may alter the address to which communications or copies are
to be sent by giving notice of such change of address in conformity with the
provisions of this Paragraph for giving of notice.
Section 6.13 Severability of Provisions
- ------------ --------------------------
If any one or more of the covenants, agreements, provision or terms of this
Agreement shall be held invalid for any reason whatsoever, then such covenants,
agreements, provisions or terms shall be deemed severable from the remaining
covenants, agreements, provisions and terms of this Agreement and shall in no
way affect the validity or enforceability of the provisions of this Agreement.
Section 6.14 Document Deficiencies
- ------------ ---------------------
The Servicer shall have no obligations to (i) address or any deficiencies
in Mortgage Loan documents transferred to it, (ii) seek any document missing
from any assignments relating to the transfer of any Mortgage Loan to or from
the Owner. The Servicer's responsibility is solely limited to notifying the
Owner as to any missing or document deficiency it becomes aware of.
23
<PAGE>
Section 6.15 Termination
- ------------ -----------
(a) The obligations and responsibilities of the Servicer shall terminate
upon the latter of (i) the final payment or other liquidation of the last
Mortgage Loan or (ii) the disposition of all property acquired upon possession
of any Mortgage Loan and the remittance of all funds due thereunder.
(b) Either Owner or Servicer may, at any time and in its sole discretion,
terminate this Agreement upon at least 90 days prior written notice to other
party; provided if the Owner terminates this Agreement, Owner shall, except upon
the occurrence of an Event of Default under Section 6.4 hereof, pay all
reasonable costs associated with the transfer of Mortgage Loans to a successor
servicer. If Servicer terminates this Agreement it shall be liable to pay all
reasonable costs associated with the transfer of Mortgage Loans to successor
servicer.
(c) If Owner transfers servicing of any amount of the Mortgage loans to
another servicer, Owner shall pay to Servicer $25.00 per Mortgage Loan
transferred; provided, however, if the Owner transfers servicing of any amount
of the Mortgage Loans to Another Servicer within ninety (90) days of the
applicable transfer date of any such mortgage loan, Owner shall pay to Servicer
$50.00 per Mortgage Loan transferred.
Section 6.16 Attorneys' Fees
- ------------ ---------------
In the event any party hereto brings an action to enforce any of the
provisions of this Agreement, the party against whom judgment is rendered in
such action shall be liable to the others for reimbursement of their costs,
expenses and attorneys' fees, including such costs, expenses and fees as may be
incurred on appeal.
Section 6.17 No Solicitation
- ------------ ---------------
Unless specifically permitted by the Owner in advance, the Servicer agrees
not to use Servicer's records to specifically solicit any Borrower with respect
to the refinancing of a Mortgage Loan.
Section 6.18 No Partnership.
- ------------ --------------
Nothing herein contained shall be deemed or construed to create a co-
partnership or joint venture between the parties hereto and the services of the
Servicer shall be rendered as an independent contractor and not as agent for the
Owner or the Third Party Beneficiary.
24
<PAGE>
Section 6.19 Execution: Successors and Assigns.
- ------------ ---------------------------------
This Agreement may be executed in one or more counterparts and by the
different parties hereto on separate counterparts, each of which, when so
executed, shall be deemed to be an original; such counterparts, together, shall
constitute one and the same agreement. This Agreement shall inure to the
benefit of and be binding upon the Servicer, the Owner and the Third Party
Beneficiary and their respective successors and assigns.
Section 6.20 Third-Party Beneficiary.
- ------------ -----------------------
The Third Party Beneficiary is an intended third-party beneficiary of this
Agreement. Upon written notification from the Third Party Beneficiary to the
Servicer in accordance with Section 6.12 herein that an event of a default by
the Owner under any credit or loan sale agreement between Owner and Third Party
Beneficiary has occurred, the Third Party Beneficiary shall be entitled to all
of the rights and benefits of the Owner under this Agreement as if the Third
Party Beneficiary were the Owner named herein and the Servicer shall continue to
service the Mortgage Loans in accordance with this Agreement.
Section 6.19 Counterparts
- ------------ ------------
This Agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original, and all of which together shall constitute
one and same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their respective officers, all as of the day and year first
above mentioned.
Advanta Mortgage Corp. USA New Century Mortgage
Corporation
By: /s/ William P. Garland By: /s/ Brad A. Morrice
--------------------------------- ----------------------------
Name: William P. Garland Name: Brad A. Morrice
Title: Senior Vice President Title: Chief Executive Officer
25
<PAGE>
FIRST AMENDMENT TO LOAN SERVICING AGREEMENT
This First Amendment to Loan Servicing Agreement ("AMENDMENT") dated
December 10, 1996 is entered into by and between New Century Mortgage
Corporation ("OWNER") and Advanta Mortgage Corp. USA ("SERVICER").
WHEREAS, Owner and Subservicer (collectively, the "PARTIES") executed that
certain Loan Servicing Agreement dated April 4, 1996 (the "SERVICING
AGREEMENT").
WHEREAS, the Servicing Agreement provides that the Subservicer shall remit
funds in the Collection Account, including Principal Prepayments, to the Owner
on the Remittance Date.
WHEREAS, the Owner desires that Servicer remit Principal Prepayments which
represent payment in full of a Mortgage Loan to Owner in five Business Days.
WHEREAS, the Servicing Agreement provides that Owner shall pay Subservicer
a set-up fee of $30.00 per Mortgage Loan and the Parties have agreed to change
the set-up fee to $35.00 per Mortgage Loan.
THEREFORE, in consideration of the foregoing, the Parties hereby agree as
follows:
1. Effective January 1, 1997, the last paragraph of Section 4.5 is
deleted in its entirety and replaced with the following:
The Servicer shall distribute that portion of collections on the
Mortgage Loans except Principal Prepayments which represent payment in
full of a Mortgage Loan, due to the Owner in the amounts and in the
manner provided herein on each Remittance Date. Servicer shall
distribute Principal Prepayments representing payment in full of a
Mortgage Loan to Owner within five (5) Business Days of the receipt of
such amount by Servicer.
2. Effective December 1, 1996, the set-up fee of $30.00 in the first
sentence of Section 4.10(c) is modified to $35.00.
Except as amended by this Amendment, the Servicing Agreement shall
remain in full force and effect.
Advanta Mortgage Corp. USA New Century Mortgage Corporation
By: /s/ William P. Garland By: /s/ Brad A. Morrice
------------------------------- -----------------------------
Name: William P. Garland Name: Brad A. Morrice
Title: Senior Vice President Title: Chief Executive Officer
<PAGE>
EXHIBIT 10.5
SUB-SERVICING AGREEMENT
-----------------------
SUB-SERVICING AGREEMENT (this "Agreement") dated as of the 1st day of
February, 1997 by and between New Century Mortgage Corporation, a California
corporation ("Master Servicer") and Advanta Mortgage Corp. USA, a Delaware
corporation ("Sub-Servicer").
BACKGROUND
----------
The Master Servicer has previously entered into a Pooling and
Servicing Agreement (the "Pooling Agreement") dated as of February 1, 1997 among
Salomon Brothers Mortgage Securities VII, Inc., as Depositor, New Century
Mortgage Corporation, as Master Servicer, and First Trust National Association,
as Trustee. Pursuant to the terms of the Pooling Agreement, the Master
Servicer, acting directly or through one or more Sub-Servicers, is to act as
master servicer to service and administer certain mortgage loans in accordance
with the Pooling Agreement.
Master Servicer desires to appoint Sub-Servicer to perform Master
Servicer's servicing obligations under the Pooling Agreement.
The Certificate Insurer and the Trustee are intended to be third party
beneficiaries of this Agreement and are hereby recognized by the parties hereto
to be third-party beneficiaries of this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual covenants
hereinafter set forth, the parties hereto, intending to be legally bound, hereby
agree as follows:
1. Definitions. Capitalized terms not defined herein shall have the same
-----------
meanings as in the Pooling Agreement.
2. Appointment of Sub-Servicer. Master Servicer hereby appoints Sub-
---------------------------
Servicer to perform Master Servicer's servicing obligations under the Pooling
Agreement with respect to the Mortgage Loans, which appointment Sub-Servicer
hereby accepts. Sub-Servicer agrees to perform in accordance with the servicing
standards set forth in the Pooling Agreement and to perform all of the duties of
Master Servicer under the Pooling Agreement with respect to the Mortgage Loans
and to be bound by all of the obligations of the Master Servicer thereunder
except that the Sub-Servicer does not (i) assume any responsibility to indemnify
nor make any of the Seller's representations and warranties under the Mortgage
Loan Purchase Agreement or the Depositor's or the Seller's or the Master
Servicer's representations and warranties under including, without limitation,
(a) the Pooling Agreement, (b) the Insurance Agreement, and the Indemnification
Agreement dated as of February 27, 1997 by and among the Certificate Insurer,
the Depositor and the Master Servicer and (c) the Certificate Insurance Policy,
(ii) assume any obligation to pay a termination fee to any Sub-Servicer pursuant
to the Pooling Agreement, (iii)
<PAGE>
assume any obligations to purchase Mortgage Loans pursuant to any agreement
including, without limitation, Sections 2.03 and 3.16 (c) of the Pooling
Agreement or under the Mortgage Loan Purchase Agreement nor assume any
obligation to record the Mortgage Loans or (iv) assume the obligations of the
Master Servicer set forth in Section 8.05 and Article XI of the Pooling
Agreement.
3. Payment of Collections. Sub-Servicer hereby agrees to deposit all
----------------------
collections with respect to Mortgage Loans, less the compensation provided for
in Paragraph 4, below, in accordance with Section 3.10 of the Pooling Agreement
and to make withdrawals from the Collection Account in accordance with Section
3.11 of the Pooling Agreement.
4. Compensation. As compensation for rendering the services specified
------------
herein, the Sub-Servicer shall be entitled to (i) retain from each monthly
payment a servicing fee in an amount equal to 0.45% per annum on the outstanding
Principal Balance of each Mortgage Loan serviced as of the first day of the
related Due Period (the "Sub-Servicing Fee"), (ii) all investment earnings on
the Collection Account and (iii) additional servicing compensation set forth in
Section 3.18 of the Pooling Agreement, including without limitation, release and
satisfaction fees (to the extent allowed by law), bad check charges, late
payment charges, assumption, modification and substitution fees, tax service
fees, fees for statement of account or pay off of the Mortgage Loan and any
other servicing-related fees to the extent not required to be deposited in
Collection Account, may be retained by the Sub-Servicer directly from
collections. So long as the Sub-Servicer receives investment earnings on the
Collection Account or the Distribution Account, respectively, any net investment
losses in funds held in the Collection Account or the Distribution Account shall
be for the account of the Sub-Servicer and promptly upon the realization of such
loss shall be contributed by the Sub-Servicer to the Collection Account or the
Distribution Account, respectively.
Each month the Sub-Servicer shall collect the Servicing Fee and the
items set forth above. The Servicing Fee shall be offset on a pro rata basis
due to Section 3.24 of the Pooling Agreement (the amount remaining following
such offset, as a dollar amount for any month, the "Net Servicing Fee"). The
Sub-Servicer shall remit to the Master Servicer on the 25th day of each month,
or if such day is not a business day the next business day thereafter, an
amount equal to (i) 5/50 of the Net Servicing Fee, if any, collected by the Sub-
Servicer, to an account specified in writing to the Sub-Servicer by an
Authorized Officer of Master Servicer.
Notwithstanding the above and the last sentence of the definition of
"Servicing Fee" contained in the Pooling Agreement, the Sub-Servicing Fee shall
not be reduced hereby and the Master Servicer shall make the Sub-Servicer whole
if the total Sub-Servicing Fee is not available. The Sub-Servicer is hereby
authorized to reduce the Net Servicing Fee in order to offset any such
reduction.
2
<PAGE>
5. Representations, Warranties and Covenants of Sub-Servicer. Sub-
---------------------------------------------------------
Servicer hereby represents and warrants to Master Servicer as follows:
(a) The Sub-Servicer is a Delaware corporation duly organized,
validly existing and in good standing under the laws of the state of its
incorporation and is in compliance with the laws of each state in which any
Mortgaged Property is located to the extent necessary to enable it to
perform its obligations under the terms of this Agreement; the Sub-Servicer
has the full corporate power and authority to execute and deliver this
Agreement and to perform in accordance herewith; the execution, delivery
and performance of this Agreement by the Sub-Servicer and the consummation
of the transactions contemplated hereby have been duly and validly
authorized; this Agreement evidences the valid, binding and enforceable
obligation of the Sub-Servicer; and all requisite corporate action has been
taken by the Sub-Servicer to make this Agreement valid and binding upon the
Sub-Servicer in accordance with its terms;
(b) Neither the execution and delivery of this Agreement, nor the
fulfillment of or compliance with the terms and conditions of this
Agreement, will conflict with or result in a breach of any of the terms,
conditions or provisions of the Sub-Servicer's charter or by-laws or any
legal restriction or any agreement or instrument to which the Sub-Servicer
is now a party or by which it is bound, or constitute a default or result
in an acceleration under any of the foregoing, or result in the violation
of any law, rule, regulation, order, judgment or decree to which the Sub-
Servicer or its property is subject, or impair the ability of the Trustee
(or the Sub-Servicer as the agent of the Trustee) to realize on the
Mortgage Loans, or impair the value of the Mortgage Loans;
(c) The Sub-Servicer is an approved seller/servicer of conventional
residential mortgage loans for FNMA and FHLMC;
(d) There is no action, suit, proceeding, or investigation pending
or, to the knowledge of the Sub-Servicer, threatened against the Sub-
Servicer which, either in any one instance or in the aggregate, may result
in any material adverse change in the business, operations, financial
condition, properties or assets of the Sub-Servicer, or in any material
impairment of the right or ability of the Sub-Servicer to carry on its
business substantially as now conducted, or of any action taken or to be
taken in connection with the obligations of the Sub-Servicer contemplated
herein, or which would materially impair the ability of the Sub-Servicer to
perform under the terms of this Agreement; and
(e) No consent, approval, authorization or order of any court or
governmental agency or body is required for the execution, delivery and
performance by the Sub-Servicer of or compliance by the Sub-Servicer with
this Agreement or the Mortgage Loans or the consummation of the
transactions contemplated by this Agreement, or if required, such approval
has been obtained prior to the Closing Date;
3
<PAGE>
It is understood and agreed that the representations and warranties
set forth in this paragraph 5 shall survive delivery of the Mortgage Loans to
the Trustee.
Upon discovery by any of the Master Servicer, the Sub-Servicer, the
Certificate Insurer or the Trustee of a breach of any of the representations and
warranties set forth in this Paragraph 5 which materially and adversely affects
the interests of the Certificateholders or of the Certificate Insurer, the party
discovering such breach shall give prompt written notice to the other parties.
Within 60 days of its discovery or its receipt of notice of breach, the Sub-
Servicer shall cure such breach in all material respects and, upon the Sub-
Servicer's continued failure to cure such breach, may thereafter be removed by
the Master Servicer or the Certificate Insurer pursuant to paragraph 6 hereof;
provided, however, that if the Sub-Servicer can demonstrate to the reasonable
- -------- -------
satisfaction of the Master Servicer and the Certificate Insurer that it is
diligently pursuing remedial action, then the cure period may be extended with
the written approval of the Master Servicer and the Certificate Insurer, which
written approval shall not be unreasonably withheld.
6. Removal of Sub-Servicer; Resignation of Sub-Servicer. (a) The Master
----------------------------------------------------
Servicer with the consent of the Certificate Insurer, or the Certificate Insurer
may remove the Sub-Servicer upon the occurrence of any of the following events
(each, a "Sub-Servicer Event of Default"):
(i) any failure by the Sub-Servicer to remit to the Trustee for
distribution to the Certificateholders any payment (other than a P&I
Advance required to be made from its own funds on any Master Servicer
Remittance Date pursuant to Section 4.03 of the Pooling Agreement) required
to be made under the terms of the Certificates and this Agreement which
continues unremedied for a period of one Business Day after the date upon
which written notice of such failure, requiring the same to be remedied,
shall have been given to the Sub-Servicer by the Depositor, the Master
Servicer, the Certificate Insurer or the Trustee (in which case notice
shall be provided by telecopy) , or to the Sub-Servicer, the Master
Servicer, the Depositor, the Certificate Insurer and the Trustee by the
Holders of Certificates entitled to at least 25% of the Voting Rights; or
(ii) any failure on the part of the Sub-Servicer duly to observe or
perform in any material respect any other of the covenants or agreements on
the part of the Sub-Servicer contained in this Agreement, or the breach by
the Sub-Servicer of any representation and warranty contained in paragraph
5 hereof, which continues unremedied for a period of 30 days after the
earlier of (i) the date on which written notice of such failure, requiring
the same to be remedied, shall have been given to the Sub-Servicer by the
Master Servicer, the Depositor, the Certificate Insurer or the Trustee, or
to the Sub-Servicer, the Master Servicer, the Depositor, the Certificate
Insurer and the Trustee by the Holders of Certificates entitled to at least
25% of the Voting Rights and
4
<PAGE>
(ii) actual knowledge of such failure by a Servicing Officer of the Sub-
Servicer; or (iii) a decree or order of a court or agency or supervisory
authority having jurisdiction in the premises in an involuntary case under
any present or future federal or state bankruptcy, insolvency or similar
law or the appointment of a conservator or receiver or liquidator in any
insolvency, readjustment of debt, marshalling of assets and liabilities or
similar proceeding, or for the winding-up or liquidation of its affairs,
shall have been entered against the Sub-Servicer and such decree or order
shall have remained in force undischarged or unstayed for a period of 90
days; or
(iv) the Sub-Servicer shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency, readjustment of
debt, marshalling of assets and liabilities or similar proceedings of or
relating to it or of or relating to all or substantially all of its
property; or
(v) the Sub-Servicer shall admit in writing its inability to pay
its debts generally as they become due, file a petition to take advantage
of any applicable insolvency or reorganization statute, make an assignment
for the benefit of its creditors, or voluntarily suspend payment of its
obligations; or
(vi) there shall have occurred, and the Certificate Insurer shall
have notified the Sub-Servicer, the master Servicer and the Trustee of the
occurrence of an event of default pursuant to Section 5.01(f) of the
Insurance Agreement; or
(vii) any failure of the Sub-Servicer to make any P&I Advance on any
Master Servicer Remittance Date required to be made from its own funds
pursuant to Section 4.03 of the Pooling Agreement which continues
unremedied until 3:00 p.m. New York time on the Business Day following the
Master Servicer Remittance Date.
If a Sub-Servicer Event of Default described in clauses (i) through (vii) of
this Section shall occur, then, and in each and every such case, so long as such
Sub-Servicer Event of Default shall not have been remedied, the Master Servicer
or the Certificate Insurer may, by notice in writing to the Sub-Servicer
terminate all of the rights and obligations of the Sub-Servicer in its capacity
of Sub-Servicer under this Agreement, to the extent permitted by law, and in and
to the Mortgage Loans and the proceeds thereof. On or after the receipt by the
Sub-Servicer of such written notice, all authority and power of the Sub-Servicer
under this Agreement, whether with respect to the Certificates (other than as a
Holder of any Certificates) or the Mortgage Loans shall pass to and be vested in
the Master Servicer pursuant to and under this Section, and, without limitation,
the Master Servicer is hereby authorized and empowered, as attorney-in-fact or
otherwise, to execute and deliver, on behalf of and at the expense of the Sub-
Servicer, any and all documents and other instruments and to do or accomplish
all other acts or things necessary of appropriate to effect the purposes of such
notice of termination, whether to complete the transfer and endorsement or
assignment of the Mortgage Loans and related documents, or otherwise. The Sub-
Servicer agrees promptly (and in any event no later than ten Business Days
subsequent to
5
<PAGE>
such notice) to provide the Master Servicer with all documents and records
requested by it to enable it to assume the Sub-Servicer's functions under this
Agreement, and to cooperate with the Master Servicer in effecting the
termination of the Sub-Servicer's responsibilities and rights under this
Agreement, including, without limitation, the transfer within one Business Day
to the Master Servicer for administration by it of all cash amounts which at the
time shall be or should have been credited by the Sub-Servicer to the Collection
Account held by or on behalf of the Sub-Servicer, or any REO Account or
Servicing Account held by or on behalf of the Sub-Servicer or thereafter be
received with respect to the Mortgage Loans or any REO Property serviced by the
Sub-Servicer (provided, however, that the Sub-Servicer shall continue to be
entitled to receive all amounts accrued or owing to it under this Agreement on
or prior to the date of such termination, whether in respect of P&I Advances,
Servicing Advances, or otherwise, and shall continue to be entitled to the
benefits of paragraph 8 notwithstanding any such termination).
(b) The Sub-Servicer shall not resign from the obligations and duties
hereby imposed on it, except by mutual consent of the Sub-Servicer and the
Master Servicer, with the consent of the Certificate Insurer, or upon
determination that the Sub-Servicer duties hereunder are no longer permissible
under applicable law or are in material conflict by reason of applicable law
with any other activities carried on by it, the other activities of the Sub-
Servicer so causing such a conflict being of a type and nature carried on by the
Sub-Servicer at the date of this Agreement. Any such determination permitting
the resignation of the Sub-Servicer shall be evidenced by an opinion of counsel
to such effect which shall be delivered to the Master Servicer and the
Certificate Insurer.
(c) Any Collections received by the Sub-Servicer after removal or
resignation shall be endorsed by it to the Master Servicer and remitted directly
and promptly to the Master Servicer.
(d) Upon removal or resignation of the Sub-Servicer, the Master
Servicer, with the consent of the Certificate Insurer, shall select a successor
Sub-Servicer.
(e) A successor Sub-Servicer under this Agreement shall take such
action, consistent with this Agreement, as shall be reasonably necessary to
effectuate any such succession. The Sub-Servicer agrees to cooperate with the
Successor Servicer in effecting the termination of the Sub-Servicer, s servicing
responsibilities and rights hereunder and shall promptly provide such Successor
Servicer all documents and records reasonably requested by it to enable it to
assume the Sub-Servicer's functions hereunder and shall promptly also transfer
to such Successor Servicer all amounts which should have been deposited in the
Collection Account by the Sub-Servicer or which are thereafter received with
respect to the Mortgage Loans. The successor Sub-Servicer shall not be held
liable by reason of any failure to make, or any delay in making, any
distribution hereunder or any portion thereof caused by (i) the failure of the
Sub-Servicer to deliver, or any delay in delivering, cash, documents or records
to it, or (ii) restrictions imposed by any regulatory authority having
jurisdiction over the Sub-Servicer.
6
<PAGE>
(f) Any successor Sub-Servicer shall assume all rights and
obligations of the predecessor Sub-Servicer under this Agreement, except those
arising before succession.
(g) If an Event of a Default of the Master Servicer occurs under the
Pooling Agreement, and (i) such Event of Default is not the result of a Sub-
Servicer Event of Default, and (ii) as a result of such Event of Default the
Master Servicer is terminated, the Sub-Servicer may, if it so chooses and with
the consent of the Certificate Insurer, become the successor Master Servicer.
(h) In the event the Master Servicer is terminated pursuant to the
terms of the Pooling Agreement and (i) the Sub-Servicer shall have elected not
to become the successor Master Servicer or (ii) if the Certificate Insurer
withholds its consent and the Sub-Servicer is not approved as the successor
Master Servicer, the Trustee or the Certificate Insurer may terminate this
Agreement without a fee.
7. No Assignment. Neither the Master Servicer or the Sub-Servicer
-------------
may assign or transfer its rights or obligations under this Agreement without
prior written consent of the parties hereto; provided, however, this shall not
prevent the Sub-Servicer in its sole judgment from delegating specific servicing
obligations hereunder to, including without limitation, computer bureaus, credit
bureaus, real estate tax service companies, real estate brokers, or agents,
attorneys, trustees and any other determined by the Sub-Servicer as long as the
Sub-Servicer remains responsible for any action taken or not taken by such
companies, agents, representatives throughout the term of this Agreement.
8. Limitation on Liability of the Sub-Servicer and Others. (a) The
------------------------------------------------------
Sub-Servicer and any director, officer, employee or agent of the Sub-Servicer
may rely in good faith on any document of any kind which, prima facie, is
properly executed and submitted by any person respecting any matters arising
thereunder. The Sub-Servicer and any director, officer, employee or agent of
the Sub-Servicer shall be indemnified and held harmless by the Master Servicer
against any loss, liability or expense incurred in connection with any legal
action relating to this Agreement or the Certificates, other than any loss,
liability or expense to any specific Mortgage Loan or Mortgage Loans (except as
any such loss, liability or expense shall be otherwise reimbursable pursuant to
this Agreement) or any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of duties
hereunder or by reason of reckless disregard of obligations and duties
hereunder.
(b) To the extent that the Sub-Servicer incurs any loss, liability or
expense arising out of or in connection with this Agreement, the Master Servicer
hereby assigns to the Sub-Servicer the Master Servicer's right to
indemnification from the Trust Fund pursuant to Section 6.03 of the Pooling
Agreement; provided, however, that in the event the Master Servicer seeks
indemnification pursuant to Section 6.03 of the Pooling Agreement for itself
from the Trust Fund, the Sub-Servicer shall be indemnified pursuant to clause
(a) hereof.
7
<PAGE>
(c) The Sub-Servicer shall not be under any obligation to appear in,
prosecute or defend any legal action unless such action is related to its
respective duties under this Agreement and, in its opinion, does not involve it
in any expense or liability; provided, however, that the Sub-Servicer may in its
discretion undertake any such action which it may deem necessary or desirable
with respect to this Agreement and the rights and duties of the parties hereto
and the interests of the Certificateholders hereunder. In such event, pursuant
to clause (b) above, the legal expenses and costs of such action and any
liability resulting therefrom (except any loss, liability or expense incurred by
reason of willful misfeasance, bad faith or gross negligence in the performance
of duties hereunder or by reason of reckless disregard of obligations and duties
hereunder) shall be expenses, costs and liabilities of either the Master
Servicer or the Trust Fund. In the case of reimbursement from the Trust Fund,
the Sub-Servicer shall be entitled to be reimbursed therefor from the Collection
Account as and to the extent provided in Section 3.11 of the Pooling Agreement,
any such right of reimbursement being prior to the rights of the
Certificateholders to receive any amount in the Collection Account.
9. Amendment to Sub-Servicing Agreement and the Pooling Agreement.
--------------------------------------------------------------
(a) This Agreement may be amended from time to time by written
agreement signed by the Master Servicer and the Sub-Servicer with the consent of
the Certificate Insurer which consent shall not be unreasonably withheld or
delayed.
(b) The Master Servicer hereby agrees that it shall not amend the
Pooling Agreement without the prior written consent of the Sub-Servicer, which
consent shall not be unreasonably withheld or delayed.
10. Annual Statement as to Compliance. The Sub-Servicer, at its own
---------------------------------
expense, will deliver to the Master Servicer, the Trustee and the Certificate
Insurer, on or before 90 days following the end of the fiscal year of the Sub-
Servicer, commencing in 1998, an Officer's Certificate stating, as to each
signer thereof, that (i) a review of the activities of the Sub-Servicer during
such preceding calendar year and of performance under this Agreement has been
made under such officer's supervision, and (ii) to the best of such officer's
knowledge, based on such review, the Sub-Servicer has fulfilled all its
obligations under this Agreement for such year, or, if there has been a default
in the fulfillment of all such obligations, specifying each such default known
to such officer and the nature and status thereof including the steps being
taken by the Sub-Servicer to remedy such default.
11. Annual Independent Certified Public Accountant's Reports. Not
--------------------------------------------------------
later than 90 days following the end of each fiscal year of the Sub-Servicer,
commencing in 1998, the Sub-Servicer, at its own expense, shall cause to be
delivered to the Master Servicer, the Trustee and the Certificate Insurer a
report stating that (i) it has obtained a letter of representation regarding
certain matters from the management of the Sub-Servicer which includes an
assertion that the Sub-Servicer has complied with certain minimum residential
mortgage loan servicing standards,
8
<PAGE>
identified in the Uniform Single Attestation Program for Mortgage Bankers
established by the Mortgage Bankers Association of America, with respect to the
servicing of residential mortgage loans during the most recently completed
fiscal year and (ii) on the basis of an examination conducted by such firm in
accordance with standards established by the American Institute of Certified
Public Accountants, such representation is fairly stated in all material
respects, subject to such exceptions and other qualifications that may be
appropriate.
12. Access to Certain Documentation and Information Regarding the Mortgage
----------------------------------------------------------------------
Loans. The Sub-Servicer shall provide to the Office of Thrift Supervision, the
- -----
FDIC, an any other federal or state banking or insurance regulatory authority
that may exercise authority over any Certificateholder, access to the
documentation regarding the Mortgage Loans required by applicable laws and
regulations. Such access shall be afforded without charge but only upon
reasonable request and during normal business hours at the offices of the Sub-
Servicer designated by it. In addition, access to the documentation regarding
the Mortgage Loans will be provided to any Certificateholder, the Certificate
Insurer, the Trustee and to any Person identified to the Sub-Servicer as a
prospective transferee of a Certificate, upon reasonable request during normal
business hours at the offices of the Sub-Servicer designated by it at the
expense of the Person requesting such access.
13. Miscellaneous.
-------------
(a) Indulgences, Etc. Neither the failure nor any delay on the part
----------------
of either party to exercise any right, remedy, power or privilege ("Right")
under this Agreement shall operate as a waiver thereof, nor shall any single or
partial exercise of any Right preclude any other or further exercise of the same
or of any other Right, nor shall any waiver of any Right with respect to any
occurrence be construed as a waiver of such Right with respect to any other
occurrence. No waiver shall be effective unless it is in writing and is signed
by the party asserted to have granted such waiver.
(b) Controlling Law. This Agreement and all questions relating to its
---------------
validity, interpretation, performance and enforcement (including, without
limitation, provisions concerning limitations of actions), shall be governed by
and construed in accordance with the laws of the State of New York,
notwithstanding any conflict-of-laws doctrines of the State of New York or other
jurisdictions to the contrary, and without the aid of any canon, custom or rule
of law requiring construction against the draftsman.
(c) Waiver of Jury Trial. Each of the parties hereby irrevocably
--------------------
waives all right to a trial by jury in any action, proceeding or counterclaim
arising out of or relating to this Agreement, any other transaction document or
any instrument or document delivered hereunder or thereunder.
9
<PAGE>
(d) Notices. All notices, requests, demands and other communications
-------
required or permitted under this Agreement shall be in writing and shall be
deemed to have been duly given, made and received only when delivered
(personally, by courier service such as Federal Express, or by other messenger)
against receipt or three days after when deposited in the United States mails,
first class postage prepaid, addressed as set forth below:
(i) If to Master Servicer:
New Century Mortgage Corporation
4910 Birch Street, Suite 100
Newport Beach, CA 92660
Attention: Brad A. Morrice
Telephone: (714) 440-7030
Telecopy: (714) 440-7033
(ii) If to Sub-Servicer:
Advanta Mortgage Corp. USA
16875 West Bernardo Drive
San Diego, California 92127
Attention: Senior Vice President Loan Servicing
Telephone: (619) 674-3356
Telecopy: (619) 674-3666
In addition, notice by mail shall be by air mail if posted outside of
the continental United States. Any party may alter the address to which
communications or copies are to be sent by giving notice of such change of
address in conformity with the provisions of this paragraph for the giving of
notice.
(e) Binding Nature of Agreement. This Agreement shall be binding upon
---------------------------
and inure to the benefit of the parties hereto and their respective permitted
successors and assigns.
(f) Provisions Separable. The provisions of this Agreement are
--------------------
independent of and separate from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or unenforceable in whole or in part.
10
<PAGE>
(g) Counterparts. For the purpose of facilitating the execution of
------------
this Agreement and or other purposes, this Agreement may be executed
simultaneously in any number of counterparts, each of which shall be deemed to
be an original, and together shall constitute and be one and the same
instrument.
(h) Entire Agreement. This Agreement contains the entire
----------------
understanding between the parties hereto with respect to the subject matter
hereof, and supersedes all prior and contemporaneous agreements and
understandings, inducements or conditions, express or implied, oral or written,
except as herein contained. The express terms hereof control and supersede any
course of performance and/or usage of the trade inconsistent with any of the
terms hereof. This Agreement may not be modified or amended other than by an
Agreement in writing.
(i) Paragraph Headings. The paragraph headings in this Agreement are
------------------
for convenience only; they form no part of this Agreement and shall not affect
its interpretation.
(j) Advice from Counsel. The parties understand that this Agreement
-------------------
is a legally binding agreement that may affect such party's rights. Each party
represents to the other that it has received legal advice from counsel of its
choice regarding meaning and legal significance of this Agreement and that it is
satisfied with its legal counsel and the advice received from it.
(k) Judicial Interpretation. Should any provision of this Agreement
-----------------------
or any of the other transaction documents require judicial interpretation, it is
agreed that a court interpreting or construing the same shall not apply a
presumption that the terms hereof shall be more strictly construed against any
Person by reason of the rule of construction that a document is to be construed
more strictly against the Person who itself or through its agent prepared the
same, it being agreed that all Parties have participated in the preparation of
this Agreement.
(l) With respect to each Distribution Date, the Sub-Servicer shall provide
to the Master Servicer (i) a copy of the Remittance Report and (ii) a copy of
the computer readable magnetic tape containing the information set forth in such
Remittance Report, each as required to be provided to the Trustee pursuant to
Section 4.03 (a) of the Pooling Agreement.
11
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their proper and duly authorized officers as of the
date first above written.
NEW CENTURY MORTGAGE CORPORATION
By: /s/ Brad A. Morrice
-------------------------------------------------
Name: Brad A. Morrice
Title: Chairman
ADVANTA MORTGAGE CORP. USA
By: /s/ William P. Garland
--------------------------------------------------
Name: William P. Garland
Title: Senior Vice President
ACKNOWLEDGED
FIRST TRUST NATIONAL ASSOCIATION
By: /s/ Eve D. Kaplan
-----------------------------------------
Name: Eve D. Kaplan
Title: Vice President
ACKNOWLEDGED
FINANCIAL SECURITY ASSURANCE INC.
By: /s/ Glenn Tso
-----------------------------------------
Name: Glenn Tso
Title: Director
12
<PAGE>
_________________, 199_
[CERTIFICATE INSURER
ADDRESS]
Re: New Century Asset-Backed Floating Rate Certificates, Series 1997-NC1
--------------------------------------------------------------------
Ladies and Gentlemen:
Please be advised that in connection with the above-referenced
transaction, (the "Master Servicer") has entered into a Sub-Servicing Agreement
with Advanta Mortgage Corp. USA ("Advanta"), pursuant to which Advanta will
service the mortgage loans owned by New Century Asset-Backed Floating Rate
Certificates, Series 1997-NC1 (the "Trust"). A copy of the Sub-Servicing
Agreement is attached.
Very truly yours,
NEW CENTURY MORTGAGE CORPORATION
By: _____________________________________
Name:
Title:
<PAGE>
February 27, 1997
Advanta Mortgage Corp. USA
16875 West Bernardo Drive
San Diego, California 92127
Ladies and Gentlemen:
Reference is made to (i) the Pooling and Servicing Agreement, dated as
of February 1, 1997 (the "Pooling and Servicing Agreement"), among Salomon
Brothers Mortgage Securities VII, Inc. as depositor (the "Depositor"), New
Century Mortgage Corporation as master servicer (the "Master Servicer") and
First Trust National Association as trustee (the "Trustee"), and (ii) the
Subservicing Agreement, dated as of February 1, 1997 (the "Subservicing
Agreement"), between the Master Servicer and Advanta Mortgage Corp. USA (the
"Sub-Servicer"). Capitalized terms used herein but not defined herein have the
meanings ascribed to them in the Pooling and Servicing Agreement.
On and after such time as the Trustee receives the resignation of, or
notice of the removal of, the Master Servicer from its rights and obligation
under the Pooling and Servicing Agreement, and with respect to resignation
pursuant to Section 6.04, after receipt by the Trustee and the Certificate
Insurer of the Opinion of Counsel required pursuant to Section 6.04, Advanta
Mortgage Corp. USA if it so elects, and if the Certificate Insurer so consents,
shall be appointed the successor Master Servicer and shall assume all of the
rights and obligations of the Master Servicer which accrue following such
transfer of servicing. The Master Servicer shall, upon request of but at the
expense of the Master Servicer, deliver to Advanta Mortgage Corp. USA all
documents and records relating to the Mortgage Loans and an accounting of
amounts collected and held by the Master Servicer and otherwise use its best
efforts to effect the orderly and efficient transfer of servicing rights and
obligations to the assuming party.
<PAGE>
FINANCIAL SECURITY
ASSURANCE INC.
By: /s/ Glenn Tso
--------------------------------------------
Name: Glenn Tso
Title: Director
FIRST TRUST NATIONAL
ASSOCIATION
By: /s/ Eve D. Kaplan
----------------------------------------
Name: Eve D. Kaplan
Title: Vice President
NEW CENTURY MORTGAGE
CORPORATION
By: /s/ Brad A. Morrice
----------------------------------------
Name: Brad A. Morrice
Title: Chairman
AGREED AND ACCEPTED
ADVANTA MORTGAGE CORP. USA
By: /s/ William P. Garland
---------------------------------------------
Name: William P. Garland
Title: Senior Vice President
2
<PAGE>
EXHIBIT 10.9
SALOMON BROTHERS REALTY CORP.
SEVEN WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
November 4, 1996
New Century Mortgage Corporation
4910 Birch Street, #100
Newport Beach, California 92660
Attention: Mr. Brad Morrice
President & General Counsel
Ladies and Gentlemen:
This letter agreement confirms the understanding and agreements
between New Century Mortgage Corporation ("New Century") and Salomon Brothers
Realty Corp. ("Salomon"), under the terms set forth herein, regarding (i) New
Century's agreement to offer for sale to Salomon on a right of first refusal
basis (with a last look) certain fixed rate and adjustable rate, one-to-four
family, first lien mortgages with loan to value ratios less than or equal to 80%
(the "Mortgage Loans") on a whole loan basis or to securitize such Mortgage
Loans using Salomon Brothers Mortgage Securities VII Inc. and (ii) Salomon's
agreement to provide an aggregation line to New Century in connection with
certain mortgage loans that are originated by New Century.
1. Offer of Mortgage Loans to Salomon Brothers.
-------------------------------------------
(a) In General. New Century hereby agrees to offer to Salomon on a
----------
right of first refusal basis (with a last look) not less than seventy percent of
the Mortgage Loans offered for sale by New Century. Prior to the disposition of
any such offered Mortgage Loans by New Century to any third party, New Century
shall offer to sell the Mortgage Loans to Salomon under the same terms as those
of the proposed disposition. In the event that mortgage loans are bid on by a
third party on a servicing released basis (and Salomon elects to bid on such
Mortgage Loans on a servicing retained basis), in evaluating such third party
bid, the value of the servicing shall be deemed to be equal to 1% of the unpaid
principal balance. If the offered Mortgage Loans are sold to any party other
than Salomon, New Century must provide prompt written confirmation of the sale
to Salomon which notice shall include the disposition price.
The agreement set forth herein shall remain in effect until New
Century has offered for sale to Salomon or securitized using Salomon Brothers
Mortgage Securities VII Inc. Mortgage Loans with an unpaid principal balance, as
of the date of offer to Salomon (or securitization), of not less than
$500,000,000, at least $200,000,000 of which shall be offered for sale as whole
mortgage loans (28,300,000 of which whole loan commitment has been
<PAGE>
New Century Mortgage Corporation
November 4, 1996 Page 2.
satisfied by New Century as of the date hereof) and the remaining Mortgage Loans
shall be offered to Salomon as whole mortgage loans or securitized through a
program of securitizations (the "Securitizations") of AAA and Aaa-rated
mortgage-backed securities (the "Securities") using Salomon Brothers Mortgage
Securities VII Inc. pursuant to transactions in which Salomon or an affiliate
shall act as the sole underwriter. No Mortgage Loan offered for sale to Salomon
which is a Problem Loan (as defined herein) or a Non-Standard Loan (as defined
herein) shall be counted toward the commitment provided in this section.
(b) Delivery of Mortgage Loans to Salomon. New Century shall offer
-------------------------------------
to sell the Mortgage Loans to Salomon in minimum increments of $5 million and
not more frequently than twice per month. New Century shall offer the Mortgage
Loans to Salomon by submitting to Salomon a preliminary mortgage loan schedule
by diskette or via modem, for Salomon's review. The preliminary mortgage loan
schedule must be received by Salomon not less than 48 hours prior to bid, must
be in a format acceptable to Salomon and shall include all information specified
on the form of mortgage loan schedule attached hereto as Exhibit A and any
additional information reasonably requested by Salomon to calculate the purchase
price for the Mortgage Loans. With respect to each pool of Mortgage Loans
offered for sale to Salomon, Salomon shall have the right to exercise its right
of first refusal with respect to all Mortgage Loans on a pool-by-pool basis.
Notwithstanding the provisions of Section 3 of this Letter Agreement regarding
the Aggregation Line, Salomon shall have no obligation to purchase any Mortgage
Loan offered for sale hereunder.
(c) Purchase Agreement. The Mortgage Loans to be sold by New Century
------------------
in a whole loan format shall be sold to Salomon pursuant to the terms of an
agreement (the "Purchase Agreement") to be entered into between New Century and
Salomon substantially in the form of the Mortgage Loan Purchase and Servicing
Agreement dated as of September 1, 1996 between Salomon and New Century, as
supplemented as provided herein. Under the Purchase Agreement, New Century will
make standard secondary market corporate representations and warranties as of
the date such Purchase Agreement is executed and as of any settlement date for
the purchase and sale of any Mortgage Loans pursuant to such Purchase Agreement
(each such date, a "Settlement Date") and New Century shall make standard
secondary market representations and warranties with respect to each Mortgage
Loan as of the Settlement Date on which such Mortgage Loan is sold to Salomon.
Notwithstanding the provisions of the Purchase Agreement, New Century
will be obligated (i) to repurchase any Mortgage Loan as to which a
representation and warranty has been breached and is not cured as set forth in
the Purchase Agreement and to indemnify Salomon in connection with the breach of
any such representation, and (ii) to repurchase any Mortgage Loan with respect
to which the related Mortgagor fails to make the first two monthly payments
required to be made under the Mortgage Loan. The repurchase price for any such
Mortgage Loan shall be equal to (A) the purchase price percentage for the
Mortgage Loan paid by Salomon, times the unpaid principal balance of the
Mortgage Loan so repurchased; plus (B) accrued interest thereon to the end of
the month in which such repurchase occurs. In the event that any Mortgage Loan
is prepaid in full by the related mortgagor within sixty days of the
<PAGE>
New Century Mortgage Corporation
November 4, 1996 Page 3.
related Settlement Date, New Century shall remit to Salomon within two (2)
business days an amount equal to the product of the amount of the prepayment in
full times the excess, if any, of the purchase price percentage paid by Salomon
over 100%. New Century shall be permitted to retain any prepayment penalties
with respect to the Mortgage Loans during the period New Century is servicing
the Mortgage Loans.
The representations and warranties will survive over the life of each
Mortgage Loan, notwithstanding any restrictive endorsement on a mortgage note or
mortgage assignment, or the extent of any diligence conducted by Salomon or on
its behalf. If requested by Salomon within a period of ninety days following
the purchase of any Mortgage Loan by Salomon, in connection with the resale by
Salomon of such Mortgage Loan pursuant to a whole loan transfer or
securitization, New Century will restate the representations and warranties
directly to Salomon, a designee of Salomon, the servicer of the Mortgage Loan or
any purchaser of the Mortgage Loan from Salomon, and the representations and
warranties with respect to such Mortgage Loan and the corporate representations
and warranties made by New Century shall be deemed to be remade by New Century
as of the date of such restatement.
New Century agrees to cooperate and use its best efforts to (i) take
such actions as are reasonably required by Salomon in connection with each
resale or securitization of the Mortgage Loans by Salomon and (ii) assist in the
preparation by Salomon of any related prospectus, private placement memorandum
or other document containing information with respect to New Century or one or
more of such Mortgage Loans, including any document used in connection with the
sale or securitization of a Mortgage Loan.
(d) Servicing of the Mortgage Loans. Unless otherwise agreed to
-------------------------------
between Salomon and New Century, New Century shall service the Mortgage Loans
through Advanta Mortgage USA, or such other sub-servicer which Salomon has
accepted in writing, as the sub-servicer (the "Sub-Servicer"). The Mortgage
Loans shall be serviced pursuant to the terms of the Purchase Agreement. New
Century or the Sub-Servicer shall remit payments of principal and interest to
Salomon on the 25th day of each month beginning with the month after the
Settlement Date (or, if the Mortgage Loans are acting as collateral for a
securitization, the remittance date shall be a date prior to the 25th day of
each month to permit remittances to the related certificateholders on the 25th
day of each month), shall enforce "due-on-sale" provisions to the extent
permitted by law, shall administer all escrow/impound deposits, shall pay
compensating interest on principal prepayments in any month up to the amount of
its servicing compensation in such month, and shall make all servicing advances
on any Mortgage Loan (including advances of delinquent principal and interest
payments) on the Mortgage Loans. New Century or the Sub-Servicer shall be
required to make advances in respect of delinquent payments of principal and
interest on the Mortgage Loans through foreclosure and in connection with any
properties acquired by the related trustee in any securitization transaction
through liquidation of such properties, subject to New Century's or the Sub-
Servicer's determination regarding recoverability. The Mortgage Loans shall be
serviced for a servicing fee equal to .50% per annum payable monthly on the
then-outstanding principal balance of each Mortgage
<PAGE>
New Century Mortgage Corporation
November 4, 1996 Page 4.
Loan (the "Servicing Fee"). Any fee payable to the Sub-Servicer shall be paid
by New Century without any right of reimbursement by Salomon.
(e) Conditions Precedent to Mortgage Loan Purchases. Salomon's
-----------------------------------------------
obligation to purchase any Mortgage Loans which it accepts for purchase
hereunder shall be subject to each of the following conditions:
(i) there shall have been delivered to Salomon a Trust Receipt
issued by First Bank National Association with a mortgage
loan schedule attached thereto;
(ii) each Mortgage Loan must be current as of the Settlement
Date and shall not have been more than thirty days
delinquent (one payment missed) in the twelve month period
preceding the related Settlement Date;
(iii) Salomon shall have had an opportunity to perform a due
diligence review of each Mortgage Loan and shall have
arranged for reappraisals of value with respect to each
Mortgage Loan if desired by Salomon; and
(iv) New Century shall have provided to Salomon such other
documents which are then required to have been delivered
under the Purchase Agreement or which are reasonably
requested by Salomon, which other documents may include
UCC financing statements, a favorable opinion or opinions
of counsel with respect to matters which are reasonably
requested by Salomon, and/or an officers' or secretary's
certificate from Salomon.
2. Securitizations.
---------------
(a) In General. As noted above, New Century shall have the option
----------
to meet its commitment to Salomon with respect to not more than $300,000,000 in
Mortgage Loans using Salomon Brothers Mortgage Securities VII Inc. pursuant to
transactions in which Salomon or an affiliate shall act as the sole underwriter.
In connection with any such offering, New Century shall appoint Salomon as New
Century's exclusive underwriter of New Century's mortgage loan securitization
transactions. New Century will pay to Salomon promptly upon the closing of each
Securitization an underwriting discount equal to the product of (i) the
applicable Underwriting Fee Percentage (as defined herein) multiplied by (ii)
the aggregate unpaid principal balance of the Mortgage Loans subject to such
Securitization (the "Underwriting Fee"). The "Underwriting Fee Percentage" with
respect to each Securitization shall be three-eighths of one percent (0.375%)
for Securitizations of the first $150 million, and one-fourth of one percent
(0.25%) for Securitizations of the remaining $150 million.
<PAGE>
New Century Mortgage Corporation
November 4, 1996 Page 5.
(b) Expenses. New Century shall pay all reasonable costs and expenses
--------
arising from the preparation for and execution of the Securitizations, including
but not limited to, the fees and disbursements of legal counsel (including
investor's counsel in any private placement, if retained), rating agency fees,
credit enhancement fees, SEC registration fees (or equivalent ratable fees of a
Salomon affiliate in lieu thereof if such affiliate's shelf registration is
utilized), auditors' fees, due diligence expenses (other than Salomon's), costs
of preparing and printing any offering documents and trustee fees, etc. Salomon
shall be responsible for the fees and disbursements of its own legal counsel and
any due diligence expenses incurred by Salomon. It is understood and agreed
that New Century may require that the parties incurring or charging such costs
and expenses to agree in advance that they are payable or reimbursable by New
Century only to a specified reasonable extent or cap.
(c) Information. New Century will furnish Salomon with all financial
-----------
and other information concerning New Century as Salomon deems reasonably
appropriate in connection with the performance of the services contemplated by
this letter and in that connection will provide Salomon with reasonable access
during normal business hours to New Century's officers, directors, employees,
accountants, and other representatives. New Century acknowledges and confirms
that Salomon (i) will rely on such information in the performance of the
services contemplated by this letter without independently investigating or
verifying any of it and (ii) assumes no responsibility for the accuracy or
completeness of such information.
(d) Offering Documents. In connection with each Securitization, New
------------------
Century will be solely responsible for the contents of any private placement
memorandum, prospectus supplement or other offering document used in connection
with the placement of the Securities (as such documents may be amended or
supplemented and including any information incorporated therein by reference,
the "Offering Document") and any and all other written communications provided
by, or authorized to be provided on behalf of, New Century to any actual or
prospective purchaser of the Securities except to the extent such contents of
the Offering Document are provided by Salomon in writing expressly for use in
the Offering Document and provided that any statistical, tabular or similar
information, including computer runs, initially prepared by or on behalf of
Salomon (but as to which Salomon is not taking responsibility in the Offering
Document) shall have been verified by New Century's independent public
accountants. New Century shall represent and warrant that the Offering Document
and such other written communications will not, as of the date of the offer or
sale of the Securities or the closing date of any such sale, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. Such
representation and warranty will not cover information provided in writing by
Salomon for use specifically in such Offering Document. New Century shall
authorize Salomon to provide the Offering Document to prospective purchasers of
the Securities. If at any time prior to the completion of the offer and sale of
the Securities an event occurs as a result of which the Offering Document (as
then supplemented or amended) would include any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements
<PAGE>
New Century Mortgage Corporation
November 4, 1996 Page 6.
therein, in light of the circumstances under which they were made, not
misleading, New Century will promptly notify Salomon of such event and Salomon
will suspend solicitations of prospective purchasers of the Securities until
such time as New Century shall prepare (and New Century agrees that, if it shall
have notified Salomon to suspend solicitations after orders have been accepted
from prospective purchasers, it will promptly prepare) a supplement or amendment
to the Offering Document which corrects such statement or omission.
(e) Indemnification. New Century agrees to indemnify and hold
---------------
harmless Salomon and each person who controls Salomon within the meaning of
either the Securities Act of 1933, as amended (the "Act") or the Securities
Exchange Act of 1934, as amended (the "Exchange Act") against any and all
losses, claims, damages or liabilities, joint or several, suffered or incurred
which arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in the Offering Document or in any
revision or amendment thereof or supplement thereof or arise out of or are based
upon the omission or alleged omission to state in the Offering Document or in
any revision or amendment thereof or supplement thereto a material fact required
to be stated therein or the omission or alleged omission to state a material
fact in any Offering Document or in any revision or amendment thereof or
supplement thereto necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and agrees to
reimburse each such indemnified party for any legal or other expenses reasonably
incurred by it or him in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however that New Century
-------- -------
shall not be liable to Salomon or any person who controls Salomon to the extent
that any misstatement or alleged misstatement or omission or alleged omission
was made in reliance upon and in conformity with the information provided in
writing to New Century by Salomon specifically for inclusion in the Offering
Document. This indemnity agreement will be in addition to any liability which
New Century may otherwise have.
In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in this Section 2(e) is
due in accordance with its terms but is for any reason held by a court to be
unavailable on grounds of policy or otherwise, the parties entitled to
indemnification thereunder shall be entitled to contribution for the aggregate
losses, claims, damages and liabilities (including legal and other expenses
reasonably incurred in connection with investigating or defending same) to which
it or they may be subject, except that no person guilty of fraudulent
misrepresentation shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. In determining the amount of
contribution to which the respective parties are entitled, consideration shall
be given to the relative benefits and also the relative fault of the party in
connection with the statements or omissions that resulted in losses, the
parties' relative knowledge and access to information concerning the matter with
respect to which the claim was asserted, the opportunity to correct and/or
prevent the breach, and any other equitable considerations appropriate under the
circumstances. For purposes of this Section 2(e), each person who controls
Salomon within the meaning of either the Act or the Exchange Act shall have the
same rights to contribution as Salomon. Any party entitled to contribution
will, promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim
<PAGE>
New Century Mortgage Corporation
November 4, 1996 Page 7.
for contribution may be made against New Century under this paragraph (e),
notify New Century, but the omission to so notify New Century shall not relieve
New Century from any other obligation it may have hereunder or otherwise than
under this paragraph (e).
(f) All financial data and other documentation prepared by Salomon in
connection with the transactions contemplated hereby (including, without
limitation, any computer models, cash flow analyses, and any documentation
prepared by counsel for Salomon) shall be proprietary to Salomon. Except as
otherwise required by law, neither New Century, any New Century affiliate, nor
any person acting on behalf of any of them (including, without limitation,
counsel and the independent accountants to New Century) shall disseminate,
distribute, or otherwise make available such data or documentation without
Salomon's prior written consent (other than New Century making such data
available to any New Century affiliate, its counsel or its independent
accountants, in each case on a need-to-know basis).
This Section 2 shall survive the termination of this Letter Agreement.
3. Aggregation Line.
----------------
(a) In General. In addition to the rights provided to Salomon
----------
pursuant to Sections 1 and 2 of this Letter Agreement, Salomon shall make
available to New Century an aggregation line (the "Aggregation Line") pursuant
to which Salomon shall simultaneously purchase from, and sign a forward
commitment to resell to, New Century Mortgage Loans that are deemed acceptable
for such Aggregation Line as set forth below. It is understood and agreed that
in connection with the resale of the Mortgage Loans by Salomon to New Century
pursuant to the prior sentence, Salomon shall not make any representations and
warranties regarding the Mortgage Loans and the Mortgage Loans will not be
subject to due diligence review by New Century. The Aggregation Line shall be
more fully documented pursuant to the Mortgage Loan Purchase and Sale Agreement
(the "Purchase and Sale Agreement") to be entered into between New Century and
Salomon. The purchase price (the "Purchase Price") for any such adjustable rate
Mortgage Loan shall be equal to the lesser of (i) 105% of the unpaid principal
balance of the Mortgage Loan or (ii) a price determined as described on the
model attached hereto as Exhibit B (the "Model"). The Purchase Price for any
such fixed rate Mortgage Loan shall be a price determined by Salomon in its sole
discretion. The Model may be revised from time to time by Salomon to conform to
changes in market conditions, the secondary market or the requirements of any
rating agency or provider of credit enhancement.
The Purchase Price with respect to each Mortgage Loan which conforms
to the Underwriting Standards of New Century which were most recently reviewed
and approved by Salomon and which is not a Problem Mortgage Loan or a Non-
Standard Mortgage Loan (a "Standard Mortgage Loan") shall be equal to at least
103% of the unpaid principal balance of the Mortgage Loan, or if such Purchase
Price is less than 103% of the unpaid principal balance of such Mortgage Loan,
upon notice by Salomon to New Century and First Bank National Association
("First Bank"), then the Purchase Price shall instead be equal to the market
value of such Mortgage Loan, as determined by Salomon in its sole discretion.
The Purchase Price
<PAGE>
New Century Mortgage Corporation
November 4, 1996 Page 8.
with respect to each Non-Standard Loan shall be equal to at least 100% of such
unpaid principal balance of the Non-Standard Loan, or if such Purchase Price is
less than 100% of the unpaid principal balance of such Non-Standard Loan, upon
notice by Salomon to New Century and First Bank, then the Purchase Price shall
instead be equal to the market value of such Non-Standard Loan, as determined by
Salomon in its sole discretion.
The repurchase price shall reflect the agreed upon return to Salomon
for providing the Aggregation Line (the "Aggregation Cost"). With respect to
any Mortgage Loan which is a Standard Mortgage Loan, the Aggregation Cost shall
equal One Month LIBOR plus 1.25%. With respect to any Problem Loan or Non-
Standard Loan, or in the event that New Century sells any Mortgage Loan which is
subject to the Aggregation Line to a party other than Salomon, the Aggregation
Cost shall equal One Month LIBOR plus 2.50%. In the event that a Mortgage Loan
is sold to any third party other than Salomon, the Mortgage Loan shall be
subject to the foregoing increased rate from the first day of the month the
commitment is entered into with such third party until the date of such sale.
New Century shall retain principal and interest on any Mortgage Loans subject to
the Aggregation Line.
The Aggregation Line, inclusive of any Problem Loans and Non-Standard
Loans, at any one time shall be limited to $175 million in amount of Mortgage
Loans and shall have a term of one month.
Salomon shall provide not less than twenty eight days' prior notice to
New Century and First Bank (or such other warehouse lender as directed by New
Century) in the event that Salomon elects to not renew the Aggregation Line for
any month.
(b) Problem Loans. Salomon, in its sole discretion, may determine
-------------
that a Mortgage Loan is (x) of insufficient quality to be financed or purchased,
(y) missing documentation or other information and such problem is not cured by
New Century in sixty days or (z) a loan which is delinquent at the time of
financing by Salomon, which becomes delinquent during such financing by Salomon
or was more than thirty days delinquent on one or more occasions in the prior
twelve months (each such Mortgage Loan, a "Problem Loan"). Problem Loans shall
be subject to the following qualifications with respect to the Aggregation Line:
(i) the maximum Aggregation Line with respect to Problem Loans
shall equal $10 million as of any trade date on which there
was formal notification of a trade by a confirmation letter
or trade ticket; and
(ii) the Purchase Price shall be equal to (A) for the first
ninety-day period after purchase, 80% of the unpaid
principal balance of the Problem Loan as of the date of
purchase and (B) thereafter, 80% of the unpaid principal
balance of the Problem Loan, minus 20% of the unpaid
principal balance of such Problem Loan for each additional
month after the initial ninety-day period.
<PAGE>
New Century Mortgage Corporation
November 4, 1996 Page 9.
In the event that Salomon determines in its sole discretion that any Problem
Loan has ceased to be a Problem Loan, such Mortgage Loan shall be treated as a
Standard Loan or a Non-Standard Loan, as the case may be, as of the first day of
the month following such determination.
(c) Non-Standard Loans. "Non Standard Loans" are defined as any
------------------
Mortgage Loan (x) with an unpaid principal balance in excess of $500,000; (y)
that is a second lien or (z) that has a loan-to-value ratio in excess of 80.00%.
Non-Standard Loans shall be subject to the following qualifications with respect
to the Aggregation Line:
(i) the maximum Aggregation Line with respect to Non-Standard
Loans shall equal $10 million as of any trade date on which
there was formal notification of a trade by a confirmation
letter or trade ticket; and
(ii) the Purchase Price for the first sixty days shall be par and
thereafter, the Purchase Price shall be calculated pursuant
to Section 3(b)(ii) above.
(d) Mortgage Loan Schedule. No Mortgage Loan shall be included in the
-----------------------
Aggregation Line unless New Century shall have delivered to Salomon at least 72
hours prior to such inclusion, a magnetic tape, in a format acceptable to
Salomon, consisting of the loan characteristics agreed upon by Salomon and New
Century with respect to each Mortgage Loan.
(e) Marketing of Mortgage Loans. Salomon may market the Problem Loans
---------------------------
and Non-Standard Mortgage Loans on New Century's behalf for a purchase price
acceptable to New Century and shall provide New Century with a copy of a trade
ticket or letter of intent with respect to any commitment to sell such Mortgage
Loans. New Century must advise Salomon within sixty days after inclusion of
each Mortgage Loan in the Aggregation Line of the course of action it intends to
take with respect to such Mortgage Loan (i.e., securitization, whole loan sale,
etc.).
4. Financing of Residual Bonds. Salomon shall provide financing for
---------------------------
the residual bonds (the "Residual Bonds") created by the asset-backed structure
on any New Century securitizations which Salomon has acted as the sole
underwriter pursuant to this Letter Agreement. Such financing shall be
performed at a rate equal to 75% of the present value of the Residual Bonds, as
determined by the Model attached hereto as Exhibit B. The Residual Bonds shall
be financed by Salomon at a financing fee equal to One Month LIBOR plus 1.50%
and will be subject to standard provisions of the PSA master repurchase
agreement. In addition, at the option of New Century, Salomon may, but is not
obligated to, provide the financing of Residual Bonds created by asset-backed
structures on securitizations for which Salomon is not acting as sole
underwriter.
5. Termination
-----------
<PAGE>
New Century Mortgage Corporation
November 4, 1996 Page 10.
(a) New Century shall have the right to terminate its obligations
hereunder upon (i) any material default by Salomon of its obligations under this
Letter Agreement which is not cured within 30 days following written notice of
such default to Salomon by New Century or (ii) the payment by New Century to
Salomon of a termination fee equal to 0.25% times the unfulfilled volume
commitment hereunder.
(b) Salomon shall have the right to terminate this Letter Agreement
upon the occurrence of any of the following events (each, a "Termination
Event"):
(i) the judgment by Salomon in good faith that a material
adverse change has occurred with respect to the business,
properties, assets or condition (financial or otherwise)
of New Century;
(ii) Salomon shall reasonably request, specifying the reasons
for such request, information, and/or written responses to
such requests, regarding the financial well-being of New
Century and such information and/or responses shall not
have been provided within three business days of such
request;
(iii) Either (A) a change in control of New Century shall have
occurred other than in connection with and as a result of
the issuance and sale by New Century of registered,
publicly offered common stock; or (B) Salomon determines
in its sole discretion that any material adverse change
has occurred in the management of New Century;
(iv) There is (A) a material breach by New Century of any
representation and warranty contained in the Purchase
Agreement or the Purchase and Sale Agreement, other than a
representation or warranty relating to particular Mortgage
Loans, and Salomon has reason to believe in good faith
either that such breach is not curable within 30 days or
that such breach may not have been cured in all material
respects at the expiration of 30 days following discovery
thereof by New Century or (B) a failure by New Century to
--
make any payment payable by it under the Purchase
Agreement or the Purchase and Sale Agreement or (C) any
--
other failure by New Century to observe and perform in any
material respect its material covenants, agreements and
obligations with Salomon, including without limitation
those contained in the Purchase Agreement or the Purchase
and Sale Agreement, and Salomon has reason to believe in
good faith that such failure may not have been cured in
all material respects at the expiration of 30 days
following discovery thereof by New Century;
<PAGE>
New Century Mortgage Corporation
November 4, 1996 Page 11.
(v) There shall have occurred any outbreak or material
escalation of hostilities, declaration by the United States
of a national emergency or war or other calamity or crisis,
the effect of which on the financial markets is such as to
make it, in the judgment of Salomon, impracticable to
continue the commitment; or
(vi) New Century fails to provide written notification to Salomon
of any change in its loan origination, acquisition or
appraisal guidelines or practices, or New Century, without
the prior consent of Salomon (which shall not be
unreasonably withheld), amends in any material respect its
loan origination, acquisition or appraisal guidelines or
practices;
provided, that Salomon shall have the right to dispose of any collateral held by
Salomon pursuant to this Letter Agreement or pursuant to the Residual Facility
in order to remedy any default based upon a Termination Event occurring
hereunder or under the Residual Facility.
(c) This Letter Agreement shall terminate upon satisfaction of the
$500,000,000 commitment; provided that the Residual Financing provided for in
Section 4 shall continue under its terms.
Notwithstanding any other provision of this Section 5, any grace or
notice period provided herein in respect of a notice to be given or action to be
taken by Salomon may be shortened or eliminated by Salomon if, in its sole good
faith discretion, it is unreasonable to do so under the circumstances, taking
into consideration, among other things, the volatility of the market for the
Mortgage Loans or other Securities involved, the extent and nature of any
Termination Event (or events which with the giving of such notice and passage of
time would constitute Termination Events) and the risks inherent in deferring
the exercise of remedies for the otherwise applicable grace or notice period.
6. General Provisions.
------------------
(a) Salomon's Discretion. It is understood that Salomon shall have
--------------------
absolute discretion in determining whether to accept or reject any proposed
offer or proposal to purchase any Mortgage Loan or securitize any Mortgage Loan.
Notwithstanding the foregoing, however, subject to New Century's
representations, warranties and covenants as set forth herein and in any related
agreements, all Standard Mortgage Loans, Non-Standard Mortgage Loans and Problem
Mortgage Loans originated by New Century in accordance with the underwriting
standards of New Century which were most recently approved by Salomon shall be
eligible for financing under the Aggregation Line in accordance with the terms
hereof. It is further understood that Salomon shall have absolute discretion in
determining whether any Mortgage Loan is a Standard Mortgage Loan, Non-Standard
Loan or Problem Loan.
<PAGE>
New Century Mortgage Corporation
November 4, 1996 Page 12.
(b) Governing Law. This Letter Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of New York (without regard
to its conflicts of laws principles).
(c) Amendment or Waiver. This Letter Agreement may not be amended or
-------------------
modified except in writing signed by each of the parties hereto.
(d) Counterparts. This Letter Agreement may be executed
------------
simultaneously in any number of counterparts. Each counterpart shall be deemed
to be an original, and all such counterparts shall constitute one and the same
instrument.
(e) Severability Clause. Any part, provision, representation or
-------------------
warranty of this Letter Agreement which is prohibited or which is held to be
void or unenforceable shall be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof. Any
part, provision, representation or warranty of this Letter Agreement which is
prohibited or unenforceable or is held to be void or unenforceable in any
jurisdiction shall be ineffective, as to such jurisdiction, to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof. To the extent permitted by applicable law, the parties
hereto waive any provision of law which prohibits or renders void or
unenforceable any provision hereof. If the invalidity of any part, provision,
representation or warranty of this Letter Agreement shall deprive any party of
the economic benefit intended to be conferred by this Letter Agreement, the
parties shall negotiate, in good-faith, to develop a structure the economic
effect of which is nearly as possible the same as the economic effect of this
Letter Agreement without regard to such invalidity.
(f) No Partnership. Nothing herein contained shall be deemed or
--------------
construed to create a co-partnership or joint venture between the parties
hereto.
(g) Further Agreements. New Century and Salomon each agree to execute
------------------
and deliver to the other such reasonable and appropriate additional documents,
instruments or agreements as may be necessary or appropriate to effectuate the
purposes of this Letter Agreement.
<PAGE>
Please confirm that the foregoing is in accordance with your
understanding by signing this letter of agreement and two enclosed copies and
returning to us the enclosed copies. The letter signed by you shall constitute a
binding agreement between us as of the date first above written.
Yours sincerely,
SALOMON BROTHERS REALTY CORP.
By: /s/ Brad Rose
------------------------------
Name: Brad Rose
----------------------------
Title: Vice President
---------------------------
ACCEPTED AND AGREED TO
AS OF THE DATE FIRST ABOVE WRITTEN:
NEW CENTURY MORTGAGE CORPORATION
By: /s/ Brad A. Morrice
---------------------------
Name: Brad A. Morrice
-------------------------
Title: Chief Executive Officer
------------------------
<PAGE>
New Century Mortgage Corporation
November 4, 1996 Page 14.
EXHIBIT A
MORTGAGE LOAN SCHEDULE
<PAGE>
New Century Mortgage Corporation
November 4, 1996 Page 15.
EXHIBIT B
PRICING MODEL
New Century and Salomon have previously agreed on a valuation model to be
used in financing Residual Bonds and determining the Purchase Price for purposes
of adding Mortgage Loans to the Aggregation Line. The inputs for the Model are
generally as follows: the servicing fee; the trustee fee; an insurer wrap fee; a
prepayment rate based on CPR; an annual default rate and a loss severity
percentage on liquidations of the defaulted loans (beginning in month one);
pricing on the senior bond and a coupon thereon as determined by Salomon; and a
discount rate of based on the initial overcollateralization determined by either
Salomon or the rating agencies and the bond insurer.
For purposes of the Aggregation Line it is assumed that each pool of
Mortgage Loans is used as collateral for a securitization utilizing the Asset-
Backed Structure (i.e., Cash flow generated by the Mortgage Loans not required
to pay senior bond debt service is used to fast pay senior bond principal until
the target level of overcollateralization is met. Once such target is met,
subject to certain tests, excess cash will be paid to the residual security).
The price calculated by the Model will be decreased by Securitization issuance
expenses and by an additional 0.50% price haircut.
<PAGE>
Salomon Brothers Inc
01/22/97 /mortgage27/d_new.cent.ca/d_repo.1101/data.cmv.remain.upd Page 1
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
| LN NUMBER | NAME |CURRENT RATE |ORIG DT | APPRAISAL AMT | PRPTY |2ndCD |DELNQ1 |
| BRANCH/INV | STREET ADDRESS | CURRENT P&I | 1STPMTDT | SALES PRICE | OCCUP | BALLN | DELNQ2 |
| DOCUMENT | CITY, STATE, ZIP, COUNTY | ORIG BALANCE | MAT DT | ORIG LTV | LPURP | PARTF | #30+YR |
| POOL | SeniorLienAmt | CURR BALANCE | PAIDTODT | CURR LTV | LTYPE | PART% | FORECL |
| GroupName | Prod Type / / | PMT PER/RTERM | ORIG TRM | PMI CODE | #UNIT | CNVT | SVSFEE |
|==================================================================================================================================|
<S> <C> <C> <C> <C> <C> <C> <C> |
|0000002220 | CLINCH | 12.250% | / /| 78,000.00| One | 1 | |
| | 8596 EDDY STREET, HANFORD, CA 9 | 653.89 | 12/96 | 0.00| P | | |
| 2 | , CA, 93230, | 62,400.00 | 11/26 | 080.00% | Re | | |
| | 00000000000 | 62,400.00 | / /| % | 2 | | |
| | 30FIX / / | / | 360 | | | N | |
|-----------+-------------------------------------+-----------------+------------+----------------+----------+--------+------------+
|000002416 | BUSTAMANTE | 09.250% | / /| 165,000.00 | One | 1 | |
| | 1433 WEST DELHAVEN STREET, WEST | 1,018.07 | 12/96 | 0.00 | P | | |
| 1 | , CA, 91790, | 123,750.00 | 11/26 | 075.00% | Re | | |
| | 00000000000 | 123,750.00 | / /| % | 1 | | |
| | 30FIX / / | / | 360 | | | N | |
|-----------+-------------------------------------+-----------------+------------+----------------+----------+--------+------------+
|0000002942 | STARR | 09.750% | / /| 139,000.00 | One | 1 | |
| | 2969 MORCOM AVENUE, OAKLAND, CA | 816.20 | 12/96 | 0.00 | P | | |
| 3 | , CA, 94619, | 95,000.00 | 11/26 | 068.35% | Re | | |
| | 00000000000 | 95,000.00 | / /| % | 1 | | |
| | 30FIX / / | / | 360 | | | N | |
|-----------+-------------------------------------+-----------------+------------+----------------+----------+--------+------------+
|0000003540 | HUMPHREY | 10.950% | / /| 71,000.00 | One | 1 | |
| | 901 WELDON AVENUE, COLUMBUS, OH | 572.45 | 12/96 | 0.00 | P | | |
| 1 | , OH, 43224, | 60,350.00 | 11/26 | 085.00% | Re | | |
| | 00000000000 | 60,350.00 | / /| % | 2 | | |
| | 30LIB6M / / | / | 360 | | | N | |
|-----------+-------------------------------------+-----------------+------------+----------------+----------+--------+------------+
|0000003617 | SCAMBLER | 09.950% | / /| 110,000.00 | One | 1 | |
| | 434 CAPPELLA DRIVE, DIAMOND SPRI | 769.02 | 12/96 | 0.00 | P | | |
| 1 | , CA, 95619, | 88,000.00 | 11/26 | 080.00% | Re | | |
| | 00000000000 | 88,000.00 | / /| % | 1 | | |
| | 30LIB6M / / | / | 360 | | | N | |
|-----------+-------------------------------------+-----------------+------------+----------------+----------+--------+------------+
|0000003887 | FILING | 09.000% | / /| 85,000.00 | One | 1 | |
<CAPTION>
- -----------------------------------------------------------------
|LN NUMBER | MARGIN | i CHG |PLAN | O RATE |
|BRANCH/INV | PERCAP | p CHG |INDX | O P&I |
|DOCUMENT | LFECAP | iCHDT |ADJC | O INDEX |
| POOL | LFE FL | pCHDT |NGAM | NEGAM % |
|GroupName | PAYCAP | 1stDT |RNDC | RND FTR |
|==============================================================|
<S> <C> <C> <C> | <C>
|0000002220 | 00.000 | 00 | | 12.250% |
| | 1.500 | 00 | | 0.0 |
| 2 | 07.000 | 00/00 | | % |
| | 000000 | 00/00 | | % |
| | | 00/00 | | |
|-----------+-----------------+------------+-------------------|
|00000025416| 00.000 | 00 | | 09.250% |
| | 1.500 | 00 | | 0.0 |
| 1 | 07.000 | 00/00 | | % |
| | 000000 | 00/00 | | % |
| | | 00/00 | | |
|-----------+-----------------+------------+-------------------|
|0000002942 | 00.000 | 00 | | 09.750% |
| | 1.500 | 00 | | 0.0 |
| 3 | 07.000 | 00/00 | | % |
| | 000000 | 00/00 | | % |
| | | 00/00 | | |
|-----------+-----------------+------------+-------------------|
|0000003540 | 07.500 | 06 | | 10.950% |
| | 1.500 | 06 | | 0.0 |
| 1 | 07.000 | 00/00 | | % |
| | 000000 | 00/00 | | % |
| | | 00/00 | | |
|-----------+-----------------+------------+-------------------|
|0000003617 | 06.950 | 06 | | 09.950% |
| | 1.500 | 06 | | 0.0 |
| 1 | 07.000 | 00/00 | | % |
| | 000000 | 00/00 | | % |
| | | 00/00 | | |
|-----------+-----------------+------------+-------------------|
|0000003887 | 06.250 | 06 | | 09.000% |
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
| |4600 MAX ROAD, N CANTON, OH 447| 512.95 | 12/96 | 0.00 | P | | |
| 3 | , OH, 44720, | 63,750.00 | 11/26 | 075.00% | Re | | |
| |00000000000 | 63,750.00 | / / | % | 1 | | |
| |30LIB26M / / | / | 360 | | | N | |
|------------+-------------------------------+-------------------------+------------+------------+----------+----------+-----------+
|0000004239 |JONES | 12.600% | / / | 32,000.00| One | 1 | |
| |621 S.MAFFIT STREET, DECATUR, I| 247.81 | 12/96 | 0.00| P | | |
| 3 | , IL, 62521, | 20,000.00 | 11/11 | 062.50% | Re | | |
| |00000000000 | 20,000.00 | / / | % | 2 | | |
| |15FIX / / | / | 180 | | | N | |
|------------+-------------------------------+-------------------------+------------+------------+----------+----------+-----------+
|0000004466 |LEDESMA | 06.950% | / / | 227,000.00| One | 1 | |
| |2210 VENTURA PLACE, SANTA CLARA| 635.47 | 12/96 | 0.00| P | | |
| 3 | , CA, 95051, | 96,000.00 | 11/26 | 042.29% | Re | | |
| |00000000000 | 96,000.00 | / / | % | 2 | | |
| |30LIB6M / / | / | 360 | | | N | |
|------------+-------------------------------+-------------------------+------------+------------+----------+----------+-----------+
<CAPTION>
<S> <C> <C> <C>
| | 1.500 | 06 | | 0.00 |
| 3 | 07.000 | 00/00 | | % |
| | 000000 | 00/00 | | % |
| | | 00/00 | | |
|------------+-----------------+----------+-------+---------------+
|0000004239 | 00.000 | 00 | | 12.600% |
| | 1.500 | 00 | | 0.00 |
| 3 | 07.000 | 00/00 | | % |
| | 000000 | 00/00 | | % |
| | | 00/00 | | |
|------------+-----------------+----------+-------+---------------+
|0000004466 | 07.950 | 06 | | 06.950% |
| | 1.500 | 06 | | 0.00 |
| 3 | 07.000 | 00/00 | | % |
| | 000000 | 00/00 | | % |
| | | 00/00 | | |
|------------+-----------------+----------+-------+---------------+
</TABLE>
<PAGE>
Salomon Brothers Inc
01/22/97 /mortgage27/d_new.cent.ca/d_repo.1101/data.cmv.remain.upd Page 2
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
| LN NUMBER | NAME | CURRENT RATE | ORIG DT | APPRAISAL AMT| PRPTY |2ndCD |DELNQ1|
| BRANCH/INV| STREET ADDRESS | CURRENT P&I | 1STPMTDT | SALES PRICE | OCCUP |BALLN |DELNQ2|
| DOCUMENTS | CITY, STATE, ZIP, COUNTY | ORIG BALANCE | MAT DT | ORIG LTV | LPURP |PARTF |#30+YR|
| POOL SeniorLienAmt | CURR BALANCE | PAIDTODT | CURR LTV | LTYPE |PART% |FORECL|
| GroupName | Prod Type / / | PMT PER/RTERM | ORIG TRM | PMI CODE | #UNIT |CNVT |SVSFEE|
|===========|======================================= |===============|==========|============= |========= |======|======|
<S> <C> <C> <C> <C> <C> <C> <C>
|0000004488 | ARMSTRONG | 11.850% | / / | 155,000.00 | One | 1 | |
| | 3004 CHARLES STREET, MELROSE PAR | 1,261.19 | 12/96 | 0.00 | P | | |
| 1 | , IL, 60164, | 124,000.00 | 11/26 | 080.00% | Re | | |
| | 00000000000 | 124,000.00 | / / | % | 2 | | |
| | 30LIB6M / / | / | 360 | | | N | |
|-----------+----------------------------------------+---------------+----------+--------------+----------+------+------+
|0000004550 |DILLARD | 11.250% | / / | 270,000.00 | 2-4 U | 1 | |
| |4319-4321 1/2 8TH AVENUE, LOS A | 1,835.69 | 12/96 | 0.00 | P | | |
| 3 | , CA, 90008, | 189,000.00 | 11/26 | 070.00% | Re | | |
| |00000000000 | 189,000.00 | / / | % | 2 | | |
| |30FIX / / | / | 360 | | | N | |
|-----------+----------------------------------------+---------------+----------+--------------+----------+------+------+
|0000004560 |SOLOMON | 08.550% | / / | 375,000.00 | One | 1 | |
| |1206 LYNN TERRACE, HIGHLAND PARK | 2,201.52 | 12/96 | 0.00 | P | | |
| 3 | , IL, 60035, | 285,000.00 | 11/26 | 076.00% | Re | | |
| |00000000000 | 285,000.00 | / / | % | 1 | | |
| |30LIB6M / / | / | 360 | | | N | |
|-----------+----------------------------------------+---------------+----------+--------------+----------+------+------+
|0000004575 |ANTHONY | 09.500% | / / | 90,000.00 | One | 1 | |
| |1623 N. LOREL , CHICAGO, IL 60 | 605.42 | 12/96 | 0.00 | P | | |
| 1 | , IL, 60639, | 72,000.00 | 11/26 | 080.00% | Re | | |
| |00000000000 | 72,000.00 | / / | % | 1 | | |
| |30LIB26M / / | / | 360 | | | N | |
|-----------+----------------------------------------+---------------+----------+--------------+----------+------+------+
|0000004578 |SHUBLAQ | 07.550% | / / | 140,000.00 | One | 1 | |
| |8701 S. 85TH STREET, HICKORY HILL | 733.56 | 12/96 | 137,000.00 | P | | |
| 3 | , IL, 60457, | 104,400.00 | 11/26 | 074.57% | Pu | | |
| |00000000000 | 104,400.00 | / / | % | | | |
| |30LIB6M / / | / | 360 | | | N | |
|-----------+----------------------------------------+---------------+----------+--------------+----------+------+------+
|0000004611 |GENUNG | 09.950% | / / | 130,000.00 | Condo | 1 | |
<CAPTION>
- ------------------------------------------------
| LN NUMBER | MARGIN | i CHG | PLAN | O RATE |
| BRANCH/INV | PERCAP | p CHG | INDX | O P&I
| DOCUMENTS | LFECAP | iCHDT | ADJC | O INDEX |
| POOL | LFE FL | pCHDT | NGAM | NEGAM % |
| GroupName | PAYCAP | 1stDT | RNDC | RND FTR |
|============| ====== |====== |======|======== |
<S> <C> <C> <C> <C>
|0000004488 | 07.950 | 06 | |11.850% |
| | 1.500 | 06 | | 0.00 |
| 1 | 07.000 | 00/00 | | % |
| | 000000 | 00/00 | | % |
| | | 00/00 | | |
|------------+--------+-------+------+---------|
|0000004550 | 00.000 | 00 | |11.250% |
| | 1.500 | 00 | | 0.00 |
| 3 | 07.000 | 00/00 | | % |
| | 000000 | 00/00 | | % |
| | | 00/00 | | |
|------------+--------+-------+------+---------|
|0000004560 | 07.550 | 06 | |08.550% |
| | 1.500 | 06 | | 0.00 |
| 3 | 07.000 | 00/00 | | % |
| | 000000 | 00/00 | | % |
| | | 00/00 | | |
|------------+--------+-------+------+---------|
|0000004575 | 06.500 | 06 | |09.500% |
| | 1.500 | 06 | | 0.00 |
| 1 | 07.000 | 00/00 | | % |
| | 000000 | 00/00 | | % |
| | | 00/00 | | |
|------------+--------+-------+------+---------|
|0000004578 | 06.550 | 06 | |07.550% |
| | 1.500 | 06 | | 0.00 |
| 3 | 07.000 | 00/00 | | % |
| | 000000 | 00/00 | | % |
| | | 00/00 | | |
|------------+--------+-------+------+---------|
|0000004611 | 07.500 | 06 | |09.950% |
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
| |3926 VIA DIEGO , SANTA BARBARA, | 699.11 |12/96 | 0.00 | P | | | 1.500 | 06 | | 0.00 |
| 3 | , CA, 93110, | 80,000.00 |11/26 | 061.54% | Re | | |07.000 |00/00| | % |
| |00000000000 | 80,000.00 | / / | % |2 | | |000000 |00/00| | % |
| |30LIB26M / / | / | 360 | | | N | | |00/00| | |
|------------+---------------------------------+------------+--------+------------+-----+------+------+-------+-----+-----+--------|
|0000004621 |MCGOWAN | 09.250% | / / | 55,000.00 |One | 1 | |07.600| 06 | |09.250% |
| |TOWNSHIP RD 5 , HAMDEN, OH 456 | 339.36 |12/96 | 0.00 | P | | | 1.500| 06 | | 0.00 |
| 1 | , OH, 45638, | 41,250.00 |11/26 | 075.00% | Re | | |07.000|00/00 | | % |
| |00000000000 | 41,250.00 | / / | % |2 | | |000000|00/00 | | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00 | | |
|------------+---------------------------------+------------+--------+------------+-----+------+------+------+------+-----+--------|
|0000004778 |WIGGINS | 09.950% | / / | 70,000.00 |One | 1 | |06.500| 06 | |09.950% |
| |108 E. LAMARTINE STREET, M T VER | 432.75 |12/96 | 88,000.00 | P | | | 1.500| 06 | | 0.00|
| 1 | , OH, 43050, | 49,520.00 |11/26 | 070.74% | Pu | | |07.000|00/00 | | % |
| |00000000000 | 49,520.00 | / / | % | | | |000000|00/00 | | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00 | | |
|____________|_________________________________|____________|________|____________|_____|______|______|______|______|_____|________|
</TABLE>
<PAGE>
Salomon Brothers Inc
01/22/97 /mortgage27/d_new.cent.ca/d_repo.1101/data.cmv.remain.upd Page 3
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
| LN NUMBER | NAME |CURRENT RATE |ORIG DT|APPRAISAL AMT|PRPTY|2ndCD|DELNQ1|MARGIN|i CHG|PLAN| O RATE |
| BRANCH/INV| STREET ADDRESS |CURRENT P&I |1STPMTDT| SALES PRICE |OCCUP|BALLN|DELNQ2|PERCAP|p CHG|INDX| O P&I |
| DOCUMENTS | CITY, STATE, ZIP, COUNTY |ORIG BALANCE |MAT DT| ORIG LTV |LPURP|PARTF|#30+YR|LFECAP|iCHDT|ADJC| O INDEX |
| POOL | SeniorLienAmt |CURR BALANCE |PAIDTODT| CURR LTV |LTYPE|PART%|FORECL|LFE FL|pCHDT|NGAM| NEGAM % |
| GroupName |Prod Type / / |PMT PER/RTERM|ORIG TRM| PMI CODE |#UNIT|CNVT |SVSFEE|PAYCAP|1stDT|RNDC| RND FTR |
|===========|================================|=============|========|=============|=====|=====|======|======|=====|====|=========|
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
|0000004835 |RAILEY | 08.950% | / / | 175,000.00|One | 1 | |00.000| 00 | | 08.950% |
| |3740 ROARING FORK DRIVE, PINETOP| 760.98|12/96 | 0.00| S | | | 1.500| 00 | | 0.00|
| 1 | , AZ, 85935, | 95,000.00|11/26 | 054.29% | Re | | |07.000|00/00| | % |
| |00000000000 | 95,000.00| / / | % |2 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000005001 |SAUER | 08.500% | / / | 77,000.00|One | 1 | |07.750| 06 | | 08.500% |
| |495 PAISLEY AVENUE, HEMET, CA 9| 444.05|12/96 | 0.00| I | | | 1.500| 06 | | 0.00|
| 1 | , CA, 92543, | 57,750.00|11/26 | 075.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 57,750.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB26M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000005095 |PRESTON | 12.250% | / / | 117,000.00|One | 2 | |00.000| 00 | | 12.250% |
| |9047 SOUTH EUCLID , CHICAGO, IL| 182.45|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 1 | , IL, 60617, | 15,000.00|11/11 | 070.94% | Re | | |07.000|00/00| | % |
| |00068000.00 | 15,000.00| / / | % |2 | | |000000|00/00| | % |
| |15FIX / / | / | 180 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000005096 |WILEY | 09.000% | / / | 115,000.00|One | 1 | |07.950| 06 | | 09.000% |
| |1122 S. CHASE , WHEATON, IL 60| 345.99|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 3 | , IL, 60187, | 43,000.00|11/26 | 037.39% | Re | | |07.000|00/00| | % |
| |00000000000 | 43,000.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000005142 |CRAYTON | 05.950% | / / | 147,000.00|One | 1 | |07.950| 06 | | 05.950% |
| |4525 2ND AVENUE, LOS ANGELES, CA| 745.13|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 1 | , CA, 90043, | 124,950.00|11/26 | 085.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 124,950.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000005169 |CASTREJON | 07.500% | / / | 140,000.00|One | 1 | |05.500| 06 | | 07.500% |
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
| |2271 POPLAR AVENUE, EAST PALO AL| 734.18|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 3 | , CA, 94303, | 105,000.00|11/26 | 075.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 105,000.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000005335 |RANDALL | 11.375% | / / | 116,000.00|One | 1 | |07.750| 06 | | 11.375% |
| |6370 WILDFLOWER COURT, PLACERVIL| 796.39|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 1 | , CA, 95667, | 81,200.00|11/26 | 070.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 81,200.00| / / | % |1 | | |000000|00/00| | % |
| |30LIB26M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000005382 |RAMOS | 12.000% | / / | 142,500.00|One | 2 | |00.000| 00 | | 12.000% |
| |16702 NORTHAM STREET, LA PUENTE,| 132.02|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 1 | , CA, 91744, | 11,000.00|11/11 | 061.40% | Re | | |07.000|00/00| | % |
| |00076500.00 | 11,000.00| / / | % |2 | | |000000|00/00| | % |
| |15FIX / / | / | 180 | | | N | | |00/00| | |
|___________|________________________________|_____________|________|_____________|_____|_____|______|______|_____|____|_________|
</TABLE>
<PAGE>
Salomon Brothers Inc
01/22/97 /mortgage27/d_new.cent.ca/d_repo.1101/data.cmv.remain.upd Page 4
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
| LN NUMBER | NAME | CURRENT RATE | ORIG DT |APPRAISAL AMT| PRPTY | 2ndCD | DELNQ1 | MARGIN | i CHG|
| BRANCH/INV| STREET ADDRESS | CURRENT P&I | 1STPMTDT | SALES PRICE | OCCUP | BALLN | DELNQ2 | PERCAP | p CHG|
| DOCUMENTS | CITY, STATE, ZIP, COUNTY | ORIG BALANCE | MAT DT | ORIG LTV | LPURP | PARTF | #30+YR | LFECAP | iCHDT|
| POOL | SeniorLienAmt | CURR BALANCE | PAIDTODT | CURR LTV | LTYPE | PART% | FORECL | LFE FL | pCHDT|
| GroupName | Prod Type / / | PMT PER/RTERM | ORIG TRM | PMI CODE | #UNIT | CNVT | SVSFEE | PAYCAP | 1stDT|
|===========|=============================== |============== |========= |=============|=======|=======|========|========|======|
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
|0000005472 |MOORE | 08.250% | / / | 123,000.00 | One | 1 | |00.000 | 00 |
| |2001 W REEVE STREET, COMPTON, CA| 693.05 |12/96 | 0.00 | P | | | 1.500 | 00 |
| 1 | , CA, 90220, | 92,250.00 |11/26 | 075.00% | Re | | |07.000 |00/00 |
| |00000000000 | 92,250.00 | / / | % |1 | | |000000 |00/00 |
| |30FIX / / | / | 360 | | | N | | |00/00 |
|-----------+--------------------------------+---------------+----------+-------------+-------+-------+--------+--------+------+
|0000005477 |KROGH | 11.100% | / / | 90,000.00 | One | 1 | |07.950 | 06 |
| |828 LEXINGTON CIRCLE, HANOVER PA| 518.34 |12/96 | 0.00 | P | | | 1.500 | 06 |
| 3 | , IL, 60103, | 54,000.00 |11/26 | 060.00% | Re | | |07.000 |00/00 |
| |00000000000 | 54,000.00 | / / | % |2 | | |000000 |00/00 |
| |30LIB6M / / | / | 360 | | | N | | |00/00 |
|-----------+--------------------------------+---------------+----------+-------------+-------+-------+--------+--------+------+
|0000005496 |MARTINEZ | 12.500% | / / | 130,000.00 | One | 2 | |00.000 | 00 |
| |11143 EL DORADO AVENUE, PACOIMA,| 278.55 |12/96 | 0.00 | I | | | 1.500 | 00 |
| 1 | , CA, 91331, | 22,600.00 |11/11 | 069.99% | Re | | |07.000 |00/00 |
| |00068381.00 | 22,600.00 | / / | % |2 | | |000000 |00/00 |
| |15FIX / / | / | 180 | | | N | | |00/00 |
|-----------+--------------------------------+---------------+----------+-------------+-------+-------+--------+--------+------+
|0000005526 |MICCO | 09.000% | / / | 138,000.00 | One | 1 | |07.950 | 06 |
| |580 WEST 12TH STREET, SAN PEDRO | 721.75 |12/96 | 0.00 | P | | | 1.500 | 06 |
| 1 | , CA, 90731, | 89,700.00 |11/26 | 065.00% | Re | | |07.000 |00/00 |
| |00000000000 | 89,700.00 | / / | % |1 | | |000000 |00/00 |
| |30LIB6M / / | / | 360 | | | N | | |00/00 |
|-----------+--------------------------------+---------------+----------+-------------+-------+-------+--------+--------+------+
|0000005556 |CROSS | 08.550% | / / | 322,000.00 | One | 1 | |06.950 | 06 |
| |3726 HILLSDALE COURT, SANTA CLAR| 1,989.86 |12/96 | 0.00 | P | | | 1.500 | 06 |
| 1 | , CA, 95051, | 257,600.00 |11/26 | 080.00% | Re | | |07.000 |00/00 |
| |00000000000 | 257,600.00 | / / | % |1 | | |000000 |00/00 |
| |30LIB26M / / | / | 360 | | | N | | |00/00 |
|-----------+--------------------------------+---------------+----------+-------------+-------+-------+--------+--------+------+
|0000005568 |MORTE | 09.300% | / / | 160,000.00 | One | 1 | |07.500 | 06 |
| |5949 CRESTMONT AVENUE, LIVERMORE| 1,057.67 |12/96 | 160,000.00 | P | | | 1.500 | 06 |
| 1 | , CA, 94550, | 128,000.00 |11/26 | 080.00% | Pu | | |07.000 |00/00 |
| |00000000000 | 128,000.00 | / / | % | | | |000000 |00/00 |
| |30LIB6M / / | / | 360 | | | N | | |00/00 |
|-----------+--------------------------------+---------------+----------+-------------+-------+-------+--------+--------+------+
|0000005612 |LAGAZO | 09.750% | / / | 170,000.00 | One | 1 | |07.500 | 06 |
| |1632 WEST WILSHIRE AVENUE, SANTA| 1,095.43 |12/96 | 0.00 | I | | | 1.500 | 06 |
| 2 | , CA, 92704, | 127,500.00 |11/26 | 075.00% | Re | | |07.000 |00/00 |
| |00000000000 | 127,500.00 | / / | % |1 | | |000000 |00/00 |
| |30LIB6M / / | / | 360 | | | N | | |00/00 |
|-----------+--------------------------------+---------------+----------+-------------+-------+-------+--------+--------+------+
|0000005613 |LAGAZO | 09.750% | / / | 188,000.00 | One | 1 | |07.500 | 06 |
| |903 SOUTH HARMON STREET, SANTA A| 1,211.41 |12/96 | 0.00 | I | | | 1.500 | 06 |
| 2 | , CA, 92704, | 141,000.00 |11/26 | 075.00% | Re | | |07.000 |00/00 |
| |00000000000 | 141,000.00 | / / | % |1 | | |000000 |00/00 |
| |30LIB6M / / | / | 360 | | | N | | |00/00 |
|___________|________________________________|_______________|__________|_____________|_______|_______|________|________|______|
<CAPTION>
- ---------------------------------
| LN NUMBER | PLAN | O RATE |
| BRANCH/INV| INDX | O P&I |
| DOCUMENTS | ADJC | O INDEX |
| POOL | NGAM | NEGAM % |
| GroupName | RNDC | RND FTR |
|===========|=========|=========|
<S> <C> <C>
|0000005472 | | 08.250% |
| | | 0.00|
| 1 | | % |
| | | % |
| | | |
|-----------+---------+---------+
|0000005477 | | 11.100% |
| | | 0.00|
| 3 | | % |
| | | % |
| | | |
|-----------+---------+---------+
|0000005496 | | 12.500% |
| | | 0.00|
| 1 | | % |
| | | % |
| | | |
|-----------+---------+---------+
|0000005526 | | 09.000% |
| | | 0.00|
| 1 | | % |
| | | % |
| | | |
|-----------+---------+---------+
|0000005556 | | 08.550% |
| | | 0.00|
| 1 | | % |
| | | % |
| | | |
|-----------+---------+---------+
|0000005568 | | 09.300% |
| | | 0.00|
| 1 | | % |
| | | % |
| | | |
|-----------+---------+---------+
|0000005612 | | 09.750% |
| | | 0.00|
| 2 | | % |
| | | % |
| | | |
|-----------+---------+---------+
|0000005613 | | 09.750% |
| | | 0.00|
| 2 | | % |
| | | % |
| | | |
|___________|_________+_________+
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Financial Printing Group Salomon Brothers Inc
01/22/97 /mortgage27/d_new.cent.ca/d_repo.1101/data.cmv.remain.upd Page 5
- ----------------------------------------------------------------------------------------------------------------------------------
| LN NUMBER | NAME |CURRENT RATE |ORIG DT|APPRAISAL AMT|PRPTY|2ndCD|DELNQ1|MARGIN|i CHG|PLAN| O RATE |
| BRANCH/INV| STREET ADDRESS |CURRENT P&I |1STPMTDT| SALES PRICE |OCCUP|BALLN|DELNQ2|PERCAP|p CHG|INDX| O P&I |
| DOCUMENTS | CITY, STATE, ZIP, COUNTY |ORIG BALANCE |MAT DT| ORIG LTV |LPURP|PARTF|#30+YR|LFECAP|iCHDT|ADJC| O INDEX |
| POOL | SeniorLienAmt |CURR BALANCE |PAIDTODT| CURR LTV |LTYPE|PART%|FORECL|LFE FL|pCHDT|NGAM| NEGAM % |
| GroupName |Prod Type / / |PMT PER/RTERM|ORIG TRM| PMI CODE |#UNIT|CNVT |SVSFEE|PAYCAP|1stDT|RNDC| RND FTR |
|===========|================================|=============|========|=============|=====|=====|======|======|=====|====|=========|
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
|0000005661 |CROWDER | 07.950% | / / | 170,000.00|One | 1 | |06.950| 06 | | 07.950% |
| |1731 BLAKE STREET, BERKELEY, CA | 1,004.14|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 1 | , CA, 94703, | 137,500.00|11/26 | 080.88% | Re | | |07.000|00/00| | % |
| |00000000000 | 137,500.00| / / | % |1 | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000005805 |RAY | 10.950% | / / | 70,000.00|One | 1 | |00.000| 00 | | 10.950% |
| |770 SOUTH COCHISE AVENUE, WILLCO| 272.04|12/96 | 0.00| S | | | 1.500| 00 | | 0.00|
| 1 | , AZ, 85643, | 24,000.00|11/11 | 034.29% | Re | | |07.000|00/00| | % |
| |00000000000 | 24,000.00| / / | % |2 | | |000000|00/00| | % |
| |15FIX / / | / | 180 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000005819 |DUNCAN | 11.000% | / / | 129,000.00|One | 1 | |00.000| 00 | | 11.000% |
| |8513 EAST TURNEY AVENUE, SCOTTSD| 982.80|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 1 | , AZ, 85251, | 103,200.00|11/26 | 080.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 103,200.00| / / | % |2 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000005859 |BUTTSTADT | 09.000% | / / | 195,000.00|One | 1 | |07.950| 06 | | 09.000% |
| |706 OLD HUNT ROAD, FOX RIVER GRO| 1,098.31|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 1 | , IL, 60021, | 136,500.00|11/26 | 070.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 136,500.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000005955 |MCCUIN | 08.900% | / / | 104,000.00|One | 1 | |07.500| 06 | | 08.900% |
| |1141 WEST CULVER STREET, PHOENIX| 622.01|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 3 | , AZ, 85007, | 78,000.00|11/26 | 075.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 78,000.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB26M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000005977 |SHIELDS | 09.950% | / / | 97,000.00|One | 1 | |06.500| 06 | | 09.950% |
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
| |1823 S. 13TH AVENUE, MAYWOOD, IL| 576.77|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 1 | , IL, 60153, | 66,000.00|11/26 | 068.04% | Re | | |07.000|00/00| | % |
| |00000000000 | 66,000.00| / / | % |1 | | |000000|00/00| | % |
| |30LIB26M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000005995 |THOMPSON | 11.450% | / / | 48,500.00|One | 1 | |00.000| 00 | | 11.450% |
| |342 HARRISON STREET, GARY, IN 4| 276.22|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 1 | , IN, 46402, | 28,000.00|11/26 | 057.73% | Re | | |07.000|00/00| | % |
| |00000000000 | 28,000.00| / / | % |2 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006011 |HANSEN | 10.250% | / / | 100,000.00|One | 1 | |07.450| 06 | | 10.250% |
| |1017 6TH STREET, OREGON CITY, OR| 582.47|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 3 | , OR, 97045, | 65,000.00|11/26 | 065.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 65,000.00| / / | % |1 | | |000000|00/00| | % |
| |30LIB26M / / | / | 360 | | | N | | |00/00| | |
|___________|________________________________|_____________|________|_____________|_____|_____|______|______|_____|____|_________|
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Salomon Brothers Inc
01/22/97 /mortgage27/d_new.cent.ca/d_repo.1101/data.cmv.remain.upd Page 6
- ----------------------------------------------------------------------------------------------------------------------------------
| LN NUMBER | NAME |CURRENT RATE |ORIG DT|APPRAISAL AMT|PRPTY|2ndCD|DELNQ1|MARGIN|i CHG|PLAN| O RATE |
| BRANCH/INV| STREET ADDRESS |CURRENT P&I |1STPMTDT| SALES PRICE |OCCUP|BALLN|DELNQ2|PERCAP|p CHG|INDX| O P&I |
| DOCUMENTS | CITY, STATE, ZIP, COUNTY |ORIG BALANCE |MAT DT| ORIG LTV |LPURP|PARTF|#30+YR|LFECAP|iCHDT|ADJC| O INDEX |
| POOL | SeniorLienAmt |CURR BALANCE |PAIDTODT| CURR LTV |LTYPE|PART%|FORECL|LFE FL|pCHDT|NGAM| NEGAM % |
| GroupName |Prod Type / / |PMT PER/RTERM|ORIG TRM| PMI CODE |#UNIT|CNVT |SVSFEE|PAYCAP|1stDT|RNDC| RND FTR |
|===========|================================|=============|========|=============|=====|=====|======|======|=====|====|=========|
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
|0000006027 |HOLSKEY | 11.500% | / / | 57,000.00|One | 1 | |07.950| 06 | | 11.500% |
| |128 FIFTH STREET, WARSAW, OH 43| 423.35|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 1 | , OH, 43844, | 42,750.00|11/26 | 075.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 42,750.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006039 |FRIERSON | 10.750% | / / | 41,500.00|One | 1 | |00.000| 00 | | 10.750% |
| |544 MONROE STREET, GARY, IN 464| 270.71|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 1 | , IN, 46403, | 29,000.00|11/26 | 069.88% | Re | | |07.000|00/00| | % |
| |00000000000 | 29,000.00| / / | % |2 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006047 |ELLIOTT | 10.700% | / / | 130,000.00|One | 1 | |07.450| 06 | | 10.700% |
| |280 MACDONALD STREET, PASADENA, | 794.92|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 2 | , CA, 91103, | 85,500.00|11/26 | 065.77% | Re | | |07.000|00/00| | % |
| |00000000000 | 85,500.00| / / | % |1 | | |000000|00/00| | % |
| |30LIB26M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006055 |GILARDI | 10.450% | / / | 250,000.00|One | 1 | |07.000| 06 | | 10.450% |
| |25821 3RD AVENUE, LOS MOLINOS, C| 1,578.32|12/96 | 247,500.00| P | | | 1.500| 06 | | 0.00|
| 3 | , CA, 96055, | 173,250.00|11/26 | 069.30% | Pu | | |07.000|00/00| | % |
| |00000000000 | 173,250.00| / / | % | | | |000000|00/00| | % |
| |30LIB26M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006056 |BARR | 09.500% | / / | 71,000.00|One | 1 | |00.000| 00 | | 09.500% |
| |1806 EUREKA STREET, MODESTO, CA | 327.94|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 1 | , CA, 95358, | 39,000.00|11/26 | 054.93% | Re | | |07.000|00/00| | % |
| |00000000000 | 39,000.00| / / | % |2 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006065 |OGDEN | 09.990% | / / | 205,000.00|One | 1 | |00.000| 00 | | 09.990% |
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
| |600 MCLAUGHLIN STREET, RICHMOND,| 1,039.05|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 1 | , CA, 94805, | 118,500.00|11/26 | 057.80% | Re | | |07.000|00/00| | % |
| |00000000000 | 118,500.00| / / | % |1 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006082 |ROBINSON | 11.500% | / / | 84,000.00|One | 1 | |07.950| 06 | | 11.500% |
| |405 N. LECLAIRE , CHICAGO, IL | 540.70|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 1 | , IL, 60644, | 54,600.00|11/26 | 065.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 54,600.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006084 |SANTOS | 10.500% | / / | 98,000.00|One | 1 | |07.950| 06 | | 10.500% |
| |5520 W. CORTEZ STREET, CHICAGO, | 503.11|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 1 | , IL, 60651, | 55,000.00|11/26 | 056.12% | Re | | |07.000|00/00| | % |
| |00000000000 | 55,000.00| / / | % | | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|___________|________________________________|_____________|________|_____________|_____|_____|______|______|_____|____|_________|
</TABLE>
<PAGE>
Salomon Brothers Inc
01/22/97 /mortgage27/d_new.cent.ca/d_repo.1101/data.cmv.remain.upd Page 7
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
| LN NUMBER | NAME |CURRENT RATE |ORIG DT|APPRAISAL AMT|PRPTY|2ndCD|DELNQ1|MARGIN|i CHG|PLAN| O RATE |
| BRANCH/INV| STREET ADDRESS |CURRENT P&I |1STPMTDT| SALES PRICE |OCCUP|BALLN|DELNQ2|PERCAP|p CHG|INDX| O P&I |
| DOCUMENTS | CITY, STATE, ZIP, COUNTY |ORIG BALANCE |MAT DT| ORIG LTV |LPURP|PARTF|#30+YR|LFECAP|iCHDT|ADJC| O INDEX |
| POOL | SeniorLienAmt |CURR BALANCE |PAIDTODT| CURR LTV |LTYPE|PART%|FORECL|LFE FL|pCHDT|NGAM| NEGAM % |
| GroupName |Prod Type / / |PMT PER/RTERM|ORIG TRM| PMI CODE |#UNIT|CNVT |SVSFEE|PAYCAP|1stDT|RNDC| RND FTR |
|===========|================================|=============|========|=============|=====|=====|======|======|=====|====|=========|
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
|0000006111 |MORROW | 12.000% | / / | 29,000.00|One | 1 | |07.950| 06 | | 12.000% |
| |422 SAGER STREET, DANVILLE, IL | 193.90|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 1 | , IL, 61832, | 18,850.00|11/26 | 065.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 18,850.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006113 |VARGAS | 09.500% | / / | 94,000.00|One | 1 | |07.950| 06 | | 09.500% |
| |5705 MILNER WAY, SACRAMENTO, CA | 546.56|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 1 | , CA, 95822, | 65,000.00|11/26 | 069.15% | Re | | |07.000|00/00| | % |
| |00000000000 | 65,000.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB26M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006115 |GIVENS | 08.950% | / / | 180,000.00|One | 2 | |07.950| 06 | | 08.950% |
| |3700 LUNDHOLM AVENUE, OAKLAND, C| 365.59|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 2 | , CA, 94605, | 36,150.00|11/11 | 077.26% | Re | | |07.000|00/00| | % |
| |00102915.00 | 36,150.00| / / | % |1 | | |000000|00/00| | % |
| |15LIB6M / / | / | 180 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006134 |LINNE | 11.250% | / / | 100,000.00|One | 2 | |00.000| 00 | | 11.250% |
| |12831 W. GLEN FLORA AVENUE, WAUK| 115.24|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 1 | , IL, 60085, | 10,000.00|11/11 | 062.50% | Re | | |07.000|00/00| | % |
| |00052500.00 | 10,000.00| / / | % |2 | | |000000|00/00| | % |
| |15FIX / / | / | 180 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006144 |TINDLE | 12.000% | / / | 126,000.00|One | 1 | |00.000| 00 | | 12.000% |
| |10602 E. 241 TERRACE, PECULIAR, | 660.10|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 3 | , MO, 64078, | 55,000.00|11/11 | 043.65% | Re | | |07.000|00/00| | % |
| |00000000000 | 55,000.00| / / | % |1 | | |000000|00/00| | % |
| |15FIX / / | / | 180 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006159 |VALENCIA | 08.900% | / / | 95,000.00|One | 1 | |07.950| 06 | | 08.900% |
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
| |2821 WEST SAINT TROPAZ AVENUE, T| 598.08|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 1 | , AZ, 85713, | 75,000.00|11/26 | 078.95% | Re | | |07.000|00/00| | % |
| |00000000000 | 75,000.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB26M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006163 |SHUBIN | 08.750% | / / | 143,000.00|One | 1 | |00.000| 00 | | 08.750% |
| |6241 HELIOTROPE AVENUE, BELL, CA| 637.23|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 1 | , CA, 90201, | 81,000.00|11/26 | 056.64% | Re | | |07.000|00/00| | % |
| |00000000000 | 81,000.00| / / | % |1 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006166 |WRIGHT | 11.500% | / / | 230,000.00|One | 2 | |00.000| 00 | | 11.500% |
| |25597 TABLE MEADOW ROAD, AUBURN,| 730.12|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 2 | , CA, 95602, | 62,500.00|11/11 | 083.70% | Re | | |07.000|00/00| | % |
| |00130000.00 | 62,500.00| / / | % |2 | | |000000|00/00| | % |
| |15FIX / / | / | 180 | | | N | | |00/00| | |
|___________|________________________________|_____________|________|_____________|_____|_____|______|______|_____|____|_________|
</TABLE>
<PAGE>
Salomon Brothers Inc
01/22/97 /mortgage27/d_new.cent.ca/d_repo.1101/data.cmv.remain.upd Page 8
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
| LN NUMBER | NAME |CURRENT RATE |ORIG DT|APPRAISAL AMT|PRPTY|2ndCD|DELNQ1|MARGIN|i CHG|PLAN| O RATE |
| BRANCH/INV| STREET ADDRESS |CURRENT P&I |1STPMTDT| SALES PRICE |OCCUP|BALLN|DELNQ2|PERCAP|p CHG|INDX| O P&I |
| DOCUMENTS | CITY, STATE, ZIP, COUNTY |ORIG BALANCE |MAT DT| ORIG LTV |LPURP|PARTF|#30+YR|LFECAP|iCHDT|ADJC| O INDEX |
| POOL | SeniorLienAmt |CURR BALANCE |PAIDTODT| CURR LTV |LTYPE|PART%|FORECL|LFE FL|pCHDT|NGAM| NEGAM % |
| GroupName |Prod Type / / |PMT PER/RTERM|ORIG TRM| PMI CODE |#UNIT|CNVT |SVSFEE|PAYCAP|1stDT|RNDC| RND FTR |
|===========|================================|=============|========|=============|=====|=====|======|======|=====|====|=========|
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
|0000006167 |BUTLER | 10.750% | / / | 140,000.00|One | 1 | |00.000| 00 | | 10.750% |
| |13780 MANZANITA WAY, PIONEER, CA| 872.23|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 1 | , CA, 95666, | 93,438.00|11/26 | 066.74% | Re | | |07.000|00/00| | % |
| |00000000000 | 93,438.00| / / | % |1 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006228 |RAY | 10.750% | / / | 72,000.00|One | 1 | |00.000| 00 | | 10.750% |
| |7564 EAST 29TH STREET, TUCSON, A| 522.75|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 1 | , AZ, 85710, | 56,000.00|11/26 | 077.78% | Re | | |07.000|00/00| | % |
| |00000000000 | 56,000.00| / / | % |1 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006230 |PACE | 10.650% | / / | 261,000.00|One | 1 | |00.000| 00 | | 10.650% |
| |211 NORTH AVENIDA ALIPAZ , WALN| 1,812.60|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 2 | , CA, 91789, | 195,750.00|11/26 | 075.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 195,750.00| / / | % |2 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006247 |CISNEROS | 09.800% | / / | 112,000.00|One | 1 | |00.000| 00 | | 09.800% |
| |10322 CROESUS AVENUE, LOS ANGELE| 724.78|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 3 | , CA, 90002, | 84,000.00|11/26 | 075.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 84,000.00| / / | % |2 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006269 |ROGERS | 10.500% | / / | 226,000.00|One | 2 | |00.000| 00 | | 10.500% |
| |14535 W BRUNS ROAD, MANHATTAN, I| 519.54|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 3 | , IL, 60442, | 47,000.00|11/11 | 045.13% | Re | | |07.000|00/00| | % |
| |00055000.00 | 47,000.00| / / | % |2 | | |000000|00/00| | % |
| |15FIX / / | / | 180 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006275 |BUCKLEY | 11.250% | / / | 307,000.00|2-4 U| 1 | |07.700| 06 | | 11.250% |
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
| |1825-1827 1/2 PEARL STREET, SANT| 2,087.25|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 2 | , CA, 90405, | 214,900.00|11/26 | 070.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 214,900.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB26M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006285 |CORTINAS | 09.750% | / / | 275,000.00|One | 1 | |07.950| 06 | | 09.750% |
| |579 MARIPOSA AVENUE, MOUNTAIN VI| 1,204.97|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 3 | , CA, 94041, | 140,250.00|11/26 | 051.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 140,250.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB26M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006295 |MACBRIDE | 09.050% | / / | 610,000.00|2-4 U| 1 | |07.350| 06 | | 09.050% |
| |3761 N KENMORE AVENUE, CHICAGO, | 3,071.25|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 3 | , IL, 60613, | 380,000.00|11/26 | 062.30% | Re | | |07.000|00/00| | % |
| |00000000000 | 380,000.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|___________|________________________________|_____________|________|_____________|_____|_____|______|______|_____|____|_________|
</TABLE>
<PAGE>
Salomon Brothers Inc
01/22/97 /mortgage27/d_new.cent.ca/d_repo.1101/data.cmv.remain.upd Page 9
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
| LN NUMBER | NAME |CURRENT RATE |ORIG DT|APPRAISAL AMT|PRPTY|2ndCD|DELNQ1|MARGIN|i CHG|PLAN| O RATE |
| BRANCH/INV| STREET ADDRESS |CURRENT P&I |1STPMTDT| SALES PRICE |OCCUP|BALLN|DELNQ2|PERCAP|p CHG|INDX| O P&I |
| DOCUMENTS | CITY, STATE, ZIP, COUNTY |ORIG BALANCE |MAT DT| ORIG LTV |LPURP|PARTF|#30+YR|LFECAP|iCHDT|ADJC| O INDEX |
| POOL | SeniorLienAmt |CURR BALANCE |PAIDTODT| CURR LTV |LTYPE|PART%|FORECL|LFE FL|pCHDT|NGAM| NEGAM % |
| GroupName |Prod Type / / |PMT PER/RTERM|ORIG TRM| PMI CODE |#UNIT|CNVT |SVSFEE|PAYCAP|1stDT|RNDC| RND FTR |
|===========|================================|=============|========|=============|=====|=====|======|======|=====|====|=========|
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
|0000006318 |GUERRA | 11.000% | / / | 81,500.00|One | 1 | |00.000| 00 | | 11.000% |
| |158 NORTH SMITH AVENUE, DINUBA, | 380.93|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 3 | , CA, 93618, | 40,000.00|11/26 | 049.08% | Re | | |07.000|00/00| | % |
| |00000000000 | 40,000.00| / / | % |2 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006319 |SULLIVAN | 12.750% | / / | 27,000.00|One | 1 | |07.950| 06 | | 12.750% |
| |932 E. CURTIS AVENUE, DECATUR, I| 176.59|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 1 | , IL, 62526, | 16,250.00|11/26 | 060.19% | Re | | |07.000|00/00| | % |
| |00000000000 | 16,250.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006322 |CIURUS | 11.700% | / / | 158,000.00|One | 1 | |07.950| 06 | | 11.700% |
| |506 BROOKWOOD , MCHENRY, IL 60| 1,112.18|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 3 | , IL, 60050, | 110,600.00|11/26 | 070.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 110,600.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB26M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006324 |FOERSCHLER | 10.250% | / / | 73,500.00|One | 1 | |06.950| 06 | | 10.250% |
| |2101 NORTH LEXINGTON , HARRISON| 559.62|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 1 | , MO, 64701, | 62,450.00|11/26 | 084.97% | Re | | |07.000|00/00| | % |
| |00000000000 | 62,450.00| / / | % |1 | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006364 |WEBB | 08.860% | / / | 93,500.00|One | 1 | |00.000| 00 | | 08.860% |
| |2009 W STONECREEK DRIVE, SALT LA| 594.34|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 1 | , UT, 84119, | 74,800.00|11/26 | 080.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 74,800.00| / / | % |1 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006385 |KIRKMAN | 07.700% | / / | 118,000.00|One | 1 | |06.500| 06 | | 07.700% |
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
| |460 CASANOVA AVENUE, MONTEREY, C| 534.73|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 3 | , CA, 93940, | 75,000.00|11/26 | 063.56% | Re | | |07.000|00/00| | % |
| |00000000000 | 75,000.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006390 |LEMING | 12.250% | / / | 25,000.00|One | 1 | |07.950| 06 | | 12.250% |
| |1950 N. CHURCH , DECATUR, IL 6| 157.19|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 3 | , IL, 62526, | 15,000.00|11/26 | 060.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 15,000.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006403 |GUNN | 13.000% | / / | 235,000.00|One | 1 | |00.000| 00 | | 13.000% |
| |568 MARTIN STREET, OAKLAND, CA | 1,603.99|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 3 | , CA, 94609, | 145,000.00|11/26 | 061.70% | Re | | |07.000|00/00| | % |
| |00000000000 | 145,000.00| / / | % |2 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|___________|________________________________|_____________|________|_____________|_____|_____|______|______|_____|____|_________|
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Salomon Brothers Inc
01/22/97 /mortgage27/d_new.cent.ca/d_repo.1101/data.cmv.remain.upd Page 10
- ----------------------------------------------------------------------------------------------------------------------------------
| LN NUMBER | NAME |CURRENT RATE |ORIG DT|APPRAISAL AMT|PRPTY|2ndCD|DELNQ1|MARGIN|i CHG|PLAN| O RATE |
| BRANCH/INV| STREET ADDRESS |CURRENT P&I |1STPMTDT| SALES PRICE |OCCUP|BALLN|DELNQ2|PERCAP|p CHG|INDX| O P&I |
| DOCUMENTS | CITY, STATE, ZIP, COUNTY |ORIG BALANCE |MAT DT| ORIG LTV |LPURP|PARTF|#30+YR|LFECAP|iCHDT|ADJC| O INDEX |
| POOL | SeniorLienAmt |CURR BALANCE |PAIDTODT| CURR LTV |LTYPE|PART%|FORECL|LFE FL|pCHDT|NGAM| NEGAM % |
| GroupName |Prod Type / / |PMT PER/RTERM|ORIG TRM| PMI CODE |#UNIT|CNVT |SVSFEE|PAYCAP|1stDT|RNDC| RND FTR |
|===========|================================|=============|========|=============|=====|=====|======|======|=====|====|=========|
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
|0000006408 |SHAFFER | 10.750% | / / | 97,000.00|One | 1 | |07.500| 06 | | 10.750% |
| |29 KATHY COURT, BLUE MOUND, IL | 724.39|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 1 | , IL, 62513, | 77,600.00|11/26 | 080.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 77,600.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006413 |PUPKA | 09.500% | / / | 160,000.00|One | 1 | |00.000| 00 | | 09.500% |
| |10781 BLAKE STREET, GARDEN GROVE| 941.76|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 3 | , CA, 92843, | 112,000.00|11/26 | 070.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 112,000.00| / / | % |1 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006447 |OWEN | 10.250% | / / | 82,000.00|One | 1 | |00.000| 00 | | 10.250% |
| |780 NORTH VALERIA DRIVE, LAYTON,| 537.67|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 1 | , UT, 84041, | 60,000.00|11/26 | 073.17% | Re | | |07.000|00/00| | % |
| |00000000000 | 60,000.00| / / | % |2 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006474 |MAKRIS | 09.950% | / / | 87,000.00|One | 1 | |07.500| 06 | | 09.950% |
| |4140 ELM AVENUE, LYONS, IL 6053| 570.21|12/96 | 87,000.00| P | | | 1.500| 06 | | 0.00|
| 3 | , IL, 60534, | 65,250.00|11/26 | 075.00% | Pu | | |07.000|00/00| | % |
| |00000000000 | 65,250.00| / / | % | | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006513 |SEIDEL | 09.950% | / / | 75,000.00|One | 1 | |05.750| 06 | | 09.950% |
| |1023 AMHERST DRIVE, MARION, OH | 589.87|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 1 | , OH, 43302, | 67,500.00|11/26 | 090.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 67,500.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006514 |STADTMILLER | 08.200% | / / | 83,000.00|One | 1 | |06.950| 06 | | 08.200% |
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
| |309 RETREAT STREET, BELLEVUE, KY| 496.51|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 1 | , KY, 41073, | 66,400.00|11/26 | 080.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 66,400.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006519 |ELDREDGE | 09.750% | / / | 67,000.00|One | 1 | |00.000| 00 | | 09.750% |
| |6938 WEST TAYLOR STREET, PHOENIX| 489.29|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 1 | , AZ, 85043, | 56,950.00|11/26 | 085.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 56,950.00| / / | % |2 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006538 |REDDIG | 10.250% | / / | 45,000.00|One | 1 | |06.750| 06 | | 10.250% |
| |409 SOUTH MONROE , KANSAS CITY,| 286.12|12/96 | 0.00| I | | | 1.500| 06 | | 0.00|
| 3 | , MO, 64124, | 26,250.00|11/11 | 058.33% | Re | | |07.000|00/00| | % |
| |00000000000 | 26,250.00| / / | % |2 | | |000000|00/00| | % |
| |15LIB6M / / | / | 180 | | | N | | |00/00| | |
|___________|________________________________|_____________|________|_____________|_____|_____|______|______|_____|____|_________|
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Salomon Brothers Inc
01/22/97 /mortgage27/d_new.cent.ca/d_repo.1101/data.cmv.remain.upd Page 11
- ----------------------------------------------------------------------------------------------------------------------------------
| LN NUMBER | NAME |CURRENT RATE |ORIG DT|APPRAISAL AMT|PRPTY|2ndCD|DELNQ1|MARGIN|i CHG|PLAN| O RATE |
| BRANCH/INV| STREET ADDRESS |CURRENT P&I |1STPMTDT| SALES PRICE |OCCUP|BALLN|DELNQ2|PERCAP|p CHG|INDX| O P&I |
| DOCUMENTS | CITY, STATE, ZIP, COUNTY |ORIG BALANCE |MAT DT| ORIG LTV |LPURP|PARTF|#30+YR|LFECAP|iCHDT|ADJC| O INDEX |
| POOL | SeniorLienAmt |CURR BALANCE |PAIDTODT| CURR LTV |LTYPE|PART%|FORECL|LFE FL|pCHDT|NGAM| NEGAM % |
| GroupName |Prod Type / / |PMT PER/RTERM|ORIG TRM| PMI CODE |#UNIT|CNVT |SVSFEE|PAYCAP|1stDT|RNDC| RND FTR |
|===========|================================|=============|========|=============|=====|=====|======|======|=====|====|=========|
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
|0000006539 |THOMAS | 12.350% | / / | 75,000.00|One | 1 | |07.950| 06 | | 12.350% |
| |7211 S. PEORIA STREET, CHICAGO, | 554.21|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 3 | , IL, 60621, | 52,500.00|11/26 | 070.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 52,500.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006554 |SKATEZE | 13.250% | / / | 82,000.00|One | 1 | |07.950| 06 | | 13.250% |
| |140 N. VINE STREET, MT GILEAD, O| 667.03|12/96 | 79,000.00| P | | | 1.500| 06 | | 0.00|
| 1 | , OH, 43338, | 59,250.00|11/26 | 072.26% | Pu | | |07.000|00/00| | % |
| |00000000000 | 59,250.00| / / | % | | | |000000|00/00| | % |
| |30LIB26M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006555 |PRICE | 13.250% | / / | 40,000.00|One | 1 | |00.000| 00 | | 13.250% |
| |1100 CHEROKEE , LEAVENWORTH, KS| 298.33|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 1 | , KS, 66048, | 26,500.00|11/26 | 066.25% | Re | | |07.000|00/00| | % |
| |00000000000 | 26,500.00| / / | % |2 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006569 |SCHWARTZ | 13.950% | / / | 70,000.00|One | 1 | |00.000| 00 | | 13.950% |
| |6714 WINCHESTER , KANSAS CITY, | 586.92|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 1 | , MO, 64133, | 49,700.00|11/26 | 071.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 49,700.00| / / | % |1 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006576 |POTCHYNOK | 10.250% | / / | 185,000.00|One | 1 | |07.950| 06 | | 10.250% |
| |211 WATERBURY , LAKE VILLA, IL | 761.69|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 3 | , IL, 60046, | 85,000.00|11/26 | 045.95% | Re | | |07.000|00/00| | % |
| |00000000000 | 85,000.00| / / | % |1 | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006607 |EYRAUD | 10.450% | / / | 475,000.00|One | 1 | |00.000| 00 | | 10.450% |
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
| |109 WEST PALM DRIVE, ARCADIA, CA| 2,277.51|12/96 | 0.00| I | | | 1.500| 00 | | 0.00|
| 3 | , CA, 91007, | 250,000.00|11/26 | 052.63% | Re | | |07.000|00/00| | % |
| |00000000000 | 250,000.00| / / | % |2 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006614 |SWENSON | 06.990% | / / | 355,000.00|One | 1 | |05.990| 06 | | 06.990% |
| |1751 EL CODO WAY, SAN JOSE, CA | 1,329.27|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 3 | , CA, 95124, | 200,000.00|11/26 | 056.34% | Re | | |07.000|00/00| | % |
| |00000000000 | 200,000.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006616 |BROWN | 12.950% | / / | 64,000.00|One | 1 | |00.000| 00 | | 12.950% |
| |659 S RICHARDSON AVENUE, COLUMBU| 564.38|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 3 | , OH, 43204, | 51,200.00|11/26 | 080.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 51,200.00| / / | % |1 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|___________|________________________________|_____________|________|_____________|_____|_____|______|______|_____|____|_________|
</TABLE>
<PAGE>
Salomon Brothers Inc
01/22/97 /mortgage27/d_new.cent.ca/d_repo.1101/data.cmv.remain.upd Page 12
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
| LN NUMBER | NAME |CURRENT RATE |ORIG DT|APPRAISAL AMT|PRPTY|2ndCD|DELNQ1|MARGIN|i CHG|PLAN| O RATE |
| BRANCH/INV| STREET ADDRESS |CURRENT P&I |1STPMTDT| SALES PRICE |OCCUP|BALLN|DELNQ2|PERCAP|p CHG|INDX| O P&I |
| DOCUMENTS | CITY, STATE, ZIP, COUNTY |ORIG BALANCE |MAT DT| ORIG LTV |LPURP|PARTF|#30+YR|LFECAP|iCHDT|ADJC| O INDEX |
| POOL | SeniorLienAmt |CURR BALANCE |PAIDTODT| CURR LTV |LTYPE|PART%|FORECL|LFE FL|pCHDT|NGAM| NEGAM % |
| GroupName |Prod Type / / |PMT PER/RTERM|ORIG TRM| PMI CODE |#UNIT|CNVT |SVSFEE|PAYCAP|1stDT|RNDC| RND FTR |
|===========|================================|=============|========|=============|=====|=====|======|======|=====|====|=========|
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
|0000006621 |JACKSON | 11.850% | / / | 100,000.00|One | 1 | |07.950| 06 | | 11.850% |
| |1792 5TH STREET, WHITE BEAR LAKE| 610.25|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 1 | , MN, 55110, | 60,000.00|11/26 | 060.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 60,000.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006622 |PERRINO | 11.850% | / / | 238,500.00|One | 1 | |07.950| 06 | | 11.850% |
| |1302 SUFFIELD DRIVE, ARLINGTON H| 1,576.48|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 1 | , IL, 60004, | 155,000.00|11/26 | 064.99% | Re | | |07.000|00/00| | % |
| |00000000000 | 155,000.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006629 |GREEN | 09.500% | / / | 165,000.00|One | 1 | |07.250| 06 | | 09.500% |
| |833 EAST RADBARD STREET, CARSON,| 1,109.93|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 2 | , CA, 90746, | 132,000.00|11/26 | 080.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 132,000.00| / / | % |1 | | |000000|00/00| | % |
| |30LIB26M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006671 |HALAJIAN | 10.500% | / / | 150,000.00|One | 1 | |00.000| 00 | | 10.500% |
| |13835 KAMLOOPS STREET, ARLETA AR| 960.48|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 3 | , CA, 91331, | 105,000.00|11/26 | 070.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 105,000.00| / / | % |2 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006675 |PALUSKA | 12.000% | / / | 95,000.00|One | 1 | |07.950| 06 | | 12.000% |
| |208 E. HOLLAND , WASHINGTON, IL| 635.17|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 1 | , IL, 61671, | 61,750.00|11/26 | 065.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 61,750.00| / / | % |1 | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006682 |POWE | 10.550% | / / | 100,000.00|Condo| 1 | |07.100| 06 | | 10.550% |
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
| |2754 EAST COURT, RICHMOND, CA 9| 597.94|12/96 | 93,000.00| P | | | 1.500| 06 | | 0.00|
| 1 | , CA, 94806, | 65,100.00|11/26 | 065.10% | Pu | | |07.000|00/00| | % |
| |00000000000 | 65,100.00| / / | % | | | |000000|00/00| | % |
| |30LIB26M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006693 |PEGUES | 09.990% | / / | 150,000.00|One | 1 | |00.000| 00 | | 09.990% |
| |3785 WEBSTER STREET, OAKLAND, CA| 1,052.20|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 1 | , CA, 94609, | 120,000.00|11/26 | 080.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 120,000.00| / / | % |2 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006697 |BLAND | 08.500% | / / | 135,000.00|One | 1 | |07.000| 06 | | 08.500% |
| |5025 ROSCREA AVENUE, SAN DIEGO, | 426.75|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 3 | , CA, 92117, | 55,500.00|11/26 | 041.11% | Re | | |07.000|00/00| | % |
| |00000000000 | 55,500.00| / / | % |1 | | |000000|00/00| | % |
| |30LIB26M / / | / | 360 | | | N | | |00/00| | |
|___________|________________________________|_____________|________|_____________|_____|_____|______|______|_____|____|_________|
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Salomon Brothers Inc
01/22/97 /mortgage27/d_new.cent.ca/d_repo.1101/data.cmv.remain.upd Page 13
- ----------------------------------------------------------------------------------------------------------------------------------
| LN NUMBER | NAME |CURRENT RATE |ORIG DT|APPRAISAL AMT|PRPTY|2ndCD|DELNQ1|MARGIN|i CHG|PLAN| O RATE |
| BRANCH/INV| STREET ADDRESS |CURRENT P&I |1STPMTDT| SALES PRICE |OCCUP|BALLN|DELNQ2|PERCAP|p CHG|INDX| O P&I |
| DOCUMENTS | CITY, STATE, ZIP, COUNTY |ORIG BALANCE |MAT DT| ORIG LTV |LPURP|PARTF|#30+YR|LFECAP|iCHDT|ADJC| O INDEX |
| POOL | SeniorLienAmt |CURR BALANCE |PAIDTODT| CURR LTV |LTYPE|PART%|FORECL|LFE FL|pCHDT|NGAM| NEGAM % |
| GroupName |Prod Type / / |PMT PER/RTERM|ORIG TRM| PMI CODE |#UNIT|CNVT |SVSFEE|PAYCAP|1stDT|RNDC| RND FTR |
|===========|================================|=============|========|=============|=====|=====|======|======|=====|====|=========|
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
|0000006738 |MOLINA | 09.500% | / / | 170,000.00|One | 2 | |00.000| 00 | | 09.500% |
| |9454 AERO DRIVE, PICO RIVERA, CA| 214.07|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 1 | , CA, 90660, | 20,500.00|11/11 | 079.29% | Re | | |07.000|00/00| | % |
| |00114290.00 | 20,500.00| / / | % |2 | | |000000|00/00| | % |
| |15FIX / / | / | 180 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006775 |RALSTON | 09.000% | / / | 233,000.00|One | 1 | |00.000| 00 | | 09.000% |
| |1160 NORTH RICHMAN AVENUE, FULLE| 1,311.54|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 3 | , CA, 92635, | 163,000.00|11/26 | 069.96% | Re | | |07.000|00/00| | % |
| |00000000000 | 163,000.00| / / | % |2 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006850 |BROWN | 08.990% | / / | 125,000.00|One | 1 | |05.950| 06 | | 08.990% |
| |18736 W 59TH DRIVE, GOLDEN, CO | 653.18|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 3 | , CO, 80403, | 81,250.00|11/26 | 065.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 81,250.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB26M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006871 |JOHNSON | 11.750% | / / | 156,000.00|One | 1 | |07.950| 06 | | 11.750% |
| |4620 ASPEN DRIVE, HAMILTON, OH | 787.34|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 1 | , OH, 45011, | 78,000.00|11/26 | 050.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 78,000.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB26M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006872 |MASON | 09.250% | / / | 65,000.00|One | 1 | |06.000| 06 | | 09.250% |
| |1061 GRAYVIEW COURT, CINCINNATI,| 374.32|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 3 | , OH, 45224, | 45,500.00|11/26 | 070.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 45,500.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006894 |ARNOLD | 09.250% | / / | 175,000.00|One | 1 | |00.000| 00 | | 09.250% |
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
| |1426 TETON DRIVE, EL CAJON, CA | 1,077.71|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 1 | , CA, 92021, | 131,000.00|11/26 | 074.86% | Re | | |07.000|00/00| | % |
| |00000000000 | 131,000.00| / / | % |1 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006941 |MOWER | 09.750% | / / | 97,000.00|One | 1 | |06.950| 06 | | 09.750% |
| |755 WEST GENESEE AVENUE, SALT LA| 618.60|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 3 | , UT, 84104, | 72,000.00|11/26 | 074.23% | Re | | |07.000|00/00| | % |
| |00000000000 | 72,000.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB26M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006948 |OWEN | 08.990% | / / | 260,000.00|One | 1 | |00.000| 00 | | 08.990% |
| |767 NORTH REDWOOD AVENUE, SAN JO| 635.09|12/96 | 0.00| P | | | 1.500| 00 | | 0.00|
| 1 | , CA, 95128, | 79,000.00|11/26 | 030.38% | Re | | |07.000|00/00| | % |
| |00000000000 | 79,000.00| / / | % |2 | | |000000|00/00| | % |
| |30FIX / / | / | 360 | | | N | | |00/00| | |
|___________|________________________________|_____________|________|_____________|_____|_____|______|______|_____|____|_________|
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Salomon Brothers Inc
01/22/97 /mortgage27/d_new.cent.ca/d_repo.1101/data.cmv.remain.upd Page 14
- ----------------------------------------------------------------------------------------------------------------------------------
| LN NUMBER | NAME |CURRENT RATE |ORIG DT|APPRAISAL AMT|PRPTY|2ndCD|DELNQ1|MARGIN|i CHG|PLAN| O RATE |
| BRANCH/INV| STREET ADDRESS |CURRENT P&I |1STPMTDT| SALES PRICE |OCCUP|BALLN|DELNQ2|PERCAP|p CHG|INDX| O P&I |
| DOCUMENTS | CITY, STATE, ZIP, COUNTY |ORIG BALANCE |MAT DT| ORIG LTV |LPURP|PARTF|#30+YR|LFECAP|iCHDT|ADJC| O INDEX |
| POOL | SeniorLienAmt |CURR BALANCE |PAIDTODT| CURR LTV |LTYPE|PART%|FORECL|LFE FL|pCHDT|NGAM| NEGAM % |
| GroupName |Prod Type / / |PMT PER/RTERM|ORIG TRM| PMI CODE |#UNIT|CNVT |SVSFEE|PAYCAP|1stDT|RNDC| RND FTR |
|===========|================================|=============|========|=============|=====|=====|======|======|=====|====|=========|
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
|0000006952 |DOLEZAL | 09.200% | / / | 220,000.00|Condo| 1 | |06.200| 06 | | 09.200% |
| |1690 SEACOAST DRIVE,C IMPERIAL B| 1,441.54|12/96 | 220,000.00| P | | | 1.500| 06 | | 0.00|
| 1 | , CA, 91932, | 176,000.00|11/26 | 080.00% | Pu | | |07.000|00/00| | % |
| |00000000000 | 176,000.00| / / | % | | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000006977 |HYER | 08.600% | / / | 116,000.00|One | 1 | |07.500| 06 | | 08.600% |
| |40779 STETSON AVENUE, HEMET AREA| 675.14|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 1 | , CA, 92544, | 87,000.00|11/26 | 075.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 87,000.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB26M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000007007 |GILARDI | 11.600% | / / | 155,000.00|2-4 U| 1 | |07.500| 06 | | 11.600% |
| |1155 DELPHINIUM STREET, RED BLUF| 1,005.42|12/96 | 0.00| I | | | 1.500| 06 | | 0.00|
| 3 | , CA, 96080, | 100,750.00|11/26 | 065.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 100,750.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB26M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000007050 |CARD | 08.950% | / / | 83,000.00|One | 1 | |07.000| 06 | | 08.950% |
| |200 NORTH EVANSLAWN AVENUE, AURO| 485.83|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 1 | , IL, 60506, | 60,650.00|11/26 | 073.07% | Re | | |07.000|00/00| | % |
| |00000000000 | 60,650.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000007117 |MOOREHEAD | 12.850% | / / | 172,000.00|2-4 U| 1 | |07.950| 06 | | 12.850% |
| |4243 WEST 101ST STREET, INGLEWOO| 1,291.50|12/96 | 0.00| P | | | 1.500| 06 | | 0.00|
| 1 | , CA, 90304, | 118,000.00|11/26 | 068.60% | Re | | |07.000|00/00| | % |
| |00000000000 | 118,000.00| / / | % |1 | | |000000|00/00| | % |
| |30LIB26M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000007173 |TAYLOR | 10.950% | / / | 79,500.00|One | 1 | |07.950| 06 | | 10.950% |
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
| |2123 MT. WERNER COURT , COLORAD| 377.05|12/96 | 0.00| I | | | 1.500| 06 | | 0.00|
| 1 | , CO, 80906, | 39,750.00|11/26 | 050.00% | Re | | |07.000|00/00| | % |
| |00000000000 | 39,750.00| / / | % |2 | | |000000|00/00| | % |
| |30LIB6M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
|0000007280 |SEIDMAN | 10.750% | / / | 85,000.00|One | 1 | |07.500| 06 | | 10.750% |
| |5010 LAGUNA ROAD, TROTWOOD, OH | 476.08|12/96 | 103,000.00| P | | | 1.500| 06 | | 0.00|
| 1 | , OH, 45426, | 51,000.00|11/26 | 060.00% | Pu | | |07.000|00/00| | % |
| |00000000000 | 51,000.00| / / | % | | | |000000|00/00| | % |
| |30LIB26M / / | / | 360 | | | N | | |00/00| | |
|-----------+--------------------------------+-------------+--------+-------------+-----+-----+------+------+-----+----+---------|
| 111 Loans 9.9105% 00/00/00 4.892 9.910% |
| 85,785.10 12/96 1.500 |
| 9,753,558.00 05/26 68.947% 07.000 00/00 0.000% |
| 9,753,558.00 00/00/00 0.000% 0.000 00/00 |
| 00.000 354 0.0000 0.000 |
|________________________________________________________________________________________________________________________________|
</TABLE>
<PAGE>
EXHIBIT 10.11
OFFICE BUILDING LEASE
This OFFICE BUILDING LEASE ("Lease") is entered into as of the ___ day of
__________, 1997 by and between KOLL CENTER IRVINE NUMBER TWO, a California
limited partnership ("Landlord"), and NEW CENTURY FINANCIAL CORPORATION, a
Delaware corporation ("Tenant").
1. BASIC LEASE TERMS. For purposes of this Lease, the following terms have the
following definitions and meanings:
(a) LANDLORD: Koll Center Irvine Number Two,
a California limited partnership
(b) LANDLORD'S ADDRESS (FOR NOTICES):
c/o Koll, 18500 Von Karman, Suite 120
Irvine, CA 92612
Attention: 18400 Building Manager,
or such other place as Landlord may from time to time designate by notice to
Tenant.
(c) TENANT: New Century Financial Corporation
a Delaware corporation
(d) TENANT'S ADDRESS (FOR NOTICES):
18400 Von Karman, Suite 1100
Irvine, CA 92612
Attention: Bill Dodge
or such other place as Tenant may from time to time designate by notice to
Landlord.
(e) DEVELOPMENT: The parcel(s) of real property commonly known as Koll Center
Irvine and located in the City of Irvine (the "City"), County of Orange (the
"County"), State of California ("State"), as shown on the site plan attached
hereto as Exhibit "A-1".
(f) BUILDING: An eleven (11) story office building located within the
Development, which Building contains approximately 218,922 Rentable Square Feet
(subject to adjustment as provided in Exhibit "B"), with the street address of
18400 Von Karman.
(g) PREMISES: Those certain premises known as Suite(s) 135 (1,806 Rentable
and 1,575 Usable Square Feet), 900 (also referred to as the Takedown Space in
Paragraph 43 of the Addendum attached hereto, 19,097 Rentable and 16,639 Usable
Square Feet), 1000 (19,852 Rentable and 18,639 Usable Square Feet), and 1100
(19,434 Rentable and 18,275 Usable Square Feet) as generally shown on the floor
plan(s) attached hereto as Exhibit "A-II", located on the 1st, 9th, 10th and
11th floor(s), respectively, of the Building, which Premises contains in the
aggregate approximately 60,189 Rentable Square Feet and 55,128 Usable Square
Feet (subject to adjustment as provided in Exhibit "B" and Exhibit "D").
(h) TENANT'S PERCENTAGE: Tenant's percentage of the Building on a Rentable
Square Foot Space basis, which initially is 27.4934% (which percentage
includes the Takedown Space), subject to final determination as provided in
Exhibit "B" and Exhibit "D".
(i) TERM: five (5) Lease Years and zero (0) Months.
(j) ESTIMATED COMMENCEMENT DATE: June 1, 1997.
ESTIMATED EXPIRATION DATE: May 31, 2002.
(k) COMMENCEMENT DATE: The date on which the Term of this Lease will commence
as determined in accordance with the provisions of Exhibit "C" and as
stated on Exhibit "D".
(l) INITIAL MONTHLY BASE RENT: $ 74,787.44 (41,092 Rentable Square Feet [which
is the size of the Premises less the Takedown Space] multiplied by $1.82),
subject to adjustment as provided in Subparagraph 1(m) below and as
otherwise provided in this Lease.
-1-
<PAGE>
(m) ADJUSTMENT TO MONTHLY BASE RENT: Monthly Base Rent will be adjusted in
accordance with the following:
<TABLE>
<CAPTION>
MONTHS MONTHLY BASE RENT
<S> <C>
Commencement Date through 11/30/97 $ 74,787.44 (41,092 Rentable Square
Feet [which is the size
of the Premises less the
Takedown Space] multiplied
by $1.82)
12/01/97 through the day prior to the $109,543.98 (60,189 Rentable Square
1st anniversary of the Commencement Date Feet multiplied by $1.82)
1st anniversary of the Commencement Date $112,553.43 (60,189 Rentable Square
through the day prior to the 2nd Feet multiplied by $1.82)
anniversary of the Commencement Date
2nd anniversary of the Commencement Date $115,562.88 (60,189 Rentable Square
through the day prior to the 3rd Feet multiplied by $1.87)
anniversary of the Commencement Date
3rd anniversary of the Commencement Date $118,572.33 (60,189 Rentable Square
through the day prior to the 4th Feet multiplied by $1.97)
anniversary of the Commencement Date
4th anniversary of the Commencement Date $121,581.78 (60,189 Rentable Square
through the expiration of the original Feet multiplied by $2.02)
Lease Term
</TABLE>
(n) OPERATING EXPENSE ALLOWANCE: Operating Expense Allowance means that portion
of Tenant's Percentage of Operating Expenses as described in Paragraph 6 below
which Landlord has included in Monthly Base Rent, which, for purposes of this
Lease, will be an amount equal to Tenant's Percentage of Operating Expenses for
the 1997 calendar base year.
(o) SECURITY DEPOSIT: $82,266.18 cash (110% of the initial Monthly Base
Rent) plus a Letter of Credit as described in Paragraph 44 of the Addendum
attached hereto.
(p) TENANT IMPROVEMENTS: All tenant improvements installed or to be installed by
Landlord or Tenant within the Premises to prepare the Premises for occupancy
pursuant to the terms of the Work Letter Agreement attached hereto as Exhibit
"C".
(q) TENANT IMPROVEMENT ALLOWANCE: $ 15.00 per Usable Square Foot of the
Premises, exclusive of Suite 135, which will be subject to a $25.00 per Usable
Square Foot Tenant Improvement Allowance, and the Takedown Space, which will be
subject to a Tenant Improvement Allowance as described in Paragraph 43(b) of the
Addendum attached hereto, to be applied as provided in the Work Letter Agreement
attached hereto as Exhibit "C".
(r) PERMITTED USE: General office space consistent with the majority of other
office users in the Development.
(s) PARKING: As described in Paragraph 48 of the Addendum attached hereto,
subject to the terms and conditions of Paragraph 32 below and the Rules and
Regulations regarding parking contained in Exhibit "H".
(t) BROKER(S): Lee & Associates and Koll Marketing Group.
(u) GUARANTOR(S): N/A
(v) INTEREST RATE: shall mean the greater of ten percent (10%) per annum or two
percent (2%) in excess of the prime lending or reference rate of Wells Fargo
Bank N.A. or any successor bank in effect on the twenty-fifth (25th) day of the
calendar month immediately prior to the event giving rise to the Interest Rate
imposition; provided, however, the Interest Rate will in no event exceed the
maximum interest rate permitted to be charged by applicable law.
(w) EXHIBITS: "A-I" through "K", inclusive, which Exhibits are attached to this
Lease and incorporated herein by this reference. As provided in Paragraph 3
below, a completed version of Exhibit "D" will be delivered to Tenant after
Landlord delivers possession of the Premises to Tenant.
(x) ADDENDUM PARAGRAPHS: 40 through 50, inclusive, which Addendum Paragraphs
are attached to this Lease and incorporated herein by this reference.
This Paragraph 1 represents a summary of the basic terms and definitions of this
Lease. In the event of any inconsistency between the terms contained in this
Paragraph 1 and any specific provision of this Lease, the terms of the more
specific provision shall prevail.
-2-
<PAGE>
2. PREMISES AND COMMON AREAS.
(a) PREMISES. Landlord hereby leases to Tenant and Tenant hereby leases from
Landlord the Premises as improved or to be improved with the Tenant Improvements
described in the Work Letter Agreement, a copy of which is attached hereto as
Exhibit "C".
- -----------
(b) MUTUAL COVENANTS. Landlord and Tenant agree that the letting and hiring of
the Premises is upon and subject to the terms, covenants and conditions
contained in this Lease and each party covenants as a material part of the
consideration for this Lease to keep and perform their respective obligations
under this Lease.
(c) TENANT'S USE OF COMMON AREAS. During the Term of this Lease, Tenant shall
have the nonexclusive right to use in common with Landlord and all persons,
firms and corporations conducting business in the Development and their
respective customers, guests, licensees, invitees, subtenants, employees and
agents (collectively, "Development Occupants"), subject to the terms of this
Lease, the Rules and Regulations referenced in Paragraph 32 below and all
covenants, conditions and restrictions now or hereafter affecting the
Development, the following common areas of the Building and/or the Development
(collectively, the "Common Areas"):
(i) The Building's common entrances, hallways, lobbies, public restrooms on
multi-tenant floors, elevators, stairways and accessways, loading docks, ramps,
drives and platforms and any passageways and serviceways thereto, and the common
pipes, conduits, wires and appurtenant equipment within the Building which serve
the Premises (collectively, "Building Common Areas"); and
(ii) The parking facilities of the Development which serve the Building (subject
to the provisions of Exhibit "H"), loading and unloading areas, trash areas,
-----------
roadways, sidewalks, walkways, parkways, driveways, landscaped areas, plaza
areas, fountains and similar areas and facilities situated within the
Development and appurtenant to the Building which are not reserved for the
exclusive use of any Development Occupants (collectively, "Development Common
Areas").
(d) LANDLORD'S RESERVATION OF RIGHTS. Provided Tenant's use of and access to the
Premises and parking to be provided to Tenant under this Lease is not interfered
with in an unreasonable manner, Landlord reserves for itself and for all other
owner(s) and operator(s) of the Development Common Areas and the balance of the
Development, the right from time to time to: (i) install, use, maintain, repair,
replace and relocate pipes, ducts, conduits, wires and appurtenant meters and
equipment above the ceiling surfaces, below the floor surfaces, within the walls
and in the central core areas of the Building; (ii) make changes to the design
and layout of the Development, including, without limitation, changes to
buildings, driveways, entrances, loading and unloading areas, direction of
traffic, landscaped areas and walkways, and, subject to the parking provisions
contained in Paragraph 32 and Exhibit "H", parking spaces and parking
-----------
areas; and (iii) use or close temporarily the Building Common Areas, the
Development Common Areas and/or other portions of the Development while engaged
in making improvements, repairs or alterations to the Building, the Development,
or any portion thereof.
3. TERM. The term of this Lease ("Term") will be for the period designated in
Subparagraph 1(i), commencing on the Commencement Date, and ending on the last
day of the month in which the expiration of such period occurs, including any
extensions of the Term pursuant to any provision of this Lease or written
agreement of the parties. Notwithstanding the foregoing, if the Commencement
Date falls on any day other than the first day of a calendar month then the Term
of this Lease will be measured from the first day of the month following the
month in which the Commencement Date occurs. Each consecutive twelve (12) month
period of the Term of this Lease, commencing on the Commencement Date, will be
referred to herein as a "Lease Year". Landlord's Notice of Lease Term Dates and
Tenant's Percentage ("Notice"), in the form of Exhibit "D" attached hereto, will
-----------
set forth the Commencement Date, the date upon which the Term of this Lease
shall end, the Rentable Square Feet within the Premises and the Building, and
Tenant's Percentage and will be delivered to Tenant after Landlord delivers
possession of the Premises to Tenant. The Notice will be binding upon Tenant
unless Tenant objects to the Notice in writing within five (5) days of Tenant's
receipt of the Notice.
4. POSSESSION.
(a) DELIVERY OF POSSESSION. Landlord agrees to deliver possession of the
Premises to Tenant in accordance with the terms of the Work Letter
Agreement attached hereto as Exhibit "C", or, if no Work Letter Agreement
-----------
is required for this Lease, then Landlord agrees to deliver possession of the
Premises to Tenant on the Commencement Date. Notwithstanding the foregoing,
Landlord will not be obligated to deliver possession of the Premises to Tenant
(but Tenant will be liable for rent if Landlord can otherwise deliver the
Premises to Tenant) until Landlord has received from Tenant all of the
following: (i) a copy of this Lease fully executed by Tenant and the guaranty of
Tenant's obligations under this Lease, if any, executed by the Guarantor(s);
(ii) the Security Deposit and the first installment of Monthly Base Rent; (iii)
executed copies of policies of insurance or certificates thereof as required
under Paragraph 19 of this Lease; (iv) copies of all governmental permits and
authorizations, if any, required in connection with Tenant's operation of its
business within the Premises; and (v) if Tenant is a corporation or partnership,
such evidence of due formation, valid existence and authority as Landlord may
reasonably require, which may include, without limitation, a certificate of good
standing, certificate of secretary, articles of incorporation, statement of
partnership, or other similar documentation.
(b) CONDITION OF PREMISES. Prior to the Commencement Date and in accordance
with the Work Letter Agreement attached hereto as Exhibit "C", Landlord and
-----------
Tenant will jointly conduct a walk-through inspection of the Premises and will
jointly prepare a punch-list ("Punch-List") of items required to be installed by
Landlord under the Work Letter Agreement which require finishing or correction.
The Punch-List will not include any items of damage to the Premises caused by
Tenant's move-in or early entry, if permitted, which damage will be corrected or
repaired by Landlord, at Tenant's expense or, at Landlord's election, by Tenant,
at Tenant's expense. Other than the items specified in the Punch-List, by taking
possession of the Premises, Tenant will be deemed to have accepted the Premises
in its condition on the date of delivery of possession and to have acknowledged
that the Tenant Improvements have been installed as required by the Work Letter
Agreement and that there are no additional items needing work or repair.
Landlord will cause all items in the Punch-List to be repaired or corrected
within thirty (30) days following the preparation of the Punch-List or as soon
as practicable after the preparation of the Punch-List. Tenant acknowledges that
neither Landlord nor any agent of Landlord has made any representation or
warranty with respect to
-3-
<PAGE>
the Premises, the Building, the Development or any portions thereof or with
respect to the suitability of same for the conduct of Tenant's business and
Tenant further acknowledges that Landlord will have no obligation to construct
or complete any additional buildings or improvements within the Development.
5. RENT.
(a) MONTHLY BASE RENT. Tenant agrees to pay Landlord the Monthly Base Rent for
the Premises (subject to adjustment as hereinafter provided) in advance on the
first day of each calendar month during the Term without prior notice or demand,
except that Tenant agrees to pay the Monthly Base Rent for the first month of
the Term directly to Landlord concurrently with Tenant's delivery of the
executed Lease to Landlord. If the Term of this Lease commences or ends on a day
other than the first day of a calendar month, then the rent for such period will
be prorated in the proportion that the number of days this Lease is in effect
during such period bears to the number of days in such month. All rent must be
paid to Landlord, without any deduction or offset, in lawful money of the United
States of America, at the address designated by Landlord or to such other person
or at such other place as Landlord may from time to time designate in writing.
Monthly Base Rent will be adjusted during the Term of this Lease as provided in
Subparagraph l(m).
(b) ADDITIONAL RENT. All amounts and charges to be paid by Tenant hereunder,
including, without limitation, payments for Operating Expenses, insurance,
repairs and parking, will be considered additional rent for purposes of this
Lease, and the word "rent" as used in this Lease will include all such
additional rent unless the context specifically or clearly implies that only
Monthly Base Rent is intended.
(c) LATE PAYMENTS. Late payments of Monthly Base Rent and/or any item of
additional rent will be subject to interest and a late charge as provided
in Subparagraph 22(f) below.
6. OPERATING EXPENSES.
(a) OPERATING EXPENSES. In addition to Monthly Base Rent, throughout the Term
of this Lease, Tenant agrees to pay Landlord as additional rent in accordance
with the terms of this Paragraph 6, Tenant's Percentage of Operating Expenses
as defined in Exhibit "E" attached hereto to the extent Tenant's Percentage
-----------
of Operating Expenses exceeds Tenant's Operating Expense Allowance.
(b) ESTIMATE STATEMENT. Prior to the Commencement Date and on or about March 1st
of each subsequent calendar year during the Term of this Lease, Landlord will
endeavor to deliver to Tenant a statement ("Estimate Statement") wherein
Landlord will estimate both the Operating Expenses and Tenant's Percentage of
Operating Expenses for the then current calendar year. If the estimate of
Tenant's Percentage of Operating Expenses in the Estimate Statement exceeds
Tenant's Operating Expense Allowance, Tenant agrees to pay Landlord, as
"Additional Rent", one-twelfth (1/12th) of such excess each month thereafter,
beginning with the next installment of rent due, until such time as Landlord
issues a revised Estimate Statement or the Estimate Statement for the succeeding
calendar year; except that, concurrently with the regular monthly rent payment
next due following the receipt of each such Estimate Statement, Tenant agrees to
pay Landlord an amount equal to one monthly installment of such excess (less any
applicable Operating Expenses already paid) multiplied by the number of months
from January, in the current calendar year, to the month of such rent payment
next due, all months inclusive. If at any time during the Term of this Lease,
but not more often than quarterly, Landlord reasonably determines that Tenant's
Percentage of Operating Expenses for the current calendar year will be greater
than the amount set forth in the then current Estimate Statement, Landlord may
issue a revised Estimate Statement and Tenant agrees to pay Landlord, within
thirty (30) days of receipt of the revised Estimate Statement, the difference
between the amount owed by Tenant under such revised Estimate Statement and the
amount owed by Tenant under the original Estimate Statement for the portion of
the then current calendar year which has expired. Thereafter Tenant agrees to
pay Tenant's Percentage of Operating Expenses based on such revised Estimate
Statement until Tenant receives the next calendar year's Estimate Statement or a
new revised Estimate Statement for the current calendar year. In the event
Tenant's Percentage of Operating Expenses for any calendar year is less than
Tenant's Operating Expense Allowance, Tenant will not be entitled to a credit
against any rent, additional rent or Tenant's Percentage of future Operating
Expenses payable hereunder.
(c) ACTUAL STATEMENT. By March 1st of each calendar year during the Term of this
Lease (commencing March 1 in the calendar year following the base year for
Operating Expenses, if applicable), Landlord will also endeavor to deliver to
Tenant a statement ("Actual Statement") which states the actual Operating
Expenses for the preceding calendar year. If the Actual Statement reveals that
Tenant's Percentage of the actual Operating Expenses is more than the total
Additional Rent paid by Tenant for Operating Expenses on account of the
preceding calendar year, Tenant agrees to pay Landlord the difference in a lump
sum within thirty (30) days of receipt of the Actual Statement. If the Actual
Statement reveals that Tenant's Percentage of the actual Operating Expenses is
less than the Additional Rent paid by Tenant for Operating Expenses on account
of the preceding calendar year, Landlord will credit any overpayment toward the
next monthly installment(s) of Tenant's Percentage of the Operating Expenses due
under this Lease.
(d) MISCELLANEOUS. Any delay or failure by Landlord in delivering any Estimate
Statement or Actual Statement pursuant to this Paragraph 6 will not constitute a
waiver of its right to require an increase in rent nor will it relieve Tenant of
its obligations pursuant to this Paragraph 6, except that Tenant will not be
obligated to make any payments based on such Estimate Statement or Actual
Statement until thirty (30) days after receipt of such Estimate Statement or
Actual Statement. Even though the Term has expired and Tenant has vacated the
Premises, when the final determination is made of Tenant's Percentage of the
actual Operating Expenses for the year in which this Lease terminates, Tenant
agrees to promptly pay any increase due over the estimated expenses paid and,
conversely, any overpayment made in the event said expenses decrease shall
promptly be rebated by Landlord to Tenant. Such obligation will be a continuing
one which will survive the expiration or earlier termination of this Lease.
Prior to the expiration or sooner termination of the Lease Term and Landlord's
acceptance of Tenant's surrender of the Premises, Landlord will have the right
to estimate the actual Operating Expenses for the then current Lease Year and to
collect from Tenant prior to Tenant's surrender of the Premises, Tenant's
Percentage of any excess of such actual Operating Expenses over the estimated
Operating Expenses paid by Tenant in such Lease Year.
-4-
<PAGE>
7. SECURITY DEPOSIT. Concurrently with Tenant's execution of this Lease, Tenant
will deposit with Landlord the Security Deposit designated in Subparagraph 1(o).
As used in this Lease, the term Security Deposit includes cash held by Landlord
as well as any amounts secured by the Letter of Credit described in Paragraph 44
of the Addendum attached hereto. The Security Deposit will be held by Landlord
as security for the full and faithful performance by Tenant of all of the terms,
covenants, and conditions of this Lease to be kept and performed by Tenant
during the Term hereof. If Tenant fully and faithfully performs its obligations
under this Lease, including, without limitation, surrendering the Premises upon
the expiration or sooner termination of this Lease in compliance with
Subparagraph 11(a) below, the Security Deposit or any balance thereof will be
returned to Tenant (or, at Landlord's option, to the last assignee of Tenant's
interest hereunder) within thirty (30) days following the expiration of the
Lease Term and Tenant's complete vacation of the Premises, provided that
Landlord may retain the Security Deposit until such time as any outstanding rent
or additional rent amount has been determined and paid in full. The Security
Deposit is not, and may not be construed by Tenant to constitute, rent for the
last month or any portion thereof. If Tenant defaults with respect to any
provisions of this Lease including, but not limited to, the provisions relating
to the payment of rent or additional rent, Landlord may (but will not be
required to) use, apply or retain all or any part of the Security Deposit for
the payment of any rent or any other sum in default, or for the payment of any
other amount which Landlord may spend or become obligated to spend by reason of
Tenant's default or to compensate Landlord for any loss or damage which Landlord
may suffer by reason of Tenant's default. If any portion of the Security
Deposit is so used or applied, Tenant agrees, within ten (10) days after
Landlord's written demand therefor, to deposit cash with Landlord in an amount
sufficient to restore the Security Deposit to its original amount and Tenant's
failure to do so shall constitute a default under this Lease. Landlord is not
required to keep Tenant's Security Deposit separate from its general funds, and
Tenant is not entitled to interest on such Security Deposit. Should Landlord
sell its interest in the Premises during the Term hereof and deposit with the
purchaser thereof the then unappropriated Security Deposit funds, Landlord will
be discharged from any further liability with respect to such Security Deposit.
8. USE.
(a) TENANT'S USE OF THE PREMISES. The Premises may be used for the use or uses
set forth in Subparagraph 1(r) only, and Tenant will not use or permit the
Premises to be used for any other purpose without the prior written consent of
Landlord, which consent Landlord may withhold in its sole and absolute
discretion. Nothing in this Lease will be deemed to give Tenant any exclusive
right to such use in the Building or the Development.
(b) COMPLIANCE. At Tenant's sole cost and expense, Tenant agrees to procure,
maintain and hold available for Landlord's inspection, all governmental licenses
and permits required for the proper and lawful conduct of Tenant's business from
the Premises, if any. Tenant agrees not to use, alter or occupy the Premises or
allow the Premises to be used, altered or occupied in violation of, and Tenant,
at its sole cost and expense, agrees to use and occupy the Premises and cause
the Premises to be used and occupied in compliance with: (i) any and all laws,
statutes, zoning restrictions, ordinances, rules, regulations, orders and
rulings now or hereafter in force and any requirements of any insurer, insurance
authority or duly constituted public authority having jurisdiction over the
Premises, the Building or the Development now or hereafter in force, (ii) the
requirements of the Board of Fire Underwriters and any other similar body, (iii)
the Certificate of Occupancy issued for the Building, and (iv) any recorded
covenants, conditions and restrictions and similar regulatory agreements, if
any, which affect the use, occupation or alteration of the Premises, the
Building and/or the Development. Tenant agrees to comply with the Rules and
Regulations referenced in Paragraph 28 below. Tenant agrees not to do or permit
anything to be done in or about the Premises which will in any manner obstruct
or interfere with the rights of other tenants or occupants of the Development,
or injure or unreasonably annoy them, or use or allow the Premises to be used
for any unlawful or unreasonably objectionable purpose. Tenant agrees not to
cause, maintain or permit any nuisance or waste in, on, under or about the
Premises or elsewhere within the Development. Notwithstanding anything contained
in this Lease to the contrary, all transferable development rights related in
any way to the Development are and will remain vested in Landlord, and Tenant
hereby waives any rights thereto.
(c) HAZARDOUS MATERIALS. Except for ordinary and general office supplies
typically used in the ordinary course of business within office buildings, such
as copier toner, liquid paper, glue, ink and common household cleaning materials
(some or all of which may constitute "Hazardous Materials" as defined in this
Lease), Tenant agrees not to cause or permit any Hazardous Materials to be
brought upon, stored, used, handled, generated, released or disposed of on, in,
under or about the Premises, the Building, the Common Areas or any other portion
of the Development by Tenant, its agents, employees, subtenants, assignees,
licensees, contractors or invitees (collectively, "Tenant's Parties"), without
the prior written consent of Landlord, which consent Landlord may withhold in
its sole and absolute discretion. Upon the expiration or earlier termination of
this Lease, Tenant agrees to promptly remove from the Premises, the Building and
the Development, at its sole cost and expense, any and all Hazardous Materials,
including any equipment or systems containing Hazardous Materials which are
installed, brought upon, stored, used, generated or released upon, in, under or
about the Premises, the Building and/or the Development or any portion thereof
by Tenant or any of Tenant's Parties. To the fullest extent permitted by law,
Tenant agrees to promptly indemnify, protect, defend and hold harmless Landlord
and Landlord's partners, officers, directors, employees, agents, successors and
assigns (collectively, "Landlord Indemnified Parties") from and against any and
all claims, damages, judgments, suits, causes of action, losses, liabilities,
penalties, fines, expenses and costs (including, without limitation, clean-up,
removal, remediation and restoration costs, sums paid in settlement of claims,
attorneys' fees, consultant fees and expert fees and court costs) which arise or
result from the presence of Hazardous Materials on, in, under or about the
Premises, the Building or any other portion of the Development and which are
caused or permitted by Tenant or any of Tenant's Parties. Tenant agrees to
promptly notify Landlord of any release of Hazardous Materials at the Premises,
the Building or any other portion of the Development which Tenant becomes aware
of during the Term of this Lease, whether caused by Tenant or any other persons
or entities. In the event of any release of Hazardous Materials caused or
permitted by Tenant or any of Tenant's Parties, Landlord shall have the right,
but not the obligation, to cause Tenant to immediately take all steps Landlord
deems necessary or appropriate to remediate such release and prevent any similar
future release to the satisfaction of Landlord and Landlord's mortgagee(s). As
used in this Lease, the term "Hazardous Materials" shall mean and include any
hazardous or toxic materials, substances or wastes as now or hereafter
designated under any law, statute, ordinance, rule, regulation, order or ruling
of any agency of the State, the United States Government or any local
governmental authority, including, without limitation, asbestos, petroleum,
petroleum hydrocarbons and petroleum based products, urea formaldehyde foam
insulation, polychlorinated biphenyls ("PCBs"), and freon and other
chlorofluorocarbons. The provisions of this Subparagraph 8(c) will survive the
expiration or earlier termination of this Lease.
-5-
<PAGE>
9. NOTICES. Any notice required or permitted to be given hereunder must be in
writing and may be given by personal delivery (including delivery by overnight
courier or an express mailing service) or by mail, if sent by registered or
certified mail. Notices to Tenant shall be sufficient if delivered to Tenant at
the address designated in Subparagraph 1(d) and notices to Landlord shall be
sufficient if delivered to Landlord at the address designated in Subparagraph
1(b). Either party may specify a different address for notice purposes by
written notice to the other, except that the Landlord may in any event use the
Premises as Tenant's address for notice purposes.
10. BROKERS. The parties acknowledge that the broker(s) who negotiated this
Lease are stated in Subparagraph 1(t). Each party represents and warrants to
the other, that, to its knowledge, no other broker, agent or finder (a)
negotiated or was instrumental in negotiating or consummating this Lease on its
behalf, and (b) is or might be entitled to a commission or compensation in
connection with this Lease. Landlord and Tenant each agree to promptly
indemnify, protect, defend and hold harmless the other from and against any and
all claims, damages, judgments, suits, causes of action, losses, liabilities,
penalties, fines, expenses and costs (including attorneys' fees and court costs)
resulting from any breach by the indemnifying party of the foregoing
representation, including, without limitation, any claims that may be asserted
by any broker, agent or finder undisclosed by the indemnifying party. The
foregoing mutual indemnity shall survive the expiration or earlier termination
of this Lease.
11. SURRENDER; HOLDING OVER.
(a) SURRENDER. The voluntary or other surrender of this Lease by Tenant, or a
mutual cancellation thereof, shall not constitute a merger, and shall, at the
option of Landlord, operate as an assignment to Landlord of any or all subleases
or subtenancies. Upon the expiration or earlier termination of this Lease,
Tenant agrees to peaceably surrender the Premises to Landlord broom clean and in
a state of first-class order, repair and condition, ordinary wear and tear and
casualty damage (if this Lease is terminated as a result thereof pursuant to
Paragraph 20) excepted, with all of Tenant's personal property and Alterations
(as defined in Paragraph 13) removed from the Premises to the extent required
under Paragraph 13 and all damage caused by such removal repaired as required by
Paragraph 13. Prior to the date Tenant is to actually surrender the Premises to
Landlord, Tenant agrees to give Landlord reasonable prior notice of the exact
date Tenant will surrender the Premises so that Landlord and Tenant can schedule
a walk-through of the Premises to review the condition of the Premises and
identify the Alterations and personal property which are to remain upon the
Premises and which items Tenant is to remove, as well as any repairs Tenant is
to make upon surrender of the Premises. The delivery of keys to any employee of
Landlord or to Landlord's agent or any employee thereof alone will not be
sufficient to constitute a termination of this Lease or a surrender of the
Premises.
(b) HOLDING OVER. Tenant will not be permitted to hold over possession of the
Premises after the expiration or earlier termination of the Term without the
express written consent of Landlord, which consent Landlord may withhold in its
sole and absolute discretion. If Tenant holds over after the expiration or
earlier termination of the Term, Landlord may, at its option, treat Tenant as a
tenant at sufferance only, and such continued occupancy by Tenant shall be
subject to all of the terms, covenants and conditions of this Lease, so far as
applicable, except that the Monthly Base Rent for any such holdover period shall
be equal to the greater of (i) one hundred fifty percent (150%) (125% during the
first three months of the holdover) of the Monthly Base Rent in effect under
this Lease immediately prior to such holdover, or (ii) the then currently
scheduled rental rate for comparable space in the Building, in either event
prorated on a daily basis. Acceptance by Landlord of rent after such expiration
or earlier termination will not result in a renewal of this Lease. The foregoing
provisions of this Paragraph 11 are in addition to and do not affect Landlord's
right of re-entry or any rights of Landlord under this Lease or as otherwise
provided by law. If Tenant fails to surrender the Premises upon the expiration
of this Lease in accordance with the terms of this Paragraph 11 despite demand
to do so by Landlord, Tenant agrees to promptly indemnify, protect, defend and
hold Landlord harmless from all claims, damages, judgments, suits, causes of
action, losses, liabilities, penalties, fines, expenses and costs (including
attorneys' fees and costs), including, without limitation, costs and expenses
incurred by Landlord in returning the Premises to the condition in which Tenant
was to surrender it and claims made by any succeeding tenant founded on or
resulting from Tenant's failure to surrender the Premises. The provisions of
this Subparagraph 11(b) will survive the expiration or earlier termination of
this Lease.
12. TAXES ON TENANT'S PROPERTY. Tenant agrees to pay before delinquency, all
taxes and assessments (real and personal) levied against (a) any personal
property or trade fixtures placed by Tenant in or about the Premises (including
any increase in the assessed value of the Premises based upon the value of any
such personal property or trade fixtures); and (b) any Tenant Improvements or
Alterations in the Premises (whether installed and/or paid for by Landlord or
Tenant) to the extent such items are assessed at a valuation higher than the
valuation at which tenant improvements conforming to Landlord's building
standard tenant improvements are assessed. If any such taxes or assessments are
levied against Landlord or Landlord's property, Landlord may, after written
notice to Tenant (and under proper protest if requested by Tenant) pay such
taxes and assessments, in which event Tenant agrees to reimburse Landlord all
amounts paid by Landlord within twenty (20) business days after demand by
Landlord; provided, however, Tenant, at its sole cost and expense, will have the
right, with Landlord's cooperation, to bring suit in any court of competent
jurisdiction to recover the amount of any such taxes and assessments so paid
under protest.
13. ALTERATIONS. After installation of the initial Tenant Improvements for the
Premises pursuant to Exhibit "C", Tenant may, at its sole cost and expense, make
-----------
alterations, additions, improvements and decorations to the Premises
(collectively, "Alterations") subject to and upon the following terms and
conditions:
(a) PROHIBITED ALTERATIONS. Tenant may not make any Alterations which: (i)
affect any area outside the Premises; (ii) affect the Building's structure,
equipment, services or systems, or the proper functioning thereof, or Landlord's
access thereto; (iii) affect the outside appearance, character or use of the
Building or the Building Common Areas; (iv) in the reasonable opinion of
Landlord, lessen the value of the Building; or (v) will violate or require a
change in any occupancy certificate applicable to the Premises.
(b) LANDLORD'S APPROVAL. Before proceeding with any Alterations which are not
prohibited in Subparagraph 13(a) above, Tenant must first obtain Landlord's
written approval of the plans, specifications and working drawings for such
Alterations, which approval Landlord will not unreasonably withhold or delay;
provided, however, Landlord's prior approval will not be required for any such
Alterations which are not prohibited by Subparagraph 13(a) above and which cost
less than Two Thousand Five Hundred Dollars ($2,500) as long as (i) Tenant
delivers to Landlord notice and a copy of any final plans, specifications
-6-
<PAGE>
and working drawings for any such Alterations at least ten (10) days prior to
commencement of the work thereof, and (ii) the other conditions of this
Paragraph 13 are satisfied, including, without limitation, conforming to
Landlord's rules, regulations and insurance requirements which govern
contractors. Landlord's approval of plans, specifications and/or working
drawings for Alterations will not create any responsibility or liability on the
part of Landlord for their completeness, design sufficiency, or compliance with
applicable permits, laws, rules and regulations of governmental agencies or
authorities. In approving any Alterations, Landlord reserves the right to
require Tenant to increase its Security Deposit to provide Landlord with
additional reasonable security for the removal of such Alterations by Tenant as
may be required by this Lease.
(c) CONTRACTORS. Alterations may be made or installed only by contractors and
subcontractors which have been approved by Landlord, which approval Landlord
will not unreasonably withhold or delay; provided, however, Landlord reserves
the right to require that Landlord's contractor for the Building be given an
opportunity to bid for any Alteration work. Before proceeding with any
Alterations, Tenant agrees to provide Landlord with ten (10) days prior written
notice and Tenant's contractors must obtain and maintain, on behalf of Tenant
and at Tenant's sole cost and expense: (i) all necessary governmental permits
and approvals for the commencement and completion of such Alterations; and (ii)
if requested by Landlord, a completion and lien indemnity bond, or other surety,
reasonably satisfactory to Landlord for such Alterations. Throughout the
performance of any Alterations, Tenant agrees to obtain, or cause its
contractors to obtain, reasonable workers' compensation insurance and general
liability insurance in compliance with the provisions of Paragraph 19 of this
Lease.
(d) MANNER OF PERFORMANCE. All Alterations must be performed: (i) in accordance
with the approved plans, specifications and working drawings; (ii) in a lien-
free and first-class and workmanlike manner; (iii) in compliance with all
applicable permits, laws, statutes, ordinances, rules, regulations, orders and
rulings now or hereafter in effect and imposed by any governmental agencies and
authorities which assert jurisdiction; (iv) in such a manner so as not to
interfere with the occupancy of any other tenant in the Building, nor impose any
additional expense upon nor delay Landlord in the maintenance and operation of
the Building; and (v) at such times, in such manner, and subject to such rules
and regulations as Landlord may from time to time reasonably designate.
(e) OWNERSHIP. The Tenant Improvements, including, without limitation, all
affixed sinks, dishwashers, microwave ovens and other fixtures, and all
Alterations will become the property of Landlord and will remain upon and be
surrendered with the Premises at the end of the Term of this Lease; provided,
however, Landlord may, by written notice delivered to Tenant concurrently with
Landlord's approval of the final working drawings for any Alterations, identify
those Alterations which Landlord will require Tenant to remove at the end of the
Term of this Lease. Landlord may also require Tenant to remove Alterations which
Landlord did not have the opportunity to approve as provided in this Paragraph
13. If Landlord requires Tenant to remove any Alterations, Tenant, at its sole
cost and expense, agrees to remove the identified Alterations on or before the
expiration or earlier termination of this Lease and repair any damage to the
Premises caused by such removal (or, at Landlord's option, Tenant agrees to pay
to Landlord all of Landlord's costs of such removal and repair).
(f) PLAN REVIEW. Tenant agrees to pay Landlord, as additional rent, the
reasonable costs of professional services and costs for general conditions of
Landlord's third party consultants if utilized by Landlord (but not Landlord's
"in-house" personnel) for review of all plans, specifications and working
drawings for any Alterations, within twenty (20) business days after Tenant's
receipt of invoices either from Landlord or such consultants. In addition,
Tenant agrees to pay Landlord, within twenty (20) business days after completion
of any Alterations, a fee to cover Landlord's costs of supervising and
administering the installation of such Alterations, in the amount of five
percent (5%) of the cost of such Alterations, but in no event less than Two
Hundred Fifty Dollars ($250.00).
(g) PERSONAL PROPERTY. All articles of personal property owned by Tenant or
installed by Tenant at its expense in the Premises (including Tenant's business
and trade fixtures, furniture, movable partitions and equipment [such as
telephones, copy machines, computer terminals, refrigerators and facsimile
machines]) will be and remain the property of Tenant, and must be removed by
Tenant from the Premises, at Tenant's sole cost and expense, on or before the
expiration or earlier termination of this Lease. Tenant agrees to repair any
damage caused by such removal at its cost on or before the expiration or earlier
termination of this Lease.
(h) REMOVAL OF ALTERATIONS. If Tenant fails to remove by the expiration or
earlier termination of this Lease all of its personal property, or any
Alterations identified by Landlord for removal, Landlord may, at its option,
treat such failure as a hold-over pursuant to Subparagraph 11(b) above, and/or
Landlord may (without liability to Tenant for loss thereof) treat such personal
property and/or Alterations as abandoned and, at Tenant's sole cost and expense,
and in addition to Landlord's other rights and remedies under this Lease, at law
or in equity: (a) remove and store such items; and/or (b) upon ten (10) days
prior notice to Tenant, sell, discard or otherwise dispose of all or any such
items at private or public sale for such price as Landlord may obtain or by
other commercially reasonable means. Tenant shall be liable for all costs of
disposition of Tenant's abandoned property and Landlord shall have no liability
to Tenant with respect to any such abandoned property. Landlord agrees to apply
the proceeds of any sale of any such property to any amounts due to Landlord
under this Lease from Tenant (including Landlord's attorneys' fees and other
costs incurred in the removal, storage and/or sale of such items), with any
remainder to be paid to Tenant.
14. REPAIRS.
(a) LANDLORD'S OBLIGATIONS. Landlord agrees to repair and maintain the
structural portions of the Building and the plumbing, heating, ventilating, air
conditioning, elevator and electrical systems installed or furnished by
Landlord, unless such maintenance and repairs are (i) attributable to items
installed in Tenant's Premises which are above standard interior improvements
(such as, for example, custom lighting, special HVAC and/or electrical panels or
systems, kitchen or restroom facilities and appliances constructed or installed
within Tenant's Premises) or (ii) caused in part or in whole by the act, neglect
or omission of any duty by Tenant, its agents, servants, employees or invitees,
in which case Tenant will pay to Landlord, as additional rent, the reasonable
cost of such maintenance and repairs. Landlord will not be liable for any
failure to make any such repairs or to perform any maintenance unless such
failure shall persist for an unreasonable time after written notice of the need
of such repairs or maintenance is given to Landlord by Tenant. Except as
provided in Paragraph 20, Tenant will not be entitled to any abatement of rent
and Landlord will not have any liability by reason of any injury to or
interference with Tenant's business arising from the making of any repairs,
alterations or improvements in or to any portion of the Building or the Premises
or in
-7-
<PAGE>
or to fixtures, appurtenances and equipment therein. Tenant waives the
right to make repairs at Landlord's expense under any law, statute, ordinance,
rule, regulation, order or ruling (including, without limitation, to the extent
the Premises are located in California, the provisions of California Civil Code
Sections 1941 and 1942 and any successor statutes or laws of a similar nature).
(b) TENANT'S OBLIGATIONS. Tenant agrees to keep, maintain and preserve the
Premises in first class condition and repair and, when and if needed, at
Tenant's sole cost and expense, to make all repairs to the Premises and every
part thereof. Any such maintenance and repairs will be performed by such
contractor or contractors as Tenant may choose from an approved list to be
submitted by Landlord. Tenant agrees to pay all costs and expenses incurred in
such maintenance and repair within thirty (30) days after billing by Landlord or
such contractor or contractors. Tenant agrees to cause any mechanics' liens or
other liens arising as a result of work performed by Tenant or at Tenant's
direction to be eliminated as provided in Paragraph 15 below. Except as provided
in Subparagraph 14(a) above, Landlord has no obligation to alter, remodel,
improve, repair, decorate or paint the Premises or any part thereof.
(c) TENANT'S FAILURE TO REPAIR. If Tenant refuses or neglects to repair and
maintain the Premises properly as required hereunder to the reasonable
satisfaction of Landlord, Landlord, at any time following ten (10) days from the
date on which Landlord makes a written demand on Tenant to effect such repair
and maintenance, may enter upon the Premises and make such repairs and/or
maintenance, and upon completion thereof, Tenant agrees to pay to Landlord as
additional rent, Landlord's costs for making such repairs plus an amount not to
exceed ten percent (10%) of such costs for overhead, within thirty (30) days of
receipt from Landlord of a written itemized bill therefor. Any amounts not
reimbursed by Tenant within such thirty (30) day period will bear interest at
the Interest Rate until paid by Tenant.
15. LIENS. Tenant agrees not to permit any mechanic's, materialmen's or other
liens to be filed against all or any part of the Development, the Building or
the Premises, nor against Tenant's leasehold interest in the Premises, by reason
of or in connection with any repairs, alterations, improvements or other work
contracted for or undertaken by Tenant or any other act or omission of Tenant or
Tenant's agents, employees, contractors, licensees or invitees. At Landlord's
request, Tenant agrees to provide Landlord with enforceable, conditional and
final lien releases (or other evidence reasonably requested by Landlord to
demonstrate protection from liens) from all persons furnishing labor and/or
materials at the Premises. Landlord will have the right at all reasonable times
to post on the Premises and record any notices of non-responsibility which it
deems necessary for protection from such liens. If any such liens are filed,
Tenant will, at its sole cost, promptly cause such liens to be released of
record or bonded so that it no longer affects title to the Development, the
Building or the Premises. If Tenant fails to cause any such liens to be so
released or bonded within ten (10) days after filing thereof, such failure will
be deemed a material breach by Tenant under this Lease without the benefit of
any additional notice or cure period described in Paragraph 22 below, and
Landlord may, without waiving its rights and remedies based on such breach, and
without releasing Tenant from any of its obligations, cause such liens to be
released by any means it shall deem proper, including payment in satisfaction of
the claims giving rise to such liens. Tenant agrees to pay to Landlord within
thirty (30) days after receipt of invoice from Landlord, any sum paid by
Landlord to remove such liens, together with interest at the Interest Rate from
the date of such payment by Landlord.
16. ENTRY BY LANDLORD. Landlord and its employees and agents will at all times
have the right to enter the Premises to inspect the same, to supply janitorial
service and any other service to be provided by Landlord to Tenant hereunder, to
show the Premises to prospective purchasers or tenants, to post notices of
nonresponsibility, and/or to repair the Premises as permitted or required by
this Lease. In exercising such entry rights, Landlord will endeavor to
minimize, as reasonably practicable, the interference with Tenant's business,
and will provide Tenant with reasonable advance notice of any such entry (except
in emergency situations). Landlord may, in order to carry out such purposes,
erect scaffolding and other necessary structures where reasonably required by
the character of the work to be performed. Landlord will at all times have and
retain a key with which to unlock all doors in the Premises, excluding Tenant's
vaults and safes. Landlord will have the right to use any and all means which
Landlord may reasonably deem proper to open said doors in an emergency in order
to obtain entry to the Premises. Any entry to the Premises obtained by Landlord
by any of said means, or otherwise, will not be construed or deemed to be a
forcible or unlawful entry into the Premises, or an eviction of Tenant from the
Premises. Landlord will not be liable to Tenant for any damages or losses for
any entry by Landlord.
17. UTILITIES AND SERVICES. Throughout the Term of the Lease so long as the
Premises are occupied, Landlord agrees to furnish or cause to be furnished to
the Premises the utilities and services described in the Standards for Utilities
and Services attached hereto as Exhibit "F", subject to the conditions and in
-----------
accordance with the standards set forth therein. Landlord may require Tenant
from time to time to provide Landlord with a list of Tenant's employees and/or
agents which are authorized by Tenant to subscribe on behalf of Tenant for any
additional services which may be provided by Landlord. Any such additional
services will be provided to Tenant at Tenant's cost. Landlord will not be
liable to Tenant for any failure to furnish any of the foregoing utilities and
services if such failure is caused by all or any of the following: (i)
accident, breakage or repairs; (ii) strikes, lockouts or other labor disturbance
or labor dispute of any character; (iii) governmental regulation, moratorium or
other governmental action or inaction; (iv) inability despite the exercise of
reasonable diligence to obtain electricity, water or fuel; or (v) any other
cause beyond Landlord's reasonable control. In addition, in the event of any
stoppage or interruption of services or utilities, Tenant shall not be entitled
to any abatement or reduction of rent (except as expressly provided in
Subparagraphs 20(f) or 21(b) if such failure results from a damage or taking
described therein), no eviction of Tenant will result from such failure and
Tenant will not be relieved from the performance of any covenant or agreement in
this Lease because of such failure. In the event of any failure, stoppage or
interruption thereof, Landlord agrees to diligently attempt to resume service
promptly. If Tenant requires or utilizes more water or electrical power than is
considered reasonable or normal by Landlord, Landlord may at its option require
Tenant to pay, as additional rent, the cost, as fairly determined by Landlord,
incurred by such extraordinary usage and/or Landlord may install separate
meter(s) for the Premises, at Tenant's sole expense, and Tenant agrees
thereafter to pay all charges of the utility providing service and Landlord will
make an appropriate adjustment to Tenant's Operating Expenses calculation to
account for the fact Tenant is directly paying such metered charges, provided
Tenant will remain obligated to pay its proportionate share of Operating
Expenses subject to such adjustment. Notwithstanding anything in this Lease,
if, as a result of the negligent acts or omissions of Landlord or its agents,
contractors or employees, for more than five (5) consecutive business days
following written notice to Landlord, there is no elevator service to the
Premises, or no HVAC or electricity to the Premises, or such an interruption of
other essential utilities and building services, such as fire protection or
water, so that any portion of the Premises cannot be and is not used by Tenant,
in Tenant's judgment reasonably exercised, then Tenant's rent shall thereafter
be abated until the Premises are again usable by Tenant in proportion to the
extent
-8-
<PAGE>
to which Tenant's use of the Premises is interfered with; provided, however,
that if Landlord is diligently pursuing the repair of such utilities or services
and Landlord provides substitute services reasonably suitable for Tenant's
purposes, as for example, bringing in portable air-conditioning equipment, then
there shall not be an abatement of rent. This paragraph shall not apply in case
of damage to, or destruction of, the Building, which shall be governed by a
separate provision of this Lease. Notwithstanding any of the foregoing to the
contrary, Tenant may not abate rent if Landlord disputes Tenant's right to abate
or the amount of such abatement, until and to the extent the arbitrator provides
that Tenant may do so in accordance with and pursuant to the terms of Paragraph
50 hereof.
18. ASSUMPTION OF RISK AND INDEMNIFICATION.
(a) ASSUMPTION OF RISK. Tenant, as a material part of the consideration to
Landlord, hereby agrees that neither Landlord nor any Landlord Indemnified
Parties (as defined in Subparagraph 8(c) above) will be liable to Tenant for,
and Tenant expressly assumes the risk of and waives any and all claims it may
have against Landlord or any Landlord Indemnified Parties with respect to, (i)
any and all damage to property or injury to persons in, upon or about the
Premises, the Building or the Development resulting from any act or omission
(except for the grossly negligent or intentionally wrongful act or omission) of
Landlord, (ii) any such damage caused by other tenants or persons in or about
the Building or the Development, or caused by quasi-public work, (iii) any
damage to property entrusted to employees of the Building, (iv) any loss of or
damage to property by theft or otherwise, or (v) any injury or damage to persons
or property resulting from any casualty, explosion, falling plaster or other
masonry or glass, steam, gas, electricity, water or rain which may leak from any
part of the Building or any other portion of the Development or from the pipes,
appliances or plumbing works therein or from the roof, street or subsurface or
from any other place, or resulting from dampness. Notwithstanding anything to
the contrary contained in this Lease, neither Landlord nor any Landlord
Indemnified Parties will be liable for consequential damages arising out of any
loss of the use of the Premises or any equipment or facilities therein by Tenant
or any Tenant Parties or for interference with light or other incorporeal
hereditaments. Tenant agrees to give prompt notice to Landlord in case of fire
or accidents in the Premises or the Building, or of defects therein or in the
fixtures or equipment.
(b) INDEMNIFICATION. Tenant will be liable for, and agrees, to the maximum
extent permissible under applicable law, to promptly indemnify, protect, defend
and hold harmless Landlord and all Landlord Indemnified Parties, from and
against, any and all claims, damages, judgments, suits, causes of action,
losses, liabilities, penalties, fines, expenses and costs, including attorneys'
fees and court costs (collectively, "Indemnified Claims"), arising or resulting
from (i) any act or omission of Tenant or any Tenant Parties (as defined in
Subparagraph 8(c) above); (ii) the use of the Premises and Common Areas and
conduct of Tenant's business by Tenant or any Tenant Parties, or any other
activity, work or thing done, permitted or suffered by Tenant or any Tenant
Parties, in or about the Premises, the Building or elsewhere within the
Development; and/or (iii) any default by Tenant of any obligations on Tenant's
part to be performed under the terms of this Lease. In case any action or
proceeding is brought against Landlord or any Landlord Indemnified Parties by
reason of any such Indemnified Claims, Tenant, upon notice from Landlord, agrees
to promptly defend the same at Tenant's sole cost and expense by counsel
approved in writing by Landlord, which approval Landlord will not unreasonably
withhold.
(c) SURVIVAL; NO RELEASE OF INSURERS. Tenant's indemnification obligations under
Subparagraph 18(b) will survive the expiration or earlier termination of this
Lease. Tenant's covenants, agreements and indemnification obligation in
Subparagraphs 18(a) and 18(b) above, are not intended to and will not relieve
any insurance carrier of its obligations under policies required to be carried
by Tenant pursuant to the provisions of this Lease.
(d) LANDLORD INDEMNITY. Notwithstanding anything to the contrary contained in
Paragraph 18 of, or elsewhere in, this Lease, Tenant shall not be required to
indemnify and hold Landlord harmless from any Indemnified Claims resulting from
the negligence or willful misconduct of Landlord or Landlord's agents, employees
or contractors (except for damage to Tenant's personal property, fixtures,
furniture and equipment in the Premises, to the extent Tenant is required to
obtain insurance coverage therefor pursuant to the terms of this Lease), and,
subject to the limitations contained in (i) the second to the last sentence of
Paragraph 18(a) of this Lease, and (ii) Paragraph 35 of this Lease, Landlord
agrees to indemnify and hold Tenant harmless from and against any and all such
Indemnified Claims. Landlord's indemnification obligations under this paragraph
will survive the expiration or earlier termination of this Lease and are not
intended to and will not relieve any insurance carrier of its obligations under
policies required to be carried by Landlord and/or by Tenant pursuant to the
provisions of this Lease.
19. INSURANCE.
(a) TENANT'S INSURANCE. On or before the earlier to occur of (i) the
Commencement Date, or (ii) the date Tenant commences any work of any type in the
Premises pursuant to this Lease (which may be prior to the Commencement Date),
and continuing throughout the entire Term hereof and any other period of
occupancy, Tenant agrees to keep in full force and effect, at its sole cost and
expense, the following insurance:
(i) "All Risks" property insurance including at least the following perils: fire
and extended coverage, smoke damage, vandalism, malicious mischief, sprinkler
leakage (including earthquake sprinkler leakage). This insurance policy must be
upon all property owned by Tenant, for which Tenant is legally liable, or which
is installed at Tenant's expense, and which is located in the Building
including, without limitation, any Tenant Improvements which satisfy the
foregoing qualification and any Alterations, and all furniture, fittings,
installations, fixtures and any other personal property of Tenant, in an amount
not less than the full replacement cost thereof. If there is a dispute as to
full replacement cost, the decision of Landlord or any mortgagee of Landlord
will be presumptive.
(ii) One (1) year insurance coverage for business interruption and loss of
income and extra expense insuring the same perils described in Subparagraph
19(a)(i) above, in such amounts as will reimburse Tenant for any direct or
indirect loss of earnings attributable to any such perils including prevention
of access to the Premises, Tenant's parking areas or the Building as a result of
any such perils.
(iii) Commercial General Liability Insurance or Comprehensive General Liability
Insurance (on an occurrence form) insuring bodily injury, personal injury and
property damage including the following divisions and extensions of coverage:
Premises and Operations; Owners and Contractors protective; blanket contractual
liability (including coverage for Tenant's indemnity
-9-
<PAGE>
obligations under this Lease); products and completed operations; liquor
liability (if Tenant serves alcohol on the Premises); and fire and water damage
legal liability in an amount sufficient to cover the replacement value of the
Premises, including Tenant Improvements, that are rented under the terms of this
Lease. Such insurance must have the following minimum limits of liability:
bodily injury, personal injury and property damage - $3,000,000 each occurrence,
provided that if liability coverage is provided by a Commercial General
Liability policy the general aggregate limit shall apply separately and in total
to this location only (per location general aggregate), and provided further,
such minimum limits of liability may be adjusted from year to year to reflect
increases in coverages as recommended by Landlord's insurance carrier as being
prudent and commercially reasonable for tenants of first class office buildings
comparable to the Building, rounded to the nearest five hundred thousand
dollars.
(iv) Comprehensive Automobile Liability insuring bodily injury and property
damage arising from all owned, non-owned and hired vehicles, if any, with
minimum limits of liability of $1,000,000 per accident.
(v) Worker's Compensation as required by the laws of the State with the
following minimum limits of liability: Coverage A - statutory benefits;
Coverage B - $1,000,000 per accident and disease.
(vi) Any other form or forms of insurance as Tenant or Landlord or any
mortgagees of Landlord may reasonably require from time to time in form, in
amounts, and for insurance risks against which, a prudent tenant would protect
itself, but only to the extent coverage for such risks and amounts are available
in the insurance market at commercially acceptable rates. Landlord makes no
representation that the limits of liability required to be carried by Tenant
under the terms of this Lease are adequate to protect Tenant's interests and
Tenant should obtain such additional insurance or increased liability limits as
Tenant deems appropriate.
(b) SUPPLEMENTAL TENANT INSURANCE REQUIREMENTS.
(i) All policies must be in a form reasonably satisfactory to Landlord and
issued by an insurer admitted to do business in the State.
(ii) All policies must be issued by insurers with a policyholder rating of "A"
and a financial rating of "X" in the most recent version of Best's Key Rating
Guide.
(iii) All policies must contain a requirement to notify Landlord (and
Landlord's property manager and any mortgagees or ground lessors of Landlord who
are named as additional insureds, if any) in writing not less than thirty (30)
days prior to any material change, reduction in coverage, cancellation or other
termination thereof. Tenant agrees to deliver to Landlord, as soon as
practicable after placing the required insurance, but in any event within the
time frame specified in Subparagraph 19(a) above, certificate(s) of insurance
and/or if required by Landlord, certified copies of each policy evidencing the
existence of such insurance and Tenant's compliance with the provisions of this
Paragraph 19. Tenant agrees to cause replacement policies or certificates to be
delivered to Landlord not less than thirty (30) days prior to the expiration of
any such policy or policies. If any such initial or replacement policies or
certificates are not furnished within the time(s) specified herein, Tenant will
be deemed to be in material default under this Lease without the benefit of any
additional notice or cure period provided in Subparagraph 22(a)(iii) below, and
Landlord will have the right, but not the obligation, to procure such insurance
as Landlord deems necessary to protect Landlord's interests at Tenant's expense.
If Landlord obtains any insurance that is the responsibility of Tenant under
this Paragraph 19, Landlord agrees to deliver to Tenant a written statement
setting forth the cost of any such insurance and showing in reasonable detail
the manner in which it has been computed and Tenant agrees to promptly reimburse
Landlord for such costs as additional rent.
(iv) General Liability and Automobile Liability policies under Subparagraphs
19(a)(iii) and (iv) must name Landlord and Landlord's property manager (and at
Landlord's request, Landlord's mortgagees and ground lessors of which Tenant has
been informed in writing) as additional insureds and must also contain a
provision that the insurance afforded by such policy is primary insurance and
any insurance carried by Landlord and Landlord's property manager or Landlord's
mortgagees or ground lessors, if any, will be excess over and non-contributing
with Tenant's insurance.
(c) TENANT'S USE. Tenant will not keep, use, sell or offer for sale in or upon
the Premises any article which may be prohibited by any insurance policy
periodically in force covering the Building or the Development Common Areas. If
Tenant's occupancy or business in, or on, the Premises, whether or not Landlord
has consented to the same, results in any increase in premiums for the insurance
periodically carried by Landlord with respect to the Building or the Development
Common Areas or results in the need for Landlord to maintain special or
additional insurance, Tenant agrees to pay Landlord the cost of any such
increase in premiums or special or additional coverage as additional rent within
thirty (30) days after being billed therefor by Landlord. In determining whether
increased premiums are a result of Tenant's use of the Premises, a schedule
issued by the organization computing the insurance rate on the Building, the
Development Common Areas or the Tenant Improvements showing the various
components of such rate, will be conclusive evidence of the several items and
charges which make up such rate. Tenant agrees to promptly comply with all
reasonable requirements of the insurance authority or any present or future
insurer relating to the Premises.
(d) CANCELLATION OF LANDLORD'S POLICIES. If any of Landlord's insurance policies
are cancelled or cancellation is threatened or the coverage reduced or
threatened to be reduced in any way because of the use of the Premises or any
part thereof by Tenant or any assignee or subtenant of Tenant or by anyone
Tenant permits on the Premises and, if Tenant fails to remedy the condition
giving rise to such cancellation, threatened cancellation, reduction of
coverage, threatened reduction of coverage, increase in premiums, or threatened
increase in premiums, within forty-eight (48) hours after notice thereof, Tenant
will be deemed to be in material default of this Lease and Landlord may, at its
option, either terminate this Lease or enter upon the Premises and attempt to
remedy such condition, and Tenant shall promptly pay Landlord the reasonable
costs of such remedy as additional rent. If Landlord is unable, or elects not to
remedy such condition, then Landlord will have all of the remedies provided for
in this Lease in the event of a default by Tenant.
-10-
<PAGE>
(e) WAIVER OF SUBROGATION. Tenant's property insurance shall contain a clause
whereby the insurer waives all rights of recovery by way of subrogation against
Landlord. Tenant shall also obtain and furnish evidence to Landlord of the
waiver by Tenant's worker's compensation insurance carrier of all rights of
recovery by way of subrogation against Landlord.
20. DAMAGE OR DESTRUCTION.
(a) PARTIAL DESTRUCTION. If the Premises or the Building are damaged by fire or
other casualty to an extent not exceeding twenty-five percent (25%) of the full
replacement cost thereof, and Landlord's contractor reasonably estimates in a
writing delivered to Landlord and Tenant that the damage thereto may be
repaired, reconstructed or restored to substantially its condition immediately
prior to such damage within one hundred fifty (150) days from the date of such
casualty, and Landlord will receive insurance proceeds sufficient to cover the
costs of such repairs, reconstruction and restoration (including proceeds from
Tenant and/or Tenant's insurance which Tenant is required to deliver to Landlord
pursuant to Subparagraph 20(e) below to cover Tenant's obligation for the costs
of repair, reconstruction and restoration of any portion of the Tenant
Improvements and any Alterations for which Tenant is responsible under this
Lease), then Landlord agrees to commence and proceed diligently with the work of
repair, reconstruction and restoration and this Lease will continue in full
force and effect.
(b) SUBSTANTIAL DESTRUCTION. Any damage or destruction to the Premises or the
Building which Landlord is not obligated to repair pursuant to Subparagraph
20(a) above will be deemed a substantial destruction. In the event of a
substantial destruction, Landlord may elect to either (i) repair, reconstruct
and restore the portion of the Building or the Premises damaged by such
casualty, in which case this Lease will continue in full force and effect,
subject to Tenant's termination right contained in Subparagraph 20(d) below; or
(ii) terminate this Lease effective as of the date which is thirty (30) days
after Tenant's receipt of Landlord's election to so terminate.
(c) NOTICE. Under any of the conditions of Subparagraph 20(a) or (b) above,
Landlord agrees to give written notice to Tenant of its intention to repair or
terminate, as permitted in such paragraphs, within the earlier of forty-five
(45) days after the occurrence of such casualty, or fifteen (15) days after
Landlord's receipt of the estimate from Landlord's contractor (the applicable
time period to be referred to herein as the "Notice Period").
(d) TENANT'S TERMINATION RIGHTS. If Landlord elects to repair, reconstruct and
restore pursuant to Subparagraph 20(b)(i) hereinabove, and if Landlord's
contractor estimates that as a result of such damage, Tenant cannot be given
reasonable use of and access to the Premises within two hundred seventy (270)
days after the date of such damage, then Tenant may terminate this Lease
effective upon delivery of written notice to Landlord within ten (10) days after
Landlord delivers notice to Tenant of its election to so repair, reconstruct or
restore.
(e) TENANT'S COSTS AND INSURANCE PROCEEDS. In the event of any damage or
destruction of all or any part of the Premises, Tenant agrees to immediately (i)
notify Landlord thereof, and (ii) deliver to Landlord all property insurance
proceeds received by Tenant with respect to any Tenant Improvements installed by
or at the cost of Tenant and any Alterations, but excluding proceeds for
Tenant's furniture, fixtures, equipment and other personal property, whether or
not this Lease is terminated as permitted in this Paragraph 20, and Tenant
hereby assigns to Landlord all rights to receive such insurance proceeds. If,
for any reason (including Tenant's failure to obtain insurance for the full
replacement cost of any Tenant Improvements installed by or at the cost of
Tenant and any Alterations from any and all casualties), Tenant fails to receive
insurance proceeds covering the full replacement cost of any Tenant Improvements
installed by or at the cost of Tenant and any Alterations which are damaged,
Tenant will be deemed to have self-insured the replacement cost of such items,
and upon any damage or destruction thereto, Tenant agrees to immediately pay to
Landlord the full replacement cost of such items, less any insurance proceeds
actually received by Landlord from Landlord's or Tenant's insurance with respect
to such items.
(f) ABATEMENT OF RENT. In the event of any damage, repair, reconstruction and/or
restoration described in this Paragraph 20, rent will be abated or reduced, as
the case may be, from the date of such casualty, in proportion to the degree to
which Tenant's use of the Premises is impaired during such period of repair
until such use is restored. Except for abatement of rent as provided
hereinabove, Tenant will not be entitled to any compensation or damages for loss
of, or interference with, Tenant's business or use or access of all or any part
of the Premises or for lost profits or any other consequential damages of any
kind or nature, which result from any such damage, repair, reconstruction or
restoration.
(g) INABILITY TO COMPLETE. Notwithstanding anything to the contrary contained in
this Paragraph 20, if Landlord is obligated or elects to repair, reconstruct
and/or restore the damaged portion of the Building or the Premises pursuant to
Subparagraph 20(a) or 20(b)(i) above, but is delayed from completing such
repair, reconstruction and/or restoration beyond the date which is sixty (60)
days after the date estimated by Landlord's contractor for completion thereof by
reason of any causes (other than delays caused by Tenant, its subtenants,
employees, agents or contractors or delays which are beyond the reasonable
control of Landlord as described in Paragraph 33), then either Landlord or
Tenant may elect to terminate this Lease upon ten (10) days prior written notice
given to the other after the expiration of such sixty (60) day period.
(h) DAMAGE NEAR END OF TERM. Landlord and Tenant shall each have the right to
terminate this Lease if any damage to the Premises occurs during the last twelve
(12) months of the Term of this Lease where Landlord's contractor estimates in a
writing delivered to Landlord and Tenant that the repair, reconstruction or
restoration of such damage cannot be completed within sixty (60) days after the
date of such casualty. If either party desires to terminate this Lease under
this Subparagraph (h), it shall provide written notice to the other party of
such election within ten (10) days after receipt of Landlord's contractor's
repair estimates.
(i) WAIVER OF TERMINATION RIGHT. Landlord and Tenant agree that the foregoing
provisions of this Paragraph 20 are to govern their respective rights and
obligations in the event of any damage or destruction and supersede and are in
lieu of the provisions of any applicable law, statute, ordinance, rule,
regulation, order or ruling now or hereafter in force which provide remedies for
damage or destruction of leased premises (including, without limitation, to the
extent the Premises are located in California, the provisions of California
Civil Code Section 1932, Subsection 2, and Section 1933, Subsection 4 and any
successor statute or laws of a similar nature).
-11-
<PAGE>
(j) TERMINATION. Upon any termination of this Lease under any of the provisions
of this Paragraph 20, the parties will be released without further obligation to
the other from the date possession of the Premises is surrendered to Landlord
except for items which have accrued and are unpaid as of the date of termination
and matters which are to survive any termination of this Lease as provided in
this Lease.
21. EMINENT DOMAIN.
(a) SUBSTANTIAL TAKING. If the whole of the Premises, or such part thereof as
shall substantially interfere with Tenant's use and occupancy of the Premises,
as contemplated by this Lease, is taken for any public or quasi-public purpose
by any lawful power or authority by exercise of the right of appropriation,
condemnation or eminent domain, or sold to prevent such taking, either party
will have the right to terminate this Lease effective as of the date possession
is required to be surrendered to such authority.
(b) PARTIAL TAKING; ABATEMENT OF RENT. In the event of a taking of a portion of
the Premises which does not substantially interfere with Tenant's use and
occupancy of the Premises, then, neither party will have the right to terminate
this Lease and Landlord will thereafter proceed to make a functional unit of the
remaining portion of the Premises (but only to the extent Landlord receives
proceeds therefor from the condemning authority), and rent will be abated with
respect to the part of the Premises which Tenant is deprived of on account of
such taking. Notwithstanding the immediately preceding sentence to the contrary,
if any part of the Building or the Development is taken (whether or not such
taking substantially interferes with Tenant's use of the Premises), Landlord may
terminate this Lease upon thirty (30) days prior written notice to Tenant if
Landlord also terminates the leases of the other tenants of the Building which
are leasing comparably sized space for comparable lease terms.
(c) CONDEMNATION AWARD. In connection with any taking of the Premises or the
Building, Landlord will be entitled to receive the entire amount of any award
which may be made or given in such taking or condemnation, without deduction or
apportionment for any estate or interest of Tenant, it being expressly
understood and agreed by Tenant that no portion of any such award will be
allowed or paid to Tenant for any so-called bonus or excess value of this Lease,
and such bonus or excess value will be the sole property of Landlord. Tenant
agrees not to assert any claim against Landlord or the taking authority for any
compensation because of such taking (including any claim for bonus or excess
value of this Lease); provided, however, if any portion of the Premises is
taken, Tenant will have the right to recover from the condemning authority (but
not from Landlord) any compensation as may be separately awarded or recoverable
by Tenant for the taking of Tenant's furniture, fixtures, equipment and other
personal property within the Premises, for Tenant's relocation expenses, and for
any loss of goodwill or other damage to Tenant's business by reason of such
taking.
(d) TEMPORARY TAKING. In the event of taking of the Premises or any part thereof
for temporary use, (i) this Lease will remain unaffected thereby and rent will
abate for the duration of the taking in proportion to the extent Tenant's use of
the Premises is interfered with, and (ii) Landlord will be entitled to receive
such portion or portions of any award made for such use provided that if such
taking remains in force at the expiration or earlier termination of this Lease,
Tenant will then pay to Landlord a sum equal to the reasonable cost of
performing Tenant's obligations under Paragraph 11 with respect to surrender of
the Premises and upon such payment Tenant will be excused from such obligations.
For purpose of this Subparagraph 21(d), a temporary taking shall be defined as a
taking for a period of ninety (90) days or less.
22. DEFAULTS AND REMEDIES.
(a) DEFAULTS. The occurrence of any one or more of the following events will
be deemed a default by Tenant:
(i) The abandonment of the Premises by Tenant, which for purposes of this Lease
means any absence by Tenant from the Premises for five (5) business days or
longer while in default of any other provision of this Lease and, with respect
to ground floor space only, any vacation of the Premises, which for purposes of
this Lease means any absence by Tenant from the Premises for sixty (60) days or
longer whether or not Tenant is in default under any provision of this Lease.
(ii) The failure by Tenant to make any payment of rent or additional rent or any
other payment required to be made by Tenant hereunder, as and when due, where
such failure continues for a period of three (3) days after written notice
thereof from Landlord to Tenant; provided, however, that any such notice will be
in lieu of, and not in addition to, any notice required under applicable law
(including, without limitation, to the extent the Premises are located in
California, the provisions of California Code of Civil Procedure Section 1161
regarding unlawful detainer actions or any successor statute or law of a similar
nature).
(iii) The failure by Tenant to observe or perform any of the express or implied
covenants or provisions of this Lease to be observed or performed by Tenant,
other than as specified in Subparagraph 22(a)(i) or (ii) above, where such
failure continues (where no other period of time is expressly provided) for a
period of ten (10) days after written notice thereof from Landlord to Tenant.
The provisions of any such notice will be in lieu of, and not in addition to,
any notice required under applicable law (including, without limitation, to the
extent the Premises are located in California, California Code of Civil
Procedure Section 1161 regarding unlawful detainer actions and any successor
statute or similar law). If the nature of Tenant's default is such that more
than ten (10) days are reasonably required for its cure, then Tenant will not be
deemed to be in default if Tenant, with Landlord's concurrence, commences such
cure within such ten (10) day period and thereafter diligently prosecutes such
cure to completion.
(iv) (A) The making by Tenant of any general assignment for the benefit of
creditors; (B) the filing by or against Tenant of a petition to have Tenant
adjudged a bankrupt or a petition for reorganization or arrangement under any
law relating to bankruptcy (unless, in the case of a petition filed against
Tenant, the same is dismissed within sixty (60) days); (C) the appointment of a
trustee or receiver to take possession of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease, where possession
is not restored to Tenant within thirty (30) days; or (D) the attachment,
execution or other judicial seizure of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease where such seizure
is not discharged within thirty (30) days.
-12-
<PAGE>
(b) LANDLORD'S REMEDIES; TERMINATION. In the event of any default by Tenant,
addition to any other remedies available to Landlord at law or in equity under
applicable law (including, without limitation, to the extent the Premises are
located in California, the remedies of Civil Code Section 1951.4 and any
successor statute or similar law, providing that Landlord may continue this
Lease in effect after Tenant's breach and abandonment and recover rent as it
becomes due, if Tenant has the right to sublet or assign, subject only to
reasonable restrictions), Landlord will have the immediate right and option to
terminate this Lease and all rights of Tenant hereunder. If Landlord elects to
terminate this Lease then, to the extent permitted under applicable law,
Landlord may recover from Tenant (i) The worth at the time of award of any
unpaid rent which had been earned at the time of such termination; plus (ii) the
worth at the time of award of the amount by which the unpaid rent which would
have been earned after termination until the time of award exceeds the amount of
such rent loss that Tenant proves could have been reasonably avoided; plus (iii)
the worth at the time of award of the amount by which the unpaid rent for the
balance of the Term after the time of award exceeds the amount of such rent loss
that Tenant proves could be reasonably avoided; plus (iv) any other amount
necessary to compensate Landlord for all the detriment proximately caused by
Tenant's failure to perform its obligations under this Lease or which, in the
ordinary course of things, results therefrom including, but not limited to:
attorneys' fees and costs; brokers' commissions; the costs of refurbishment,
alterations, renovation and repair of the Premises, and removal (including the
repair of any damage caused by such removal) and storage (or disposal) of
Tenant's personal property, equipment, fixtures, Alterations, the Tenant
Improvements and any other items which Tenant is required under this Lease to
remove but does not remove, as well as the unamortized value of any free rent,
reduced rent, free parking, reduced rate parking and any Tenant Improvement
Allowance or other costs or economic concessions provided, paid, granted or
incurred by Landlord pursuant to this Lease. The unamortized value of such
concessions shall be determined by taking the total value of such concessions
and multiplying such value by a fraction, the numerator of which is the number
of months of the Lease Term not yet elapsed as of the date on which the Lease is
terminated, and the denominator of which is the total number of months of the
Lease Term. As used in Subparagraphs 22(b)(i) and (ii) above, the "worth at the
time of award" is computed by allowing interest at the Interest Rate. As used in
Subparagraph 22(b)(iii) above, the "worth at the time of award" is computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of award plus one percent (1%).
(c) LANDLORD'S REMEDIES; RE-ENTRY RIGHTS. In the event of any default by Tenant,
in addition to any other remedies available to Landlord under this Lease, at law
or in equity, Landlord will also have the right, with or without terminating
this Lease, to re-enter the Premises and remove all persons and property from
the Premises; such property may be removed and stored in a public warehouse or
elsewhere and/or disposed of at the sole cost and expense of and for the account
of Tenant in accordance with the provisions of Subparagraph 13(h) of this Lease
or any other procedures permitted by applicable law. No re-entry or taking
possession of the Premises by Landlord pursuant to this Subparagraph 22(c) will
be construed as an election to terminate this Lease unless a written notice of
such intention is given to Tenant or unless the termination thereof is decreed
by a court of competent jurisdiction.
(d) LANDLORD'S REMEDIES; RE-LETTING. In the event of the vacation or abandonment
of the Premises by Tenant or in the event that Landlord elects to re-enter the
Premises or takes possession of the Premises pursuant to legal proceeding or
pursuant to any notice provided by law, then if Landlord does not elect to
terminate this Lease, Landlord may from time to time, without terminating this
Lease, either recover all rent as it becomes due or relet the Premises or any
part thereof on terms and conditions as Landlord in its sole and absolute
discretion may deem advisable with the right to make alterations and repairs to
the Premises in connection with such reletting. If Landlord elects to relet the
Premises, then rents received by Landlord from such reletting will be applied:
first, to the payment of any indebtedness other than rent due hereunder from
Tenant to Landlord; second, to the payment of any cost of such reletting; third,
to the payment of the cost of any alterations and repairs to the Premises
incurred in connection with such reletting; fourth, to the payment of rent due
and unpaid hereunder and the residue, if any, will be held by Landlord and
applied to payment of future rent as the same may become due and payable
hereunder. Should that portion of such rents received from such reletting during
any month, which is applied to the payment of rent hereunder, be less than the
rent payable during that month by Tenant hereunder, then Tenant agrees to pay
such deficiency to Landlord immediately upon demand therefor by Landlord. Such
deficiency will be calculated and paid monthly.
(e) LANDLORD'S REMEDIES; PERFORMANCE FOR TENANT. All covenants and agreements to
be performed by Tenant under any of the terms of this Lease are to be performed
by Tenant at Tenant's sole cost and expense and without any abatement of rent.
If Tenant fails to pay any sum of money owed to any party other than Landlord,
for which it is liable under this Lease, or if Tenant fails to perform any other
act on its part to be performed hereunder, and such failure continues for ten
(10) days after notice thereof by Landlord, Landlord may, without waiving or
releasing Tenant from its obligations, but shall not be obligated to, make any
such payment or perform any such other act to be made or performed by Tenant.
Tenant agrees to reimburse Landlord upon demand for all sums so paid by Landlord
and all necessary incidental costs, together with interest thereon at the
Interest Rate, from the date of such payment by Landlord until reimbursed by
Tenant. This remedy shall be in addition to any other right or remedy of
Landlord set forth in this Paragraph 22.
(f) LATE PAYMENT. If Tenant fails to pay any installment of rent within five
business (5) days of when due or if Tenant fails to make any other payment for
which Tenant is obligated under this Lease within five business (5) days of when
due, such late amount will accrue interest at the Interest Rate and Tenant
agrees to pay Landlord as additional rent such interest on such amount from the
date such amount becomes due until such amount is paid. In addition, Tenant
agrees to pay to Landlord concurrently with such late payment amount, as
additional rent, a late charge equal to five percent (5%) of the amount due to
compensate Landlord for the extra costs Landlord will incur as a result of such
late payment. The parties agree that (i) it would be impractical and extremely
difficult to fix the actual damage Landlord will suffer in the event of Tenant's
late payment, (ii) such interest and late charge represents a fair and
reasonable estimate of the detriment that Landlord will suffer by reason of late
payment by Tenant, and (iii) the payment of interest and late charges are
distinct and separate in that the payment of interest is to compensate Landlord
for the use of Landlord's money by Tenant, while the payment of late charges is
to compensate Landlord for Landlord's processing, administrative and other costs
incurred by Landlord as a result of Tenant's delinquent payments. Acceptance of
any such interest and late charge will not constitute a waiver of the Tenant's
default with respect to the overdue amount, or prevent Landlord from exercising
any of the other rights and remedies available to Landlord. If Tenant incurs a
late charge more than three (3) times in any period of twelve (12) months during
the Lease Term, then, notwithstanding that Tenant cures the late payments for
which such late charges are imposed, Landlord will have the right to require
Tenant thereafter to pay all installments of Monthly Base Rent quarterly in
advance throughout the remainder of the Lease Term.
-13-
<PAGE>
(g) RIGHTS AND REMEDIES CUMULATIVE. All rights, options and remedies of
Landlord contained in this Lease will be construed and held to be cumulative,
and no one of them will be exclusive of the other, and Landlord shall have the
right to pursue any one or all of such remedies or any other remedy or relief
which may be provided by law or in equity, whether or not stated in this Lease.
Nothing in this Paragraph 22 will be deemed to limit or otherwise affect
Tenant's indemnification of Landlord pursuant to any provision of this Lease.
23. LANDLORD'S DEFAULT. Landlord will not be in default in the performance of
any obligation required to be performed by Landlord under this Lease unless
Landlord fails to perform such obligation within thirty (30) days after the
receipt of written notice from Tenant specifying in detail Landlord's failure to
perform; provided however, that if the nature of Landlord's obligation is such
that more than thirty (30) days are required for performance, then Landlord will
not be deemed in default if it commences such performance within such thirty
(30) day period and thereafter diligently pursues the same to completion. Upon
any default by Landlord, Tenant may exercise any of its rights provided at law
or in equity, subject to the limitations on liability set forth in Paragraph 35
of this Lease.
24. ASSIGNMENT AND SUBLETTING.
(a) RESTRICTION ON TRANSFER. Except as expressly provided in this Paragraph 24,
Tenant will not, either voluntarily or by operation of law, assign or encumber
this Lease or any interest herein or sublet the Premises or any part thereof, or
permit the use or occupancy of the Premises by any party other than Tenant (any
such assignment, encumbrance, sublease or the like will sometimes be referred to
as a "Transfer"), without the prior written consent of Landlord, which consent
Landlord will not unreasonably withhold.
(b) CORPORATE AND PARTNERSHIP TRANSFERS. For purposes of this Paragraph 24, if
Tenant is a corporation, partnership or other entity, any transfer, assignment,
encumbrance or hypothecation of twenty-five percent (25%) or more (individually
or in the aggregate) of any stock or other ownership interest in such entity,
and/or any transfer, assignment, hypothecation or encumbrance of any controlling
ownership or voting interest in such entity, will be deemed a Transfer and will
be subject to all of the restrictions and provisions contained in this Paragraph
24. Notwithstanding the foregoing, the immediately preceding sentence will not
apply to any transfers of stock of Tenant in connection with an initial public
offering or if Tenant is a publicly-held corporation and such stock is
transferred publicly over a recognized security exchange or over-the-counter
market.
(c) PERMITTED CONTROLLED TRANSFERS. Notwithstanding the provisions of this
Paragraph 24 to the contrary, Tenant may assign this Lease or sublet the
Premises or any portion thereof ("Permitted Transfer"), without Landlord's
consent and without extending any sublease termination option to Landlord, to
any parent, subsidiary or affiliate corporation which controls, is controlled by
or is under common control with Tenant, or to any corporation resulting from a
merger or consolidation with Tenant, or to any person or entity which acquires
all the assets of Tenant's business as a going concern, provided that: (i) at
least twenty (20) days prior to such assignment or sublease, Tenant delivers to
Landlord the financial statements and other financial and background information
of the assignee or sublessee described in Subparagraph 24(d) below; (ii) if an
assignment, the assignee assumes, in full, the obligations of Tenant under this
Lease (or if a sublease, the sublessee of a portion of the Premises or Term
assumes, in full, the obligations of Tenant with respect to such portion); (iii)
the financial net worth of the assignee or sublessee as of the time of the
proposed assignment or sublease equals or exceeds that of Tenant as of the date
of execution of this Lease; (iv) Tenant remains fully liable under this Lease;
and (v) the use of the Premises under Paragraph 8 remains unchanged.
(d) TRANSFER NOTICE. If Tenant desires to effect a Transfer, then at least
twenty (20) days prior to the date when Tenant desires the Transfer to be
effective (the "Transfer Date"), Tenant agrees to give Landlord a notice (the
"Transfer Notice"), stating the name, address and business of the proposed
assignee, sublessee or other transferee (sometimes referred to hereinafter as
"Transferee"), reasonable information (including references) concerning the
character, ownership, and financial condition of the proposed Transferee, the
Transfer Date, any ownership or commercial relationship between Tenant and the
proposed Transferee, and the consideration and all other material terms and
conditions of the proposed Transfer, all in such detail as Landlord may
reasonably require. If Landlord reasonably requests additional detail, the
Transfer Notice will not be deemed to have been received until Landlord receives
such additional detail, and Landlord may withhold consent to any Transfer until
such information is provided to it.
(e) LANDLORD'S OPTIONS. Within fifteen (15) days of Landlord's receipt of any
Transfer Notice, and any additional information requested by Landlord concerning
the proposed Transferee's financial responsibility, Landlord will elect to do
one of the following (i) consent to the proposed Transfer; (ii) refuse such
consent, which refusal shall be on reasonable grounds including, without
limitation, those set forth in Subparagraph 24(f) below; or (iii) terminate this
Lease as to all or such portion of the Premises which is proposed to be sublet
or assigned and recapture all or such portion of the Premises for reletting by
Landlord.
(f) REASONABLE DISAPPROVAL. Landlord and Tenant hereby acknowledge that
Landlord's disapproval of any proposed Transfer pursuant to Subparagraph 24(e)
will be deemed reasonably withheld if based upon any reasonable factor,
including, without limitation, any or all of the following factors: (i)
intentionally omitted; (ii) the proposed Transferee is a governmental entity;
(iii) the portion of the Premises to be sublet or assigned is irregular in shape
with inadequate means of ingress and egress; (iv) the use of the Premises by the
Transferee (A) is not permitted by the use provisions in Paragraph 8 hereof, (B)
violates any exclusive use granted by Landlord to another tenant in the
Building, or (C) otherwise poses a risk of increased liability to Landlord; (v)
the Transfer would likely result in a significant and inappropriate increase in
the use of the parking areas or Development Common Areas by the Transferee's
employees or visitors, and/or significantly increase the demand upon utilities
and services to be provided by Landlord to the Premises; (vi) the Transferee
does not have the financial capability to fulfill the obligations imposed by the
Transfer and this Lease; (vii) the Transferee is not in Landlord's reasonable
opinion consistent with Landlord's desired tenant mix; or (viii) the Transferee
poses a business or other economic risk which Landlord reasonably deems
unacceptable.
(g) ADDITIONAL CONDITIONS. A condition to Landlord's consent to any Transfer of
this Lease will be the delivery to Landlord of a true copy of the fully executed
instrument of assignment, sublease, transfer or hypothecation, and, in the case
of an assignment, the delivery to Landlord of an agreement executed by the
Transferee in form and substance reasonably satisfactory
-14-
<PAGE>
to Landlord, whereby the Transferee assumes and agrees to be bound by all of the
terms and provisions of this Lease and to perform all of the obligations of
Tenant hereunder. As a condition for granting its consent to any assignment or
sublease, Landlord may require, if Tenant is in default, that the assignee or
sublessee remit directly to Landlord on a monthly basis, all monies due to
Tenant by said assignee or sublessee. As a condition to Landlord's consent to
any sublease, such sublease must provide that it is subject and subordinate to
this Lease and to all mortgages; that Landlord may enforce the provisions of the
sublease, including collection of rent; that in the event of termination of this
Lease for any reason, including without limitation a voluntary surrender by
Tenant, or in the event of any reentry or repossession of the Premises by
Landlord, Landlord may, at its option, either (i) terminate the sublease, or
(ii) take over all of the right, title and interest of Tenant, as sublessor,
under such sublease, in which case such sublessee will attorn to Landlord, but
that nevertheless Landlord will not (1) be liable for any previous act or
omission of Tenant under such sublease, (2) be subject to any defense or offset
previously accrued in favor of the sublessee against Tenant, or (3) be bound by
any previous modification of any sublease made without Landlord's written
consent, or by any previous prepayment by sublessee of more than one month's
rent.
(h) EXCESS RENT. If Landlord consents to any assignment of this Lease, Tenant
agrees to pay to Landlord, as additional rent, one-half (1/2) of all sums and
other consideration payable to and for the benefit of Tenant by the assignee on
account of the assignment, as and when such sums and other consideration are due
and payable by the assignee to or for the benefit of Tenant (or, if Landlord so
requires, and without any release of Tenant's liability for the same, Tenant
agrees to instruct the assignee to pay such sums and other consideration
directly to Landlord). If for any sublease, Tenant receives rent or other
consideration, either initially or over the term of the sublease, in excess of
the rent fairly allocable to the portion of the Premises which is subleased
based on square footage, Tenant agrees to pay to Landlord as additional rent
one-half (1/2) of the excess of each such payment of rent or other consideration
received by Tenant promptly after its receipt. In calculating excess rent or
other consideration which may be payable to Landlord under this paragraph,
Tenant will be entitled to deduct commercially reasonable third party brokerage
commissions, subtenant improvements, and attorneys' fees and other amounts
reasonably and actually expended by Tenant in connection with such assignment or
subletting if acceptable written evidence of such expenditures is provided to
Landlord.
(i) TERMINATION RIGHTS.
(i) If Tenant requests Landlord's consent to any subletting of all or a portion
of the ground floor portion of Premises, or if Tenant requests Landlord's
consent to any subletting of all or a portion of the balance of the Premises (A)
during the remainder of the Sublease Year following the expiration of the
Sublease Period described in clause (ii) below, or (B) without following the
procedures set forth in clause (ii) below, then in any such event, Landlord will
have the right, as provided in Subparagraph 24(e), to terminate this Lease as to
all or such portion of the Premises which is proposed to be sublet effective as
of the date Tenant proposes to sublet; provided, however, if Landlord elects to
terminate this Lease, then within five (5) business days after receipt of such
election by Tenant, Tenant will have the right to rescind the request of
Landlord to consent to such subletting, and if Tenant timely delivers such
rescission to Landlord, then Landlord's election to terminate this Lease shall
be void.
(ii) If Tenant desires to sublease all or a portion of the balance of the
Premises, then once per twelve (12) consecutive calendar months (a "Sublease
Year") Tenant will have the right to notify Landlord of such desire (the
"Sublease Notice"), identifying in such notice the specific portions of the
balance of the Premises which Tenant desires to sublease (the "Proposed Sublease
Space"). Landlord will then have sixty (60) days following its receipt of the
Sublease Notice (the "Recapture Period") in which to elect to recapture from
Tenant all or some of the Proposed Sublease Space (the "Recapture Notice");
provided, however, if Landlord delivers to Tenant a Recapture Notice, then
within five (5) business days after receipt of such notice by Tenant, Tenant
will have the right to rescind its Sublease Notice as to the portion of the
Proposed Sublease Space which Landlord desires to recapture, and if Tenant
timely delivers such rescission to Landlord, then Landlord's Recapture Notice as
to such space shall be void. To the extent Landlord does not deliver a Recapture
Notice within the Recapture Period, Tenant will have one hundred twenty (120)
days after the expiration of the Recapture Period in which to consummate a
sublease or subleases for the Proposed Sublease Space (the "Sublease Period").
Any portion of the Proposed Sublease Space which has not been subleased within
the Sublease Period will be subject to recapture by Landlord in accordance with
the terms of clause (i) above.
(iii) Landlord's right to terminate this Lease as to less than all of the
Premises proposed to be sublet will not terminate as to any future additional
subletting as a result of Landlord's consent to a subletting of less than all of
the Premises or Landlord's failure to exercise its termination right with
respect to any subletting. Landlord will exercise its termination right
described in clause (i) above, if at all, by giving written notice to Tenant
within fifteen (15) days of receipt by Landlord of the financial responsibility
information required by this Paragraph 24. Tenant understands and acknowledges
that the option, as provided in this Paragraph 24, to terminate this Lease as to
all or such portion of the Premises which is proposed to be sublet rather than
approve the subletting of all or a portion of the Premises, is a material
inducement for Landlord's agreeing to lease the Premises to Tenant upon the
terms and conditions herein set forth. In the event of any such termination
with respect to less than all of the Premises, the cost of segregating the
recaptured space from the balance of the Premises will be paid by Tenant and
Tenant's future monetary obligations under this Lease will be reduced
proportionately on a square footage basis to correspond to the balance of the
Premises which Tenant continues to lease.
(j) NO RELEASE. No Transfer will release Tenant of Tenant's obligations under
this Lease or alter the primary liability of Tenant to pay the rent and to
perform all other obligations to be performed by Tenant hereunder. Landlord may
require that any Transferee remit directly to Landlord on a monthly basis, all
monies due Tenant by said Transferee. However, the acceptance of rent by
Landlord from any other person will not be deemed to be a waiver by Landlord of
any provision hereof. Consent by Landlord to one Transfer will not be deemed
consent to any subsequent Transfer. In the event of default by any Transferee of
Tenant or any successor of Tenant in the performance of any of the terms hereof,
Landlord may proceed directly against Tenant without the necessity of exhausting
remedies against such Transferee or successor. Landlord may consent to
subsequent assignments of this Lease or sublettings or amendments or
modifications to this Lease with assignees of Tenant, without notifying Tenant,
or any successor of Tenant, and without obtaining its or their consent thereto
and any such actions will not relieve Tenant of liability under this Lease.
(k) ADMINISTRATIVE AND ATTORNEYS' FEES. If Tenant effects a Transfer or requests
the consent of Landlord to any Transfer (whether or not such Transfer is
consummated), then, upon demand, Tenant agrees to pay Landlord a non-refundable
administrative fee of Two Hundred Fifty Dollars ($250.00), plus any reasonable
attorneys' and paralegal fees incurred by
-15-
<PAGE>
Landlord in connection with such Transfer or request for consent (whether
attributable to Landlord's in-house attorneys or paralegals or otherwise) not to
exceed One Hundred Dollars ($100.00) for each one thousand (1,000) rentable
square feet of area contained within the Premises or portion thereof to be
assigned or sublet. Acceptance of the Two Hundred Fifty Dollar ($250.00)
administrative fee and/or reimbursement of Landlord's attorneys' and paralegal
fees will in no event obligate Landlord to consent to any proposed Transfer.
25. SUBORDINATION. Without the necessity of any additional document being
executed by Tenant for the purpose of effecting a subordination, and at the
election of Landlord or any mortgagee or beneficiary with a deed of trust
encumbering the Building and/or the Development, or any lessor of a ground or
underlying lease with respect to the Building, this Lease will be subject and
subordinate at all times to: (i) all ground leases or underlying leases which
may now exist or hereafter be executed affecting the Building; and (ii) the lien
of any mortgage or deed of trust which may now exist or hereafter be executed
for which the Building, the Development or any leases thereof, or Landlord's
interest and estate in any of said items, is specified as security.
Notwithstanding the foregoing, Landlord reserves the right to subordinate any
such ground leases or underlying leases or any such liens to this Lease. If any
such ground lease or underlying lease terminates for any reason or any such
mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure
is made for any reason, at the election of Landlord's successor in interest,
Tenant agrees to attorn to and become the tenant of such successor in which
event Tenant's right to possession of the Premises will not be disturbed as long
as Tenant is not in default under this Lease. Tenant hereby waives its rights
under any law which gives or purports to give Tenant any right to terminate or
otherwise adversely affect this Lease and the obligations of Tenant hereunder in
the event of any such foreclosure proceeding or sale. Tenant covenants and
agrees to execute and deliver, upon demand by Landlord and in the form
reasonably required by Landlord, any additional documents evidencing the
priority or subordination of this Lease and Tenant's attornment agreement with
respect to any such ground lease or underlying leases or the lien of any such
mortgage or deed of trust. If Tenant fails to sign and return any such
documents within ten (10) days of receipt, Tenant will be in default hereunder.
26. ESTOPPEL CERTIFICATE.
(a) TENANT'S OBLIGATIONS. Within ten (10) days following any written request
which Landlord may make from time to time, Tenant agrees to execute and deliver
to Landlord a statement, in a form substantially similar to the form of Exhibit
-------
"G" attached hereto or as may reasonably be required by Landlord's lender,
- ---
certifying: (i) the date of commencement of this Lease; (ii) the fact that this
Lease is unmodified and in full force and effect (or, if there have been
modifications, that this Lease is in full force and effect, and stating the date
and nature of such modifications); (iii) the date to which the rent and other
sums payable under this Lease have been paid; (iv) that there are no current
defaults under this Lease by either Landlord or Tenant except as specified in
Tenant's statement; and (v) such other matters reasonably requested by Landlord.
Landlord and Tenant intend that any statement delivered pursuant to this
Paragraph 26 may be relied upon by any mortgagee, beneficiary, purchaser or
prospective purchaser of the Building or any interest therein.
(b) TENANT'S FAILURE TO DELIVER. Tenant's failure to deliver such statement
within such time will be conclusive upon Tenant (i) that this Lease is in full
force and effect, without modification except as may be represented by Landlord,
(ii) that there are no uncured defaults in Landlord's performance, and (iii)
that not more than one (1) month's rent has been paid in advance. Without
limiting the foregoing, if Tenant fails to deliver any such statement within
such ten (10) day period, Landlord may deliver to Tenant an additional request
for such statement and Tenant's failure to deliver such statement to Landlord
within ten (10) days after delivery of such additional request will constitute a
default under this Lease. Tenant agrees to indemnify and protect Landlord from
and against any and all claims, damages, losses, liabilities and expenses
(including attorneys' fees and costs) attributable to any failure by Tenant to
timely deliver any such estoppel certificate to Landlord as required by this
Paragraph 26.
27. INTENTIONALLY OMITTED.
28. RULES AND REGULATIONS. Tenant agrees to faithfully observe and comply with
the "Rules and Regulations," a copy of which is attached hereto and incorporated
herein by this reference as Exhibit "H", and all reasonable and
-----------
nondiscriminatory modifications thereof and additions thereto from time to time
put into effect by Landlord. Landlord will not be responsible to Tenant for the
violation or non-performance by any other tenant or occupant of the Building of
any of the Rules and Regulations.
29. MODIFICATION AND CURE RIGHTS OF LANDLORD'S MORTGAGEES AND LESSORS.
(a) MODIFICATIONS. If, in connection with Landlord's obtaining or entering into
any financing or ground lease for any portion of the Building or the
Development, the lender or ground lessor requests modifications to this Lease,
Tenant, within ten (10) days after request therefor, agrees to execute an
amendment to this Lease incorporating such modifications, provided such
modifications are reasonable and do not increase the obligations of Tenant under
this Lease or adversely affect the leasehold estate created by this Lease.
(b) CURE RIGHTS. In the event of any default on the part of Landlord, Tenant
will give notice by registered or certified mail to any beneficiary of a deed of
trust or mortgage covering the Premises or ground lessor of Landlord whose
address has been furnished to Tenant, and Tenant agrees to offer such
beneficiary, mortgagee or ground lessor a reasonable opportunity to cure the
default (including with respect to any such beneficiary or mortgagee, time to
obtain possession of the Premises, subject to this Lease and Tenant's rights
hereunder, by power of sale or a judicial foreclosure, if such should prove
necessary to effect a cure).
30. DEFINITION OF LANDLORD. The term "Landlord," as used in this Lease, so far
as covenants or obligations on the part of Landlord are concerned, means and
includes only the owner or owners, at the time in question, of the fee title of
the Premises or the lessees under any ground lease, if any. In the event of any
transfer, assignment or other conveyance or transfers of any such title (other
than a transfer for security purposes only), Landlord herein named (and in case
of any subsequent transfers or conveyances, the then grantor) will be
automatically relieved from and after the date of such transfer, assignment or
conveyance of all liability as respects the performance of any covenants or
obligations on the part of Landlord contained in this Lease thereafter to be
performed, so long as the transferee assumes in writing all such covenants and
obligations of Landlord
-16-
<PAGE>
arising after the date of such transfer. Landlord and Landlord's transferees and
assignees have the absolute right to transfer all or any portion of their
respective title and interest in the Development, the Building, the Premises
and/or this Lease without the consent of Tenant, and such transfer or subsequent
transfer will not be deemed a violation on Landlord's part of any of the terms
and conditions of this Lease.
31. WAIVER. The waiver by either party of any breach of any term, covenant or
condition herein contained will not be deemed to be a waiver of any subsequent
breach of the same or any other term, covenant or condition herein contained,
nor will any custom or practice which may develop between the parties in the
administration of the terms hereof be deemed a waiver of or in any way affect
the right of either party to insist upon performance in strict accordance with
said terms. The subsequent acceptance of rent or any other payment hereunder by
Landlord will not be deemed to be a waiver of any preceding breach by Tenant of
any term, covenant or condition of this Lease, other than the failure of Tenant
to pay the particular rent so accepted, regardless of Landlord's knowledge of
such preceding breach at the time of acceptance of such rent. No acceptance by
Landlord of a lesser sum than the basic rent and additional rent or other sum
then due will be deemed to be other than on account of the earliest installment
of such rent or other amount due, nor will any endorsement or statement on any
check or any letter accompanying any check be deemed an accord and satisfaction,
and Landlord may accept such check or payment without prejudice to Landlord's
right to recover the balance of such installment or other amount or pursue any
other remedy provided in this Lease. The consent or approval of Landlord to or
of any act by Tenant requiring Landlord's consent or approval will not be deemed
to waive or render unnecessary Landlord's consent or approval to or of any
subsequent similar acts by Tenant.
32. PARKING.
(a) GRANT OF PARKING RIGHTS. So long as this Lease is in effect and provided
Tenant is not in default hereunder, Landlord grants to Tenant and Tenant's
Authorized Users (as defined below) a license to use the number and type of
parking spaces designated in Subparagraph 1(s) subject to the terms and
conditions of this Paragraph 32 and the Rules and Regulations regarding parking
contained in Exhibit "H" attached hereto. Except as otherwise expressly set
-----------
forth in Subparagraph 1(s), as consideration for the use of such parking spaces,
Tenant agrees to pay to Landlord or, at Landlord's election, directly to
Landlord's parking operator, as additional rent under this Lease, the prevailing
parking rate for each such parking space as established by Landlord in its
discretion from time to time. Tenant agrees that all parking charges will be
payable on a monthly basis concurrently with each monthly payment of Monthly
Base Rent. Tenant agrees to submit to Landlord or, at Landlord's election,
directly to Landlord's parking operator with a copy to Landlord, written notice
in a form reasonably specified by Landlord containing the names, home and office
addresses and telephone numbers of those persons who are authorized by Tenant to
use Tenant's parking spaces on a monthly basis ("Tenant's Authorized Users") and
shall use its best efforts to identify each vehicle of Tenant's Authorized Users
by make, model and license number. Tenant agrees to deliver such notice within
thirty (30) days after Landlord's request and to periodically update such notice
as well as upon specific request by Landlord or Landlord's parking operator to
reflect changes to Tenant's Authorized Users or their vehicles.
(b) VISITOR PARKING. So long as this Lease is in effect, Tenant's visitors and
guests will be entitled to use those specific parking areas which are designated
for short term visitor parking and which are located within the surface parking
area(s), if any, and/or within the parking structure(s) which serve the
Building. Visitor parking will be made available at a charge to Tenant's
visitors and guests, with the rate being established by Landlord in its
discretion from time to time. Tenant, at its sole cost and expense, may elect to
validate such parking for its visitors and guests. All such visitor parking will
be on a non-exclusive, in common basis with all other visitors and guests of the
Development.
(c) USE OF PARKING SPACES. Tenant will not use or allow any of Tenant's
Authorized Users to use any parking spaces which have been specifically assigned
by Landlord to other tenants or occupants or for other uses such as visitor
parking or which have been designated by any governmental entity as being
restricted to certain uses. Tenant will not be entitled to increase or reduce
its parking privileges applicable to the Premises during the Term of the Lease
except as follows: If at any time Tenant desires to increase or reduce the
number of parking spaces allocated to it under the terms of this Lease, Tenant
must notify Landlord in writing of such desire and Landlord will have the right,
in its sole and absolute discretion, to either (a) approve such requested
increase in the number of parking spaces allocated to Tenant (with an
appropriate increase to the additional rent payable by Tenant for such
additional spaces based on the then prevailing parking rates), (b) approve such
requested decrease in the number of parking spaces allocated to Tenant (with an
appropriate reduction in the additional rent payable by Tenant for such
eliminated parking spaces based on the then prevailing parking rates), or (c)
disapprove such requested increase or decrease in the number of parking spaces
allocated to Tenant. Promptly following receipt of Tenant's written request,
Landlord will provide Tenant with written notice of its decision including a
statement of any adjustments to the additional rent payable by Tenant for
parking under the Lease, if applicable.
(d) GENERAL PROVISIONS. Except as otherwise expressly set forth in Subparagraph
1(s), Landlord reserves the right to set and increase monthly fees and/or daily
and hourly rates for parking privileges from time to time during the Term of the
Lease. Landlord may assign any unreserved and unassigned parking spaces and/or
make all or any portion of such spaces reserved, if Landlord reasonably
determines that it is necessary for orderly and efficient parking or for any
other reasonable reason. Failure to pay the rent for any particular parking
spaces or failure to comply with any terms and conditions of this Lease
applicable to parking may be treated by Landlord as a default under this Lease
and, in addition to all other remedies available to Landlord under the Lease, at
law or in equity, Landlord may elect to recapture such parking spaces for the
balance of the Term of this Lease if Tenant does not cure such failure within
the applicable cure period set forth in Paragraph 22 of this Lease. In such
event, Tenant and Tenant's Authorized Users will be deemed visitors for purposes
of parking space use and will be entitled to use only those parking areas
specifically designated for visitor parking subject to all provisions of this
Lease applicable to such visitor parking use. Except in connection with an
assignment or sublease expressly permitted under the terms of this Lease,
Tenant's parking rights and privileges described herein are personal to Tenant
and may not be assigned or transferred, or otherwise conveyed, without
Landlord's prior written consent, which consent Landlord may withhold in its
sole and absolute discretion. In any event, under no circumstances may Tenant's
parking rights and privileges be transferred, assigned or otherwise conveyed
separate and apart from Tenant's interest in this Lease.
(e) COOPERATION WITH TRAFFIC MITIGATION MEASURES. Tenant agrees to use its
reasonable, good faith efforts to cooperate in traffic mitigation programs which
may be undertaken by Landlord independently, or in cooperation with local
municipalities or governmental agencies or other property owners in the vicinity
of the Building. Such programs may include, but will not be limited to,
carpools, vanpools and other ridesharing programs, public and private transit,
flexible work hours, preferential
-17-
<PAGE>
assigned parking programs and programs to coordinate tenants within the
Development with existing or proposed traffic mitigation programs.
(f) PARKING RULES AND REGULATIONS. Tenant and Tenant's Authorized Users shall
comply with all rules and regulations regarding parking set forth in
Exhibit "H" attached hereto and Tenant agrees to cause its employees,
- -----------
subtenants, assignees, contractors, suppliers, customers and invitees to comply
with such rules and regulations. Landlord reserves the right from time to time
to modify and/or adopt such other reasonable and non-discriminatory rules and
regulations for the parking facilities as it deems reasonably necessary for the
operation of the parking facilities.
33. FORCE MAJEURE. If either Landlord or Tenant is delayed, hindered in or
prevented from the performance of any act required under this Lease by reason of
strikes, lock-outs, labor troubles, inability to procure standard materials,
failure of power, restrictive governmental laws, regulations or orders or
governmental action or inaction (including failure, refusal or delay in issuing
permits, approvals and/or authorizations which is not the result of the action
or inaction of the party claiming such delay), riots, civil unrest or
insurrection, war, fire, earthquake, flood or other natural disaster, unusual
and unforeseeable delay which results from an interruption of any public
utilities (e.g., electricity, gas, water, telephone) or other unusual and
unforeseeable delay not within the reasonable control of the party delayed in
performing work or doing acts required under the provisions of this Lease, then
performance of such act will be excused for the period of the delay and the
period for the performance of any such act will be extended for a period
equivalent to the period of such delay. The provisions of this Paragraph 33
will not operate to excuse Tenant from prompt payment of rent or any other
payments required under the provisions of this Lease.
34. SIGNS. Landlord will designate the location on the Premises for one Tenant
identification sign. Tenant agrees to have Landlord install and maintain
Tenant's identification sign in such designated location in accordance with this
Paragraph 34 at Tenant's sole cost and expense. Tenant has no right to install
Tenant identification signs in any other location in, on or about the Premises
or the Development and will not display or erect any other signs, displays or
other advertising materials that are visible from the exterior of the Building
or from within the Building in any interior or exterior common areas. The size,
design, color and other physical aspects of any and all permitted sign(s) will
be subject to (i) Landlord's written approval prior to installation, which
approval may be withheld in Landlord's discretion, (ii) any covenants,
conditions or restrictions governing the Premises, and (iii) any applicable
municipal or governmental permits and approvals. Tenant will be solely
responsible for all costs for installation, maintenance, repair and removal of
any Tenant identification sign(s). If Tenant fails to remove Tenant's sign(s)
upon termination of this Lease and repair any damage caused by such removal,
Landlord may do so at Tenant's sole cost and expense. Tenant agrees to
reimburse Landlord for all costs incurred by Landlord to effect any
installation, maintenance or removal on Tenant's account, which amount will be
deemed additional rent, and may include, without limitation, all sums disbursed,
incurred or deposited by Landlord including Landlord's costs, expenses and
actual attorneys' fees with interest thereon at the Interest Rate from the date
of Landlord's demand until paid by Tenant. Any sign rights granted to Tenant
under this Lease are personal to Tenant and may not be assigned, transferred or
otherwise conveyed to any assignee or subtenant of Tenant without Landlord's
prior written consent, which consent Landlord may withhold in its sole and
absolute discretion.
35. LIMITATION ON LIABILITY. In consideration of the benefits accruing
hereunder, Tenant on behalf of itself and all successors and assigns of Tenant
covenants and agrees that, in the event of any actual or alleged failure, breach
or default hereunder by Landlord: (a) Tenant's recourse against Landlord for
monetary damages will be limited to Landlord's interest in the Building
including, subject to the prior rights of any Mortgagee, Landlord's interest in
the rents of the Building and any insurance proceeds payable to Landlord; (b)
Except as may be necessary to secure jurisdiction of the partnership or company,
no partner or member of Landlord shall be sued or named as a party in any suit
or action and no service of process shall be made against any partner or member
of Landlord; (c) No partner or member of Landlord shall be required to answer
or otherwise plead to any service of process; (d) No judgment will be taken
against any partner or member of Landlord and any judgment taken against any
partner or member of Landlord may be vacated and set aside at any time after the
fact; (e) No writ of execution will be levied against the assets of any partner
or member of Landlord; (f) The obligations under this Lease do not constitute
personal obligations of the individual members, partners, directors, officers or
shareholders of Landlord, and Tenant shall not seek recourse against the
individual members, partners, directors, officers or shareholders of Landlord or
any of their personal assets for satisfaction of any liability in respect to
this Lease; and (g) These covenants and agreements are enforceable both by
Landlord and also by any partner or member of Landlord.
36. FINANCIAL STATEMENTS. Prior to the execution of this Lease by Landlord and
at any time during the Term of this Lease upon ten (10) days prior written
notice from Landlord, Tenant agrees to provide Landlord with a current financial
statement for Tenant and any guarantors of Tenant and financial statements for
the two (2) years prior to the current financial statement year for Tenant and
any guarantors of Tenant. Such statements are to be prepared in accordance with
generally accepted accounting principles and, if such is the normal practice of
Tenant, audited by an independent certified public accountant.
37. QUIET ENJOYMENT. Landlord covenants and agrees with Tenant that upon
Tenant paying the rent required under this Lease and paying all other charges
and performing all of the covenants and provisions on Tenant's part to be
observed and performed under this Lease, Tenant may peaceably and quietly have,
hold and enjoy the Premises in accordance with this Lease without hindrance or
molestation by Landlord or its employees or agents.
38. MISCELLANEOUS.
(a) CONFLICT OF LAWS. This Lease shall be governed by and construed solely
pursuant to the laws of the State, without giving effect to choice of law
principles thereunder.
(b) SUCCESSORS AND ASSIGNS. Except as otherwise provided in this Lease, all of
the covenants, conditions and provisions of this Lease shall be binding upon and
shall inure to the benefit of the parties hereto and their respective heirs,
personal representatives, successors and assigns.
(c) PROFESSIONAL FEES AND COSTS. If either Landlord or Tenant should bring
suit against the other with respect to this Lease, then all costs and
expenses, including without limitation, actual professional fees and costs
such as appraisers', accountants' and
-18-
<PAGE>
attorneys' fees and costs, incurred by the party which prevails in such action,
whether by final judgment or out of court settlement, shall be paid by the other
party, which obligation on the part of the other party shall be deemed to have
accrued on the date of the commencement of such action and shall be enforceable
whether or not the action is prosecuted to judgment. As used herein, attorneys'
fees and costs shall include, without limitation, attorneys' fees, costs and
expenses incurred in connection with any (i) postjudgment motions; (ii) contempt
proceedings; (iii) garnishment, levy, and debtor and third party examination;
(iv) discovery; and (v) bankruptcy litigation.
(d) TERMS AND HEADINGS. The words "Landlord" and "Tenant" as used herein shall
include the plural as well as the singular. Words used in any gender include
other genders. The paragraph headings of this Lease are not a part of this Lease
and shall have no effect upon the construction or interpretation of any part
hereof.
(e) TIME. Time is of the essence with respect to the performance of every
provision of this Lease in which time of performance is a factor.
(f) PRIOR AGREEMENT; AMENDMENTS. This Lease constitutes and is intended by the
parties to be a final, complete and exclusive statement of their entire
agreement with respect to the subject matter of this Lease. This Lease
supersedes any and all prior and contemporaneous agreements and understandings
of any kind relating to the subject matter of this Lease. There are no other
agreements, understandings, representations, warranties, or statements, either
oral or in written form, concerning the subject matter of this Lease. No
alteration, modification, amendment or interpretation of this Lease shall be
binding on the parties unless contained in a writing which is signed by both
parties.
(g) SEPARABILITY. The provisions of this Lease shall be considered separable
such that if any provision or part of this Lease is ever held to be invalid,
void or illegal under any law or ruling, all remaining provisions of this Lease
shall remain in full force and effect to the maximum extent permitted by law.
(h) RECORDING. Neither Landlord nor Tenant shall record this Lease nor a short
form memorandum thereof without the consent of the other.
(i) COUNTERPARTS. This Lease may be executed in one or more counterparts, each
of which shall constitute an original and all of which shall be one and the same
agreement.
(j) NONDISCLOSURE OF LEASE TERMS. Tenant acknowledges and agrees that the terms
of this Lease are confidential and constitute proprietary information of
Landlord. Disclosure of the terms could adversely affect the ability of Landlord
to negotiate other leases and impair Landlord's relationship with other tenants.
Accordingly, Tenant agrees that it, and its partners, officers, directors,
employees, agents and attorneys, shall not intentionally and voluntarily
disclose the terms and conditions of this Lease to any newspaper or other
publication or any other tenant or apparent prospective tenant of the Building
or other portion of the Development, or real estate agent, either directly or
indirectly, without the prior written consent of Landlord, provided, however,
that Tenant may disclose the terms to prospective subtenants or assignees under
this Lease.
(k) NON-DISCRIMINATION. Tenant acknowledges and agrees that there shall be no
discrimination against, or segregation of, any person, group of persons, or
entity on the basis of race, color, creed, religion, age, sex, marital status,
national origin, or ancestry in the leasing, subleasing, transferring,
assignment, occupancy, tenure, use, or enjoyment of the Premises, or any portion
thereof.
39. EXECUTION OF LEASE.
(a) JOINT AND SEVERAL OBLIGATIONS. If more than one person executes this Lease
as Tenant, their execution of this Lease will constitute their covenant and
agreement that (i) each of them is jointly and severally liable for the keeping,
observing and performing of all of the terms, covenants, conditions, provisions
and agreements of this Lease to be kept, observed and performed by Tenant, and
(ii) the term "Tenant" as used in this Lease means and includes each of them
jointly and severally. The act of or notice from, or notice or refund to, or the
signature of any one or more of them, with respect to the tenancy of this Lease,
including, but not limited to, any renewal, extension, expiration, termination
or modification of this Lease, will be binding upon each and all of the persons
executing this Lease as Tenant with the same force and effect as if each and all
of them had so acted or so given or received such notice or refund or so signed.
(b) TENANT AS CORPORATION OR PARTNERSHIP. If Tenant executes this Lease as a
corporation or partnership, then Tenant and the persons executing this Lease on
behalf of Tenant represent and warrant that such entity is duly qualified and in
good standing to do business in California and that the individuals executing
this Lease on Tenant's behalf are duly authorized to execute and deliver this
Lease on its behalf, and in the case of a corporation, in accordance with a duly
adopted resolution of the board of directors of Tenant, a copy of which is to be
delivered to Landlord on execution hereof, if requested by Landlord, and in
accordance with the by-laws of Tenant, and, in the case of a partnership, in
accordance with the partnership agreement and the most current amendments
thereto, if any, copies of which are to be delivered to Landlord on execution
hereof, if requested by Landlord, and that this Lease is binding upon Tenant in
accordance with its terms.
(c) EXAMINATION OF LEASE. Submission of this instrument by Landlord to Tenant
for examination or signature by Tenant does not constitute a reservation of or
option for lease, and it is not effective as a lease or otherwise until
execution by and delivery to both Landlord and Tenant.
IN WITNESS WHEREOF, the parties have caused this Lease to be duly executed by
their duly authorized representatives as of the date first above written.
-19-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
TENANT: LANDLORD:
NEW CENTURY FINANCIAL CORPORATION KOLL CENTER IRVINE NUMBER TWO,
a Delaware corporation a California limited partnership
By: /s/ BRAD A. MORRICE By: Connecticut General Life Insurance Company,
------------------------------ General Partner
Print Name: Brad A. Morrice
----------------- By: Cigna Investments, Inc.,
Print Title: President Its Authorized Agent
-----------------
By: By: /s/ STEPHEN I. OLSTEIN
------------------------------ -----------------------------------
Print Name: Print Name: Stephen I. Olstein
----------------- -----------------------------------------
Print Title: Print Title: Managing Director
----------------- -----------------------------
</TABLE>
-20-
<PAGE>
ADDENDUM TO LEASE
-----------------
This ADDENDUM is attached to, made a part of, incorporated into and
amends and supplements that certain Office Building Lease dated ___________,
1997 (the "Lease"), by and between KOLL CENTER IRVINE NUMBER TWO, a California
limited partnership ("Landlord"), and NEW CENTURY FINANCIAL CORPORATION, a
Delaware corporation ("Tenant"). Landlord and Tenant agree that,
notwithstanding anything contained in the Lease to the contrary, the provisions
set forth in this Addendum will be deemed to be a part of the Lease and will
supersede any contrary provision in the Lease and shall prevail and control for
all purposes. All references in the Lease and this Addendum to the defined term
"Lease" are to be construed to mean the Lease as amended and supplemented by
this Addendum. Terms which are not defined in this Addendum have the meanings
given to them in the Lease. The paragraphs below are numbered consecutively
with those in the Lease.
40. Option To Extend.
----------------
(a) Subject to the terms of this Paragraph 40 and Paragraph 42,
entitled "Options," Landlord hereby grants to Tenant an option (the
"Extension Option") to extend the Term of this Lease with respect to the
entire Premises (as expanded, if applicable) for one (1) additional period
of five (5) years (the "Option Term"), on the same terms, covenants and
conditions as provided for in this Lease during the initial Lease Term,
except that all economic terms such as, without limitation, Monthly Base
Rent, an Operating Expense Allowance, if any, parking charges, etc., shall
be established based on the "fair market rental rate" for the Premises for
the Option Term as defined and determined in accordance with the provisions
of this Paragraph 40 below.
(b) The Extension Option must be exercised, if at all, by written
notice ("Extension Notice") delivered by Tenant to Landlord no later than
the date which is two hundred seventy (270) days, and no earlier than the
date which is one (1) year, prior to the expiration of the then current
Term of this Lease.
(c) The term "fair market rental rate" as used in this Addendum
shall mean the annual amount per rentable square foot, projected during the
relevant period, that a willing, comparable, non-equity tenant (excluding
sublease and assignment transactions) would pay, and a willing, comparable
landlord of a comparable Class "A" quality office building located in the
Newport Beach-Irvine-Costa Mesa airport area ("Comparison Area") would
accept, at arm's length (what Landlord is accepting in current transactions
for the Building may be considered), for full-floor space, comparable in
quality and floor height as the leased area at issue, taking into account
the age, quality and layout of the existing improvements in the leased area
at issue, and taking into account items that professional real estate
brokers customarily consider, including, but not limited to, rental rates,
office space availability, tenant size, tenant improvement allowances,
operating expenses and allowance, parking charges, and any other lease
terms then being considered by Landlord or the lessors of such similar
office buildings.
(d) Landlord's determination of fair market rental rate shall be
delivered to Tenant in writing not later than thirty (30) days following
Landlord's receipt of Tenant's Extension Notice. Tenant will have thirty
(30) days ("Tenant's Review Period") after receipt of Landlord's notice of
the fair market rental rate within which to accept such fair market rental
rate or to object thereto in writing. Tenant's failure to object to the
fair market rental rate submitted by Landlord in writing within Tenant's
Review Period will conclusively be deemed Tenant's approval and acceptance
thereof. If Tenant objects to the fair market rental rate submitted by
Landlord within Tenant's Review Period, then Landlord and Tenant will
attempt in good faith to agree upon such fair market rental rate using
their best good faith efforts. If Landlord and Tenant fail to reach
agreement on such fair market rental rate within fifteen (15) days
following the expiration of Tenant's Review Period (the "Outside Agreement
Date"), then each party's determination will be submitted to appraisal in
accordance with the provisions below.
(e) (i) Landlord and Tenant shall each appoint one independent,
unaffiliated appraiser who shall by profession be a real estate broker who
has been active over the five (5) year period ending on the date of such
appointment in the leasing of high-rise office space in the Comparison
Area. Each such appraiser will be appointed within thirty (30) days after
the Outside Agreement Date.
(ii) The two (2) appraisers so appointed will within fifteen (15)
days of the date of the appointment of the last appointed appraiser agree
upon and appoint a third appraiser who shall be qualified under the same
criteria set forth herein above for qualification of the initial two (2)
appraisers.
(iii) The determination of the appraisers shall be limited
solely to the issue of whether Landlord's or Tenant's last proposed (as of
the Outside Agreement Date) new Monthly Base Rent for the Premises is the
closest to the actual new Monthly Base Rent for the Premises as determined
by the appraisers, taking into account the requirements of Paragraph (c)
and this Paragraph (e) regarding same.
(iv) The three (3) appraisers shall within thirty (30) days of
the appointment of the third appraiser reach a decision as to whether the
parties shall use Landlord's or Tenant's submitted new Monthly Base Rent,
and shall notify Landlord and Tenant thereof.
(v) The decision of the majority of the three (3) appraisers
shall be binding upon Landlord and Tenant. The cost of each party's
appraiser shall be the responsibility of the party selecting
ADDENDUM
--------
Page 1
<PAGE>
such appraiser, and the cost of the third appraiser (or arbitration, if
necessary) shall be shared equally by Landlord and Tenant.
(vi) If either Landlord or Tenant fails to appoint an appraiser
within the time period in Paragraph (e)(i) herein above, the appraiser
appointed by one of them shall reach a decision, notify Landlord and Tenant
thereof and such appraiser's decision shall be binding upon Landlord and
Tenant.
(vii) If the two (2) appraisers fail to agree upon and appoint a
third appraiser, both appraisers shall be dismissed and the matter to be
decided shall be forthwith submitted to arbitration under the provisions of
the American Arbitration Association.
(viii) In the event that the new Monthly Base Rent is not
established prior to end of the initial Term of the Lease, the Monthly Base
Rent immediately payable at the commencement of the Option Term shall be
the Monthly Base Rent payable in the immediately preceding month.
Notwithstanding the above, once the fair market rental is determined in
accordance with this section, the parties shall settle any overpayment or
underpayment on the next Monthly Base Rent payment date falling not less
than thirty (30) days after such determination.
41. Right to Lease Additional Space.
-------------------------------
(a) Subject to the terms of this Paragraph 41 and Paragraph 42,
entitled "Options," Tenant shall have a continuing right to lease (the
"Right to Lease") any space on the second (2nd) or ninth (9th) floors of
the Building in incremental sizes acceptable to Landlord, to the extent
such space becomes available for lease to third parties after the
expiration of any existing lease for such space during the initial Term or
the Option Term (if Tenant properly exercises its Extension Option),
including the expiration of all renewal or extension options under such
leases, and after the existing tenants or occupants vacate such space (the
"First Offer Space"). Tenant's Right to Lease is subject and subordinate
to the rights of all other tenants of the Building with rights relative to
any such First Offer Space granted prior to the date of this Lease. Thus,
Landlord's Economic Terms (as defined below) will be delivered to Tenant
only after Landlord has appropriately notified and received negative
responses from all other tenants with rights in the First Offer Space prior
to Tenant's rights. Additionally, Landlord reserves the right to renew the
leases (either on a month-to-month or fixed-term basis) of tenants in the
First Offer Space or allow such tenants to hold over with respect to any or
all of the First Offer Space, without giving rise to any of Tenant's rights
pursuant to this Right to Lease, as Landlord deems appropriate in its sole
and absolute discretion.
(b) As to First Offer Space which is unleased as of the date of
this Lease, promptly following Landlord's receipt of genuine interest from
a third party to lease such space, Landlord will give Tenant written notice
of such interest and the availability of such space ("Landlord's
Availability Notice"). As to First Offer Space which is leased on the date
of this Lease, promptly following written request ("Tenant Request") by
Tenant (which may not be given more than twice in any twelve (12)
consecutive month period), Landlord will give Tenant Landlord's
Availability Notice as to such space. Within five (5) business days
following delivery of Landlord's Availability Notice, Tenant will in
writing have the right to request from Landlord a written statement setting
forth the basic economic terms, including, but not limited to, Landlord's
determination (as provided in Paragraph 40(c) above) of the Monthly Base
Rent, an improvement allowance, if any, and all other economic terms and
conditions (collectively, the "Economic Terms"), upon which Landlord is
willing to lease the First Offer Space desired by Tenant.
(c) Within five (5) business days after receipt of the Economic
Terms from Landlord, Tenant must give Landlord written notice pursuant to
which Tenant shall elect to either (i) lease such First Offer Space upon
such Economic Terms and the same non-Economic Terms as set forth in this
Lease with respect to the Premises, or (ii) refuse to lease such First
Offer Space. Tenant's failure to timely choose either clause (i) or clause
(ii) above will be deemed to be Tenant's choice of clause (ii) above.
(d) If Tenant chooses (or is deemed to have chosen) clause
(c)(ii) above, then Tenant's Right to Lease any First Offer Space will be
null and void until Tenant once again validly delivers to Landlord a Tenant
Request, in which event, the procedures and sequences described above will
be followed. If Tenant exercises its Right to Lease as provided herein,
the parties will promptly thereafter execute an amendment to this Lease to
include the First Offer Space in the Premises and to document the lease
terms thereof. The Lease Term for any First Offer Space shall be
coterminous with the Lease Term for the original Premises. It shall be a
condition to the valid exercise by Tenant of its Right to Lease that
Tenant, within ten (10) days following such exercise, deliver to Landlord a
new Letter of Credit, if the Letter of Credit is still outstanding as
contemplated in Paragraph 44 below, in a greater amount commensurate with
the leasing commissions and maximum tenant improvement dollars to be
expended by Landlord pursuant to the terms of Tenant's leasing of such
First Offer Space.
42. Options.
-------
(a) As used in this Paragraph, the word "Option" means the
Extension Option pursuant to Paragraph 40 herein and the Right to Lease
pursuant to Paragraph 41 herein.
ADDENDUM
--------
Page 2
<PAGE>
(b) The Options are personal to the original Tenant executing
this Lease and may be exercised only by the original Tenant executing this
Lease while occupying the entire Premises (as expanded) and without the
intent of thereafter assigning this Lease or subletting the Premises (as
expanded) and may not be exercised or be assigned, voluntarily or
involuntarily, by any person or entity other than the original Tenant
executing this Lease. The Options are not assignable separate and apart
from this Lease, nor may any Option be separated from this Lease in any
manner, either by reservation or otherwise.
(c) Tenant shall have no right to exercise any Option,
notwithstanding any provision of the grant of Option to the contrary, and
Tenant's exercise of any Option may be nullified by Landlord and deemed of
no further force or effect, if (i) Tenant shall be in default of any
monetary obligation or material nonmonetary obligation under the terms of
this Lease as of Tenant's exercise of the Option in question or at any time
after the exercise of such Option and prior to the commencement of the
Option event, or (ii) Landlord has given Tenant two (2) or more notices of
default, whether or not such defaults are subsequently cured, during any
twelve (12) consecutive month period.
43. Mandatory Space Takedown.
------------------------
(a) Tenant hereby agrees to lease that certain space on the ninth
(9th) floor of the Building which consists of approximately 19,097 Rentable
(16,639 Usable) Square Feet as shown on Exhibit "A-II" attached hereto (the
--------------
"Takedown Space"). Tenant's lease of the Takedown Space shall take effect
on December 1, 1997, or earlier to the extent Tenant moves into any portion
of such space prior to such date ("Takedown Commencement Date"). Effective
upon the Takedown Commencement Date, the Takedown Space shall be included
within the Premises pursuant to the terms of this Lease and this Lease
shall govern Landlord's and Tenant's rights and obligations with respect to
the Takedown Space, provided, however, the improvement of the Takedown
Space shall be subject to the provisions of subparagraph (b) below.
(b) Landlord and Tenant agree that the Takedown Space is to be
improved prior to the Takedown Commencement Date in a manner similar to the
improvement of the original portions of the Premises pursuant to the floor
plan and buildout specifications which will be approved by Landlord and
Tenant pursuant to the terms of the Work Letter Agreement which is attached
to this Lease as Exhibit "C". Landlord and Tenant agree that Tenant shall
-----------
receive a prorated "Allowance" which shall be applied by Landlord to the
costs of improving the Takedown Space, which shall be accomplished in a
manner consistent with the terms of the Work Letter Agreement. For
purposes of calculating the prorated amount of the Allowance as applied to
the Takedown Space, the Allowance shall be Fifteen Dollars ($15.00) per
Usable Square Foot of the Takedown Space multiplied by a fraction, the
numerator of which is the number of full months remaining in the original
Lease Term from the Takedown Commencement Date (i.e., December 1, 1997),
----
and the denominator of would be 60. Tenant acknowledges that in no event
will Landlord be required to commence incurring costs with respect to the
design and improvement of the Takedown Space until the amount secured by
the Letter of Credit has stepped-up to the full amount required to be
secured thereby (i.e., $1,221,320.00).
(c) The term of Tenant's lease of the Takedown Space shall expire
coterminously with the Term of Tenant's lease of the original Premises.
Even though Monthly Base Rent on the Takedown Space will commence on the
Takedown Commencement Date, Landlord will not be obligated to deliver
possession of the Takedown Space to Tenant until Tenant pays to Landlord
(i) the first installment of $34,756.54 in Monthly Base Rent on the
Takedown Space, calculated at the rate provided in Paragraph 1(m) of this
Lease, and (ii) an additional $38,232.19 in cash Security Deposit (110% of
the amount of the Monthly Base Rent described in clause (i) immediately
preceding). Tenant acknowledges that the portion of the Takedown Space
which is Suite 910, consisting of approximately 1,158 Rentable Square Feet,
is not scheduled to be vacant until October 31, 1997. Accordingly, Monthly
Base Rent on Suite 910 will commence to accrue on the day which is sixty
(60) days after the existing occupant vacates Suite 910.
ADDENDUM
--------
Page 3
<PAGE>
44. Letter of Credit.
----------------
(a) On or before April 15, 1997, Tenant shall deliver to Landlord
an unconditional, irrevocable letter of credit ("Letter of Credit") in the
amount and substantially in the form attached hereto as Exhibit "J" and
-----------
otherwise satisfactory to Landlord in its sole discretion. Tenant's
failure to timely deliver to Landlord the Letter of Credit will constitute
a material default under this Lease, as to which Landlord will have all
rights and remedies. Additionally, for each day after April 15, 1997 that
Tenant fails to deliver to Landlord the Letter of Credit, such day shall
constitute a day of Tenant Delay as contemplated in the Work Letter
Agreement. Until Tenant delivers to Landlord the Letter of Credit, Tenant
acknowledges that Landlord will not be required to incur any costs in
connection with the design and construction of the Tenant Improvements,
other than as may have already been incurred by Landlord pursuant to the
terms of the Design Work Reimbursement Agreement between Landlord and
Tenant, the terms of which shall survive the execution of this Lease
(notwithstanding anything to the contrary contained in such Agreement) and
Tenant will be responsible for all amounts incurred by Landlord pursuant to
such Agreement. The Letter of Credit shall be held by Landlord as Security
Deposit to secure Tenant's faithful performance of Tenant's obligations
under this Lease. The Letter of Credit shall be issued by a financial
institution acceptable to Landlord in its sole discretion and such
financial institution must have an established presence in Orange County,
California and the Letter of Credit must be presentable in Orange County;
provided, however, Landlord initially approves First Bank as the issuer of
the Letter of Credit and acknowledges that draws will be required to be
presented in Minneapolis, Minnesota. If Tenant fails to pay rent, or
otherwise defaults with respect to any provision of this Lease and fails to
cure any such default after Landlord has given any notice required under
this Lease (provided Landlord is not barred by applicable law from giving
such notice), Landlord may execute one or more drafts on the Letter of
Credit for the payment of any rent or for the payment of any other sum for
which Landlord may become entitled by reason of Tenant's default, or for
any payment to which Landlord may become entitled by reason of Tenant's
default, or for payment to Landlord for any loss or damage which Landlord
may suffer thereby. The Letter of Credit shall contain language allowing
Landlord to draw upon the Letter of Credit upon presentation to the issuer
of the Letter of Credit of Landlord's written statement that Landlord is
entitled to the funds represented by such Letter of Credit in accordance
with the terms of this Lease. Notification of or approval by Tenant prior
to any drawing upon the Letter of Credit shall not be required. Landlord
and Tenant agree that Landlord may draw upon the Letter of Credit without
notice to Tenant upon the occurrence or non-occurrence of any event
entitling Landlord under this Lease to apply any portion of the Security
Deposit. If Landlord so uses or applies all or any portion of said
Security Deposit, Tenant shall, within ten (10) days after written demand
therefor, at Landlord's sole option, (i) deposit cash with Landlord in lieu
of the Letter of Credit in amount drawn or (ii) deliver a replacement
Letter of Credit in the amount drawn so that the total funds for the
Security Deposit equals the required amount, and Tenant's failure to do so
shall be material breach of this Lease.
(b) The initial Letter of Credit steps up to the maximum amount
of $1,221,320. Such amount was derived by assuming the full amount of the
tenant improvement allowances ($817,806 in the aggregate) will be expended
by Landlord as contemplated in this Lease. After the entire Premises
(including the Takedown Space) has been built out and Landlord has
determined exactly how much it spent, until the first anniversary of the
Commencement Date (provided Tenant is not in default under this Lease),
Tenant may substitute the initial Letter of Credit for a new Letter of
Credit (otherwise satisfying and subject to the provisions set forth in
subparagraph (a) above) in an amount equal to the difference between
$1,221,320 and the portion of the aggregate tenant improvements allowances
($817,806) not expended by Landlord. By way of example, if Landlord only
spends $796,486 on improving the Premises (including the Takedown Space),
then the replacement Letter of Credit would be in the amount of $1,200,000.
The expiration date of the replacement Letter of Credit shall be no earlier
than the expiration of the initial Letter of Credit.
(c) No later than thirty (30) days prior to the expiration of the
Letter of Credit initially delivered to Landlord or any replacement or
renewal thereof, Tenant shall deliver a new Letter of Credit substantially
the same in form (except as provided in subparagraph (d) below and except
that the new Letter of Credit will not step-up in amount as contemplated in
the form of Letter of Credit attached hereto as Exhibit "J" ) as the then
-----------
existing Letter of Credit held by Landlord except that the expiration date
set forth in such new Letter of Credit shall not be earlier than twelve
(12) months after the expiration date set forth in the Letter of Credit
which is then being replaced and the issuer may be changed by Tenant to a
financial institution acceptable to Landlord in its sole discretion. If
Tenant fails to deliver a new Letter of Credit as required herein by this
subparagraph (c), Landlord shall have the right, at its sole option, to
draw on and present the then existing Letter of Credit for the entire
amount remaining available thereunder. Until such time as Tenant shall
thereafter deliver a new Letter of Credit in the form and substance
required hereunder, Landlord shall retain possession of funds so drawn as
Security Deposit to secure Tenant's faithful obligations under this Lease.
Any such replacement Letter of Credit shall satisfy and be subject to the
provisions set forth in subparagraph (a) above. Should the Letter of
Credit then in effect be revoked or should the creditworthiness of the
issuer of the Letter of Credit then in effect become impaired (in
Landlord's sole judgment), then Tenant shall deliver a replacement Letter
of Credit in form and substance required hereunder.
ADDENDUM
--------
Page 4
<PAGE>
(d) On each anniversary of the date of issuance of the initial
Letter of Credit delivered to Landlord pursuant to the terms of
subparagraph (a) above, the amount secured by the Letter of Credit (as
increased pursuant to the terms of Paragraph 41(d) hereof, if applicable)
shall be reduced by twenty percent (20%) of the current amount of the
Letter of Credit, provided Landlord has not previously sent a notice of
default (provided Landlord is not barred by applicable law from giving such
notice) to Tenant relative to any monetary or material nonmonetary
provision of this Lease (whether or not such default was later cured).
(e) If Landlord transfers its interest under this Lease, within
ten (10) days following demand by Landlord, Tenant shall at its cost
deliver to the transferee a replacement Letter of Credit naming such
transferee (rather than Landlord) as the beneficiary thereunder. On or
after the second anniversary of the Commencement Date, Tenant may submit to
Landlord audited (by a "Big Six" accounting firm) financial statements for
Tenant showing Tenant having either a net worth equal to or greater than
$25,000,000 or retained earnings equal to or greater than $10,000,000, for
at least the four (4) most recent consecutive fiscal quarters of Tenant.
If Tenant can satisfy such requirement and Landlord has not previously
deliver to Tenant a notice of default under this Lease (provided Landlord
is not barred by applicable law from giving such notice) with respect to
any monetary or material nonmonetary provision of this Lease (whether or
not such default was later cured), then Landlord will return to Tenant the
Letter of Credit.
45. Satellite Dish. Provided Tenant executes and delivers to Landlord
--------------
the Satellite Antenna License Agreement in the form attached to this Lease as
Exhibit "I" and Tenant is not in default under this Lease at the time of such
execution and delivery, Tenant may install one (1) antenna or satellite dish on
the roof of the Building, subject to compliance with all of the terms and
conditions of the Satellite Antenna License Agreement. As provided in such
Agreement, the rent will be $250.00 per month with annual, compounding 4%
increases.
46. ADA. Tenant shall be responsible for causing, at Tenant's sole
---
cost and expense, the Premises (which includes the elevator lobbies and
restrooms on the 10th and 11th floors) to comply with the Americans With
Disabilities Act of 1990, as subsequently amended (the "ADA"), and all similar
federal, state and local laws, rules and regulations and subsequent amendments
thereof. Landlord shall be responsible for causing, as and when deemed
appropriate by Landlord, the Common Areas of the remainder of the Building
(including the elevator lobbies and restrooms, if any, on the ground and 9th
floors) to comply with the ADA, the costs for which shall constitute a component
of Operating Expenses, except to the extent such costs are incurred as a result
of Tenant's specific use of the Premises, or as a result of any Alterations to
the Premises made by or on behalf of Tenant.
47. Adjacent Restaurant Use. Tenant acknowledges that a restaurant
-----------------------
operation is or will be located immediately adjacent to the ground floor portion
of the Premises and that as a result of such restaurant use, Tenant may
experience mild odors, noise and other mild inconveniences associated with such
use. Tenant shall not be entitled to cancel this Lease, abate or reduce rent or
other sums due hereunder, or otherwise to allege or claim as to Landlord any
damages, losses or other consideration arising out of or attributable to such
use.
48. Parking. Tenant shall be entitled to a maximum of five (5), and
-------
will pay for, whether or not Tenant uses, a minimum of three (3), unreserved
employee parking spaces per 1,000 Usable Square Feet of the Premises from time
to time leased by Tenant. The rental rate for the unreserved parking spaces used
by Tenant, subject to the minimum and maximum amounts described above, will be
in accordance with the following schedule:
<TABLE>
<CAPTION>
Rate Per Stall
Months Per Month
------ ---------------
<S> <C>
1 - 24 $40.00
25 - 48 $50.00
49 - 60 $60.00
</TABLE>
At Landlord's option, upon providing Tenant with no less than thirty
(30) days prior written notice, Landlord may relocate up to fifty percent (50%)
of the above-referenced parking spaces to the top level of the parking structure
and Tenant will cooperate with Landlord in enforcing such arrangement. With
respect to any such relocated parking spaces, Tenant's parking rate will be as
follows:
<TABLE>
<CAPTION>
Rate Per Stall
Months Per Month
------ ---------------
<S> <C>
1 - 24 $40.00
25 - 36 $45.00
37 - 60 $50.00
</TABLE>
Tenant will also be entitled to use, and will pay for whether or not
Tenant uses, seven (7) reserved parking spaces at the rate of $100.00 per stall
per month throughout the original Lease Term. Such reserved parking spaces may
be included within the minimum number of parking spaces required to be paid for
by Tenant as described above in connection with the unreserved parking stalls.
The location of the reserved parking spaces is shown on Exhibit "K" attached
-----------
hereto.
49. Signage. In accordance with the terms of Paragraph 34 of this
-------
Lease, Tenant will be entitled to two (2) building top signs, which will say New
Century, in the location designated by Landlord.
ADDENDUM
--------
Page 5
<PAGE>
50. Arbitration. If Landlord and Tenant dispute whether or not
-----------
Tenant may abate rent pursuant to the terms of Paragraph 17 of this Lease, or
the amount thereof ("Dispute"), then such Dispute, if timely demanded pursuant
to Subparagraph (a) below, shall be resolved and adjudicated by binding
arbitration in accordance with Title 9 of the California Code of Civil
Procedure, Section 1280, et seq., except to the extent otherwise specified
herein. The arbitrator shall be a neutral, disinterested retired judge selected
by the parties from a panel of retired judges available through the Judicial
Arbitration and Mediation Service ("JAMS") or, if JAMS or its successor does not
then exist, by any other arbitrator or retired judge affiliated with a private,
disinterested association providing arbitration services. Should the parties
fail to agree on the selection of a disinterested, neutral arbitrator within
twenty (20) days of written demand accompanied by written notice of the Dispute
by either party, either party may petition a California court of competent
jurisdiction and proper venue to appoint an arbitrator pursuant to Code of Civil
Procedure Section 1281.6. The arbitration shall be held within sixty (60) days
after the selection of the arbitrator. The provisions of Code of Civil
Procedure Section 1283.05, allowing for the taking of depositions for discovery
purposes in arbitration proceedings, are hereby expressly adopted and agreed to
by the parties. Any hearings required for purposes of the arbitration shall be
in Orange County, California, at the offices of the arbitrator or such other
place designated by the arbitrator. The arbitration procedure shall be subject
to the following:
(a) Any demand for arbitration shall be in writing and must be
made and served on the other party within a reasonable time after the
Dispute has arisen and in no event shall the demand for arbitration be made
after the earlier of the date which is (i) thirty (30) days after service
by either party of summons and complaint, the subject matter of which is
essentially identical with the subject matter of the demand for
arbitration, or (ii) the date that institution of legal or equitable
proceedings based on such Dispute would be barred by the applicable statute
of limitations.
(b) The provisions of this Paragraph 50 are not intended to
require Landlord to arbitrate any matters relating to a default by Tenant
under this Lease, which matters shall, at the election of Landlord, be
governed by the applicable provisions of this Lease and/or applicable law.
(c) All proceedings involving the parties shall be reported by a
certified shorthand court reporter and written transcripts of the
proceedings shall be prepared and made available to the parties.
(d) The arbitrator shall prepare and deliver to the parties
factual findings in writing which shall include the reasons on which the
decision of the arbitrator is based. The arbitrator shall be bound by the
provisions of this Lease, and shall not add to, subtract from or otherwise
modify such provisions.
(e) Final decision by the arbitrator must be provided to the
parties within thirty (30) days from the date on which the matter is
submitted to the arbitrator.
(f) The prevailing party (as defined below) shall be awarded
reasonable attorneys' fees, expert and nonexpert witness costs and expenses
(including without limitation the fees and costs of the court reporter
described in Subparagraph (c) above), and other costs and expenses incurred
in connection with the arbitration, unless the arbitrator for good cause
determines otherwise.
(g) As used herein, the term "prevailing party" shall mean the
party, if any, that the arbitrator determines is "clearly the prevailing
party."
(h) Costs and fees of the arbitrator shall be borne by the
nonprevailing party, unless the arbitrator for good cause determines
otherwise. If there is no prevailing party, the parties shall bear their
own fees and costs and split the fees and costs of the arbitrator and court
reporter.
(i) The award or decision of the arbitrator, which may include
equitable relief, shall be final and judgment may be entered on it in
accordance with applicable law in any court having jurisdiction over the
matter. The provisions of this Paragraph 50 are not intended to alter the
applicable provisions of law which provide the grounds on which a court may
vacate an arbitration award.
ADDENDUM
--------
Page 6
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
TENANT: LANDLORD:
NEW CENTURY FINANCIAL CORPORATION KOLL CENTER IRVINE NUMBER TWO,
a Delaware corporation a California limited partnership
By: By: Connecticut General Life Insurance Company,
----------------------------- General Partner
Print Name:
---------------------- By: Cigna Investments, Inc.,
Print Title: Its Authorized Agent
---------------------
By: By:
----------------------------- ---------------------------------------
Print Name: Print Name:
------------------ ----------------------------
Print Title: Print Title:
------------------- ----------------------------
</TABLE>
ADDENDUM
--------
Page 7
<PAGE>
SITE PLAN
---------
[To be supplied]
EXHIBIT "A=1"
-------------
<PAGE>
OUTLINE OF FLOOR
PLAN OF PREMISES
----------------
[To be supplied]
EXHIBIT "A-II"
--------------
Page 1
<PAGE>
EXHIBIT "A=II"
--------------
Page 2
<PAGE>
EXHIBIT "A=II"
--------------
Page 3
<PAGE>
EXHIBIT "A=II"
--------------
Page 4
<PAGE>
RENTABLE SQUARE FEET AND USABLE SQUARE FEET
-------------------------------------------
1. The term "Rentable Square Feet" as used in the Lease will be deemed to
include: (a) with respect to the Premises, the usable area of the Premises
determined in accordance with the Method for Measuring Floor Area in Office
Buildings, ANSI Z65.1-1980 (the "BOMA Standard"), plus a pro rata portion of
the main lobby area on the ground floor and all elevator machine rooms,
electrical and telephone equipment rooms and mail delivery facilities and
other areas used by all tenants of the Building, if any, plus (i) for single
tenancy floors, all the area covered by the elevator lobbies, corridors,
special stairways, restrooms, mechanical rooms, electrical rooms and
telephone closets on such floors, or (ii) for multiple tenancy floors, a pro-
rata portion of all of the area covered by the elevator lobbies, corridors,
special stairways, restrooms, mechanical rooms, electrical rooms and
telephone closets on such floor; and (b) with respect to the Building, the
total rentable area for all floors in the Building computed in accordance
with the provisions of Subparagraph 1(a) above. In calculating the "Rentable
Square Feet" of the Premises or the Building, the area contained within the
exterior walls of the Building stairs, fire towers, vertical ducts, elevator
shafts, flues, vents, stacks and major pipe shafts will be excluded.
2. The term "Usable Square Feet" as used in Exhibit "C" with respect to the
-----------
Premises will be deemed to include the usable area of the Premises as
determined in accordance with the BOMA Standard.
3. For purposes of establishing Tenant's Percentage, Tenant's Operating Expense
Allowance, and Monthly Base Rent as shown in Paragraph 1 of the Lease, the
number of Rentable Square Feet of the Premises is deemed to be as set forth
in Subparagraph 1(g) of the Lease, and the number of Rentable Square Feet of
the Building is deemed to be as set forth in Subparagraph 1(f) of the Lease.
For purposes of establishing the amount of the Tenant Improvement Allowance
in Exhibit "C", the number of Usable Square Feet of the Premises is deemed to
-----------
be as set forth in Subparagraph 1(g). From time to time at Landlord's
option, Landlord's architect may redetermine the actual number of Rentable
Square Feet of the Premises, and the Building, and the actual number of
Usable Square Feet of the Premises respectively, based upon the criteria set
forth in Paragraph 1 and Paragraph 2 above, which determination will be
conclusive, and thereupon Tenant's Percentage, Tenant's Operating Expense
Allowance, Monthly Base Rent and the Tenant Improvement Allowance will be
adjusted accordingly.
EXHIBIT "B"
-----------
<PAGE>
WORK LETTER AGREEMENT
---------------------
[ALLOWANCE]
This WORK LETTER AGREEMENT ("Work Letter Agreement") is entered into as of the
day of , 19 by and between KOLL CENTER IRVINE NUMBER TWO, a
California limited partnership ("Landlord"), and NEW CENTURY FINANCIAL
CORPORATION, a Delaware corporation ("Tenant").
R E C I T A L S :
----------------
A. Concurrently with the execution of this Work Letter Agreement, Landlord and
Tenant have entered into a lease (the "Lease") covering certain premises (the
"Premises") more particularly described in Exhibit "A" attached to the Lease.
-----------
All terms not defined herein have the same meaning as set forth in the Lease.
To the extent applicable, the provisions of the Lease are incorporated herein by
this reference.
B. In order to induce Tenant to enter into the Lease and in consideration of the
mutual covenants hereinafter contained, Landlord and Tenant agree as follows:
1. TENANT IMPROVEMENTS. As used in the Lease and this Work Letter Agreement,
-------------------
the term "Tenant Improvements" or "Tenant Improvement Work" means those items of
general tenant improvement construction shown on the Final Plans (described in
Paragraph 4 below), more particularly described in Paragraph 5 below. Landlord
and Tenant contemplate that Landlord will bid the Tenant Improvement Work (using
the same bid package, including required construction deadlines) to three
contractors, two of which will be selected by Landlord and the third of which
("Tenant's Contractor") will be selected by Tenant, but subject to Landlord's
reasonable approval. Landlord will select the lowest responsive bidder;
provided, however, if Tenant's Contractor is not the lowest responsive bidder
but Tenant's Contractor's bid is within $10,000 of the lowest responsive bidder,
then Landlord agrees to contract with Tenant's Contractor to construct the
Tenant Improvement Work. The Contractor selected by Landlord to construct the
Tenant Improvement Work in accordance with the foregoing is referred to in this
Work Letter Agreement as the "Approved Contractor." The contractors selected by
Landlord shall have a minimum of five (5) business days to bid the Tenant
Improvement Work and if any such contractor takes longer to submit a bid and all
required permits are in hand such that waiting for the missing bid(s) will delay
commencement of construction of the Tenant Improvements, then Landlord will only
consider the bid(s) timely received and will not wait for any other bid(s).
Landlord has agreed to contract with Tenant's Architect to produce the Space
Plans and the Final Plans (as defined below), who is referred to herein as
"Tenant's Architect." The Approved Contractor will be required to use
Landlord's designated engineers to design, and Landlord's designated
subcontractors to install, the mechanical, electrical and fire and life safety
system portions of the Tenant Improvement Work ("Landlord's Subcontractors and
Engineers").
2. WORK SCHEDULE. Within ten (10) days after the execution of this Lease,
-------------
Landlord will deliver to Tenant, for Tenant's review and approval, a schedule
("Work Schedule") which will set forth the timetable for the planning and
completion of the installation of the Tenant Improvements and the Commencement
Date of the Lease. The Work Schedule will set forth each of the various items
of work to be done or approval to be given by Landlord and Tenant in connection
with the completion of the Tenant Improvements. The Work Schedule will be
submitted to Tenant for its approval, which approval Tenant agrees not to
unreasonably withhold, and, once approved by both Landlord and Tenant, the Work
Schedule will become the basis for completing the Tenant Improvements. All
plans and drawings required by this Work Letter Agreement and all work performed
pursuant thereto are to be prepared and performed in accordance with the Work
Schedule. If Tenant fails to approve the Work Schedule, as it may be modified
after discussions between Landlord and Tenant within five (5) business days
after the date the Work Schedule is first received by Tenant, the Work Schedule
shall be deemed to be approved by Tenant as submitted or Landlord may, at its
option, terminate the Lease upon written notice to Tenant.
3. CONSTRUCTION REPRESENTATIVES. Landlord hereby appoints the following
----------------------------
person(s) as Landlord's representative ("Landlord's Representative") to act for
Landlord in all matters covered by this Work Letter Agreement: Scott Sheridan
--------------
Tenant hereby appoints the following person(s) as Tenant's representative
("Tenant's Representative") to act for Tenant in all matters covered by this
Work Letter Agreement: Bill Dodge.
----------
All communications with respect to the matters covered by this Work Letter
Agreement are to made to Landlord's Representative or Tenant's Representative,
as the case may be, in writing in compliance with the notice provisions of the
Lease. Either party may change its representative under this Work Letter
Agreement at any time by written notice to the other party in compliance with
the notice provisions of the Lease.
4. TENANT IMPROVEMENT PLANS.
------------------------
(a) PREPARATION OF SPACE PLANS. In accordance with the Work Schedule, Landlord
--------------------------
agrees to meet with Tenant's Architect for the purpose of promptly preparing
preliminary space plans for the layout of Premises ("Space Plans"). The Space
Plans are to be sufficient to convey the architectural design of the Premises
and layout of the Tenant Improvements therein and are to be submitted to
Landlord in accordance with the Work Schedule for Landlord's approval. If
Landlord reasonably disapproves any aspect of the Space Plans, Landlord will
advise Tenant in writing of such disapproval and the reasons therefor in
accordance with the Work Schedule. Tenant will then cause Tenant's Architect to
submit to Landlord for Landlord's approval, in accordance with the Work
Schedule, a redesign of the Space Plans incorporating the revisions reasonably
required by Landlord.
EXHIBIT "C"
-----------
Page 1
<PAGE>
(b) PREPARATION OF FINAL PLANS. Based on the approved Space Plans, and in
--------------------------
accordance with the Work Schedule, Tenant will cause Tenant's Architect to
prepare complete architectural plans, drawings and specifications and complete
engineered mechanical, structural and electrical working drawings for all of the
Tenant Improvements for the Premises (collectively, the "Final Plans"). The
Final Plans will show: (a) the subdivision (including partitions and walls),
layout, lighting, finish and decoration work (including carpeting and other
floor coverings) for the Premises; (b) all internal and external communications
and utility facilities which will require conduiting or other improvements from
the base Building shell work and/or within common areas; and (c) all other
specifications for the Tenant Improvements. The Final Plans will be submitted to
Landlord for signature to confirm that they are consistent with the Space Plans.
If Landlord reasonably disapproves any aspect of the Final Plans based on any
inconsistency with the Space Plans, Landlord agrees to advise Tenant in writing
of such disapproval and the reasons therefor within the time frame set forth in
the Work Schedule. In accordance with the Work Schedule, Tenant will then cause
Tenant's Architect to redesign the Final Plans incorporating the revisions
reasonably requested by Landlord so as to make the Final Plans consistent with
the Space Plans.
(c) REQUIREMENTS OF TENANT'S FINAL PLANS. Tenant's Final Plans will include
------------------------------------
locations and complete dimensions, and the Tenant Improvements, as shown on
Final Plans, will (i) be compatible with the Building shell and with the design,
construction and equipment of the Building; (ii) if not comprised of the
Building standards set forth in the written description thereof (the
"Standards"), then compatible with and of at least equal quality as the
Standards and approved by Landlord; (iii) comply with all applicable laws,
ordinances, rules and regulations of all governmental authorities having
jurisdiction, and all applicable insurance regulations; (iv) not require
Building service beyond the level normally provided to other tenants in the
Building and will not overload the Building floors; and (v) be of a nature and
quality consistent with the overall objectives of Landlord for the Building, as
determined by Landlord in its reasonable but subjective discretion.
(d) SUBMITTAL OF FINAL PLANS. Once approved by Landlord and Tenant, Tenant
------------------------
will cause Tenant's Architect to submit the Final Plans to the appropriate
governmental agencies for plan checking and the issuance of a building permit.
Tenant will cause Tenant's Architect to, with Landlord's cooperation, make any
changes to the Final Plans which are requested by the applicable governmental
authorities to obtain the building permit. After approval of the Final Plans no
further changes may be made without the prior written approval of both Landlord
and Tenant, and then only after agreement by Tenant to pay any excess costs
resulting from the design and/or construction of such changes. Tenant hereby
acknowledges that any such changes will be subject to the terms of Paragraph 10
below.
(e) CHANGES TO SHELL OF BUILDING. If the Final Plans or any amendment thereof
----------------------------
or supplement thereto shall require changes in the Building shell, the increased
cost of the Building shell work caused by such changes will be paid for by
Tenant or charged against the "Allowance" described in Paragraph 5 below.
(f) WORK COST ESTIMATE AND STATEMENT. Prior to the commencement of
--------------------------------
construction of any of the Tenant Improvements shown on the Final Plans,
Landlord will cause the Approved Contractor to submit to Tenant a written
estimate of the cost to complete the Tenant Improvement Work, which written
estimate will be based on the Final Plans taking into account any modifications
which may be required to reflect changes in the Final Plans required by the City
or County in which the Premises are located (the "Work Cost Estimate"). Tenant
will either approve the Work Cost Estimate or disapprove specific items and
submit to Landlord revisions to the Final Plans to reflect deletions of and/or
substitutions for such disapproved items. Submission and approval of the Work
Cost Estimate will proceed in accordance with the Work Schedule. Upon Tenant's
approval of the Work Cost Estimate (such approved Work Cost Estimate to be
hereinafter known as the "Work Cost Statement"), Landlord will have the right to
purchase materials and to commence the construction of the items included in the
Work Cost Statement pursuant to Paragraph 6 hereof. If the total costs reflected
in the Work Cost Statement exceed the Allowance described in Paragraph 5 below,
Tenant agrees to pay such excess, as additional rent, within five (5) business
days after Tenant's approval of the Work Cost Estimate. Throughout the course of
construction, any differences between the estimated Work Cost in the Work Cost
Statement and the actual Work Cost will be determined by Landlord and
appropriate adjustments and payments by Landlord or Tenant, as the case may be,
will be made within five (5) business days thereafter.
5. PAYMENT FOR THE TENANT IMPROVEMENTS.
-----------------------------------
(a) ALLOWANCE. Landlord hereby grants to Tenant a tenant improvement allowance
---------
(the "Allowance") of the amount set forth in Paragraph 1(p) of the Lease.
The Allowance is to be used only for:
(i) Payment of the cost of preparing the Space Plans and the Final Plans,
including mechanical, electrical, plumbing and structural drawings and of all
other aspects necessary to complete the Final Plans. The Allowance will not be
used for the payment of extraordinary design work not consistent with the scope
of the Standards (i.e., above-standard design work) or for payments to any other
consultants, designers or architects other than Landlord's engineers and
architect and/or Tenant's Architect.
(ii) The payment of plan check, permit and license fees relating to construction
of the Tenant Improvements.
(iii) Construction of the Tenant Improvements, including, without limitation,
the following:
(aa) Installation within the Premises of all partitioning, doors, floor
coverings, ceilings, wall coverings and painting, millwork and similar items;
(bb) All electrical wiring, lighting fixtures, outlets and switches, and other
electrical work necessary for the Premises;
(cc) The furnishing and installation of all duct work, terminal boxes, diffusers
and accessories necessary for the heating, ventilation and air conditioning
systems within the Premises, including the cost of meter and key control for
after-hour air conditioning;
(dd) Any additional improvements to the Premises required for Tenant's use of
the Premises including, but not limited to, odor control, special heating,
ventilation and air conditioning, noise or vibration control or other special
systems or improvements;
EXHIBIT "C"
-----------
Page 2
<PAGE>
(ee) All fire and life safety control systems such as fire walls, sprinklers,
halon, fire alarms, including piping, wiring and accessories, necessary for
the Premises;
(ff) All plumbing, fixtures, pipes and accessories necessary for the Premises;
(gg) Testing and inspection costs; and
(hh) Fees for the contractor and tenant improvement coordinator including, but
not limited to, fees and costs attributable to general conditions associated
with the construction of the Tenant Improvements.
(iv) All other costs to be expended by Landlord in the construction of the
Tenant Improvements, including those costs incurred by Landlord for construction
of elements of the Tenant Improvements in the Premises, which construction was
performed by Landlord prior to the execution of this Lease by Landlord and
Tenant and which construction is for the benefit of tenants and is customarily
performed by Landlord prior the execution of leases for space in the Building
for reasons of economics (examples of such construction would include, but not
be limited to, the extension of mechanical [including heating, ventilating and
air conditioning systems] and electrical distribution systems outside of the
core of the Building, wall construction, column enclosures and painting outside
of the core of the Building, ceiling hanger wires and window treatment).
(b) EXCESS COSTS. The cost of each item referenced in Paragraph 5(a) above
------------
shall be charged against the Allowance. If the Work Cost exceeds the Allowance,
Tenant agrees to pay to Landlord such excess including fees for the Approved
Contractor and Landlord's standard five percent (5%) fee for the tenant
improvement coordinator associated with the supervision of such excess work
prior to the commencement of construction within ten (10) business days after
invoice therefor (less any sums previously paid by Tenant for such excess
pursuant to the Work Cost Estimate). In no event (except as provided in
subparagraph (e) below) will the Allowance be used to pay for Tenant's
furniture, artifacts, equipment, telephone systems or any other item of personal
property which is not affixed to the Premises.
(c) CHANGES. If, after the Final Plans have been prepared and the Work Cost
-------
Statement has been established, Tenant requires any changes or substitutions to
the Final Plans, any additional costs related thereto including fees for the
Approved Contractor and Landlord's standard five percent (5%) fee for the tenant
improvement coordinator associated with the supervision of such changes or
substitutions are to be paid by Tenant to Landlord prior to the commencement of
construction of the Tenant Improvements. Any changes to the Final Plans will be
approved by Landlord and Tenant in the manner set forth in Paragraph 4 above and
will, if necessary, require the Work Cost Statement to be revised and agreed
upon between Landlord and Tenant in the manner set forth in Subparagraph 4(f)
above. Landlord will have the right to decline Tenant's request for a change to
the Final Plans if such changes are inconsistent with the provisions of
Paragraph 4 above, or if the change would unreasonably delay construction of the
Tenant Improvements and the Commencement Date of the Lease.
(d) GOVERNMENTAL COST INCREASES. If increases in the cost of the Tenant
---------------------------
Improvements as set forth in the Work Cost Statement are due to requirements of
any governmental agency, Tenant agrees to pay Landlord the amount of such
increase including fees for the Approved Contractor and Landlord's standard five
percent (5%) fee for the tenant improvement coordinator associated with the
supervision of such additional work within ten (10) days of Landlord's written
notice; provided, however, that Landlord will first apply toward any such
increase any remaining balance of the Allowance.
(e) UNUSED ALLOWANCE AMOUNTS. Any unused portion of the Allowance upon
------------------------
completion of the Tenant Improvements will not be refunded to Tenant or be
available to Tenant as a credit against any obligations of Tenant under the
Lease unless Tenant has paid for excess costs as described in Subparagraphs
5(b), 5(c) or 5(d), in which case the unused Allowance may be applied toward
such excess cost amounts and paid to Tenant. Notwithstanding the foregoing,
Tenant may utilize up to $2.00 per Usable Square Foot of the unused Allowance
(as applied to the respective portions of the Premises as contemplated in
Paragraph 1(p) of the Lease) for the purchase of telephone and computer cabling
in the Premises, for the purchase of furniture for the Premises, cost of
installation of Building top signs, or to offset the costs incurred by Tenant in
moving in to the Premises.
6. CONSTRUCTION OF TENANT IMPROVEMENTS. Until Tenant approves the Final Plans
-----------------------------------
and Work Cost Statement, Landlord will be under no obligation to cause the
construction of any of the Tenant Improvements. Following Tenant's approval of
the Work Cost Statement described in Subparagraph 4(f) above and upon Tenant's
payment of the total amount by which such Work Cost Statement exceeds the
Allowance, if any, the Approved Contractor will commence and diligently proceed
with the construction of the Tenant Improvements, subject to Tenant Delays (as
described in Paragraph 9 below) and Force Majeure Delays (as described in
Paragraph 10 below).
7. FREIGHT/CONSTRUCTION ELEVATOR. Landlord will, consistent with its obligation
-----------------------------
to other tenants in the Building, if appropriate and necessary, make the
freight/construction elevator reasonably available to Tenant in connection with
initial decorating, furnishing and moving into the Premises. Tenant agrees to
pay for any after-hours staffing of the freight/construction elevator, if
needed.
8. COMMENCEMENT DATE AND SUBSTANTIAL COMPLETION.
--------------------------------------------
(a) COMMENCEMENT DATE. The Term of the Lease will commence on the date (the
-----------------
"Commencement Date") which is the earlier of: (i) the date Tenant moves into the
Premises to commence operation of its business in all or any portion of the
Premises; or (ii) the date the Tenant Improvements have been "substantially
completed" (as defined below); provided, however, that if substantial completion
of the Tenant Improvements is delayed as a result of any Tenant Delays described
in Paragraph 9 below, then the Commencement Date as would otherwise have been
established pursuant to this Subparagraph 8(a)(ii) will be accelerated by the
number of days of such Tenant Delays.
(b) SUBSTANTIAL COMPLETION; PUNCH-LIST. For purposes of Subparagraph 8(a)(ii)
----------------------------------
above, the Tenant Improvements will be deemed to be "substantially completed"
when Landlord's contractor certifies in writing to Landlord and Tenant that
Landlord: (a) is able to provide Tenant with reasonable access to the Premises;
(b) has substantially performed all of the Tenant Improvement Work required to
be performed by Landlord under this Work Letter Agreement, other than decoration
and minor
EXHIBIT "C"
-----------
Page 3
<PAGE>
"punch-list" type items and adjustments which do not materially interfere with
Tenant's access to or use of the Premises; and (c) has obtained a temporary
certificate of occupancy or other required equivalent approval from the local
governmental authority permitting occupancy of the Premises. Within ten (10)
days after receipt of such certificate from Landlord's contractor, Tenant will
conduct a walk-through inspection of the Premises with Landlord and provide to
Landlord a written punch-list specifying those decoration and other punch-list
items which require completion, which items Landlord will thereafter diligently
complete.
(c) DELIVERY OF POSSESSION. Landlord agrees to deliver possession of the
----------------------
Premises to Tenant when the Tenant Improvements have been substantially
completed in accordance with Subparagraph (b) above. The parties estimate that
Landlord will deliver possession of the Premises to Tenant and the Term of this
Lease will commence on or before the estimated commencement date set forth in
the Work Schedule delivered to Tenant pursuant to Paragraph 2 above (the
"Projected Commencement Date"). Landlord agrees to use its commercially
reasonable efforts to cause the Premises to be substantially completed on or
before the Projected Commencement Date. Tenant agrees that if Landlord is unable
to deliver possession of the Premises to Tenant on or prior to the Projected
Commencement Date, the Lease will not be void or voidable, nor will Landlord be
liable to Tenant for any loss or damage resulting therefrom, but if such late
delivery is due to Landlord's fault or due to any Force Majeure Delay(s), then,
as Tenant's sole remedy, the Commencement Date and the Expiration Date of the
Term will be extended one (1) day for each day Landlord is delayed in delivering
possession of the Premises to Tenant.
9. TENANT DELAYS. For purposes of this Work Letter Agreement, "Tenant Delays"
-------------
means any delay in the completion of the Tenant Improvements resulting from any
or all of the following: (a) Tenant's failure to timely perform any of its
obligations pursuant to the Lease or this Work Letter Agreement, including any
failure to complete, on or before the due date therefor, any action item which
is Tenant's responsibility pursuant to the Work Schedule delivered by Landlord
to Tenant pursuant to this Work Letter Agreement; (b) Tenant's changes to Space
Plans or Final Plans after Landlord's approval thereof; (c) Tenant's request for
materials, finishes, or installations which are not readily available or which
are incompatible with the Standards; (d) any delay of Tenant in making payment
to Landlord for Tenant's share of the Work Cost; or (e) any other act or failure
to act by Tenant, Tenant's employees, agents, architects, independent
contractors, consultants and/or any other person performing or required to
perform services on behalf of Tenant, including, without limitation, Tenant's
Contractor (if Tenant's Contractor is the Approved Contractor) and Tenant's
Architect.
10. FORCE MAJEURE DELAYS. For purposes of this Work Letter, "Force Majeure
--------------------
Delays" means any actual delay in the construction of the Tenant Improvements,
which is beyond the reasonable control of Landlord or Tenant, as the case may
be, as described in Paragraph 33 of the Lease.
11. MISCELLANEOUS.
-------------
(a) DILIGENT CONSTRUCTION. If Tenant's Contractor is the Approved Contractor,
---------------------
then Tenant will cause Tenant's Contractor to promptly, diligently and
continuously pursue construction of the Tenant Improvements to successful
completion in full compliance with the Final Plans, the Work Cost Statement, the
Work Schedule and this Work Letter Agreement.
(b) COMPLIANCE WITH LAWS. If Tenant's Contractor is the Approved Contractor,
--------------------
Tenant will cause Tenant's Contractor to construct the Tenant Improvements in a
safe and lawful manner, in compliance with all applicable laws and regulations
of, and all licenses and permits issued by, all municipal and other governmental
bodies with jurisdiction; and if any portion of the Tenant Improvements is not
acceptable to any applicable governmental body, agency or department, Tenant
shall cause Tenant's Contractor to promptly repair or replace the same at
Tenant's expense, subject to the proper application of the Allowance as provided
herein.
(c) CONSTRUCTION DEFECTS. If Tenant's Contractor is the Approved Contractor,
--------------------
and other than as to Landlord's Subcontractors and Engineers, then Landlord will
have no responsibility for any defects in the Tenant Improvements, which will be
remedied by Tenant at its own expense. If Tenant's Contractor is the Approved
Contractor, and other than as to Landlord's Subcontractors and Engineers, Tenant
will reimburse Landlord for any costs or expenses incurred by Landlord by reason
of any defect in any portion of the Tenant Improvements constructed by Tenant's
Contractor, by reason of delays caused by the construction of the Tenant
Improvements, or by reason of inadequate cleanup following completion of the
Tenant Improvements.
(d) COORDINATION OF LEASE. Nothing herein shall be construed as (i)
---------------------
constituting Tenant, Tenant's Architect, or Tenant's Contractor as Landlord's
agent for any purpose whatsoever, or (ii) a waiver by Landlord of any of the
terms or provisions of the Lease.
(e) APPROVAL OF PLANS. Landlord will not check the drawings of Tenant's
-----------------
Architect for building code compliance. Approval of the Final Plans by Landlord
is not a representation that the drawings are in compliance with the
requirements of governing authorities. Approval of the Final Plans by Landlord
does not constitute an assumption of responsibility by Landlord (or any of its
consultants) for their accuracy, sufficiency or efficiency.
(f) WARRANTIES. If Tenant's Contractor is the Approved Contractor, then Tenant
----------
shall cause Tenant's Contractor to provide warranties for not less than one (1)
year against defects in workmanship, materials and equipment, which warranties
shall run to the benefit of, or shall be assignable to, Landlord.
///
///
///
EXHIBIT "C"
-----------
Page 4
<PAGE>
(g) "AS-BUILT" DRAWINGS. Tenant shall cause Tenant's Architect to deliver to
------------------
Landlord "as-built" drawings (excluding furniture and equipment) no later
than sixty (60) days after the completion of Tenant's Work. The "as-built"
drawings shall include CAD Files (DXF format).
IN WITNESS WHEREOF, the undersigned Landlord and Tenant have caused this Work
Letter Agreement to be duly executed by their duly authorized representatives as
of the date of the Lease.
<TABLE>
<CAPTION>
<S> <C>
TENANT: LANDLORD:
NEW CENTURY FINANCIAL CORPORATION KOLL CENTER IRVINE NUMBER TWO,
a Delaware corporation a California limited partnership
By: By: Connecticut General Life Insurance Company,
------------------------------- General Partner
Print Name:
---------------------- By: Cigna Investments, Inc.
Print Title: Its Authorized Agent
----------------------
By: By:
------------------------------- ----------------------
Print Name: Print Name:
--------------------- ---------------------
Print Title: Print Title:
-------------------- ---------------------
</TABLE>
EXHIBIT "C"
-----------
Page 5
<PAGE>
NOTICE OF LEASE TERM DATES
AND TENANT'S PERCENTAGE
---------------------------
To:
--------------------------------------------
- ------------------------------------------------
- ------------------------------------------------
Date:
------------------
Re: Lease dated , 19 (the "Lease"), between
---------------- --- ______________,
Landlord, and , Tenant, concerning Suite
--------------------------------- ------
located at (the "Premises").
------------------------------------------
To Whom It May Concern:
In accordance with the subject Lease, we wish to advise and/or confirm as
follows:
1. That the Premises have been accepted by the Tenant as being substantially
complete in accordance with the subject Lease and that there is no deficiency in
construction except as may be indicated on the "Punch-List" prepared by Landlord
and Tenant, a copy of which is attached hereto.
2. That the Tenant has possession of the subject Premises and acknowledges
that under the provisions of the Lease the Commencement Date is ,
----------------
and the Term of the Lease will expire on .
-----------------------------
3. That in accordance with the Lease, rent commenced to accrue on .
-------------
4. If the Commencement Date of the Lease is other than the first day of the
month, the first billing will contain a pro rata adjustment. Each billing
thereafter will be for the full amount of the monthly installment as provided
for in the Lease.
5. Rent is due and payable in advance on the first day of each and every
month during the Term of the Lease. Your rent checks should be made payable to
at
- --------------------------------------- -----------------------------------.
6. The number of Rentable square feet within Premises is
---------------------
square feet as determined by Landlord's architect in accordance with the terms
of the Lease.
7. The number of Rentable square feet within the Building is
-------------------
square feet as determined by Landlord's architect in accordance with the terms
of the Lease.
8. Tenant's Percentage, as adjusted based upon the number of Rentable Square
Feet within the Premises, is %.
-----
LANDLORD:
--------------------------------------
a
-------------------------------------
By:
-----------------------------------
Print Name:
------------------------
Print Title:
-----------------------
By:
-----------------------------------
Print Name:
------------------------
Print Title:
-----------------------
SAMPLE ONLY
[NOT FOR EXECUTION]
EXHIBIT "D"
-----------
<PAGE>
DEFINITION OF OPERATING EXPENSES
--------------------------------
1. ITEMS INCLUDED IN OPERATING EXPENSES. The term "Operating Expenses" as used
------------------------------------
in the Lease to which this Exhibit "E" is attached means: all costs and
-----------
expenses of operation and maintenance of the Building and the Common Areas (as
such terms are defined in the Lease), as determined by standard accounting
practices, calculated assuming the Building is ninety-five percent (95%)
occupied, including the following costs by way of illustration but not
limitation, but excluding those items specifically set forth in Paragraph 3
below:
(a) Real Property Taxes and Assessments (as defined in Paragraph 2 below) and
any taxes or assessments imposed in lieu thereof;
(b) any and all assessments imposed with respect to the Building pursuant to
any covenants, conditions and restrictions affecting the Development, the
Common Areas or the Building;
(c) water and sewer charges and the costs of electricity, heating, ventilating,
air conditioning and other utilities;
(d) utilities surcharges and any other costs, levies or assessments resulting
from statutes or regulations promulgated by any government or quasi-
government authority in connection with the use, occupancy or alteration of
the Building or the Premises or the parking facilities serving the Building
or the Premises;
(e) costs of insurance obtained by Landlord;
(f) waste disposal and janitorial services;
(g) labor;
(h) reasonable costs incurred in the management of the Building, including,
without limitation: (i) supplies, (ii) wages and salaries (and payroll taxes and
similar governmental charges related thereto) of employees used in the
management, operation and maintenance of the Building, (iii) Building management
office rental, supplies, equipment and related operating expenses, and (iv) a
management/administrative fee determined as a percentage of the annual gross
revenues of the Building exclusive of the proceeds of financing or a sale of the
Building and an administrative fee for the management of the Development Common
Area determined as a percentage of Development Common Area Operating Expenses;
(i) supplies, materials, equipment and tools including rental of personal
property used for maintenance;
(j) repair and maintenance of the elevators and the structural portions of the
Building, including the plumbing, heating, ventilating, air-conditioning and
electrical systems installed or furnished by Landlord;
(k) maintenance, costs and upkeep of all parking and Development Common Areas;
(l) depreciation on a straight line basis and rental of personal property used
in maintenance;
(m) amortization on a straight line basis over the useful life [together with
interest at the Interest Rate on the unamortized balance] of all capitalized
expenditures which are: (i) reasonably intended to produce a reduction in
operating charges or energy consumption; or (ii) required under any governmental
law or regulation that was not applicable to the Building at the time it was
originally constructed; or (iii) for replacement of any Building equipment
needed to operate the Building at the same quality levels as prior to the
replacement;
(n) costs and expenses of gardening and landscaping;
(o) maintenance of signs (other than signs of tenants of the Building);
(p) personal property taxes levied on or attributable to personal property used
in connection with the Building or the Common Areas;
(q) reasonable accounting, audit, verification, legal and other consulting
fees; and
(r) costs and expenses of repairs, resurfacing, repairing, maintenance,
painting, lighting, cleaning, refuse removal, security and similar items,
including appropriate reserves.
When calculating Operating Expenses for purposes of establishing Tenant's
Operating Expense Allowance, Operating Expenses shall not include Real Property
Taxes and Assessments attributable to special assessments, charges, costs, or
fees or due to modifications or changes in governmental laws or regulations
including, but not limited to, the institution of a split tax roll, and shall
exclude market-wide labor-rate increases due to extraordinary circumstances
including, but not limited to, boycotts and strikes and utility increases due to
extraordinary circumstances including, but not limited to, conservation
surcharges, boycotts, embargoes or other shortages.
2. REAL PROPERTY TAXES AND ASSESSMENTS. The term "Real Property Taxes and
-----------------------------------
Assessments", as used in this Exhibit "E", means: any form of assessment,
-----------
license fee, license tax, business license fee, commercial rental tax, levy,
charge, improvement bond, tax or similar imposition imposed by any authority
having the direct power to tax, including any city, county, state or federal
government, or any school, agricultural, lighting, drainage or other improvement
or special assessment district thereof, as against any legal or equitable
interest of Landlord in the Premises, Building, Common Areas or the Development
(as such terms are defined in the Lease), adjusted to reflect an assumption that
the Building is fully assessed for real property tax purposes as a completed
building ready for occupancy, including the following by way of illustration but
not limitation:
EXHIBIT "E"
-----------
Page 1
<PAGE>
(a) any tax on Landlord's "right" to rent or "right" to other income from the
Premises or as against Landlord's business of leasing the Premises;
(b) any assessment, tax, fee, levy or charge in substitution, partially or
totally, of any assessment, tax, fee, levy or charge previously included within
the definition of real property tax, it being acknowledged by Tenant and
Landlord that Proposition 13 was adopted by the voters of the State of
California in the June, 1978 election and that assessments, taxes, fees, levies
and charges may be imposed by governmental agencies for such services as fire
protection, street, sidewalk and road maintenance, refuse removal and for other
governmental services formerly provided without charge to property owners or
occupants. It is the intention of Tenant and Landlord that all such new and
increased assessments, taxes, fees, levies and charges be included within the
definition of "real property taxes" for the purposes of this Lease;
(c) any assessment, tax, fee, levy or charge allocable to or measured by the
area of the Premises or other premises in the Building or the rent payable by
Tenant hereunder or other tenants of the Building, including, without
limitation, any gross receipts tax or excise tax levied by state, city or
federal government, or any political subdivision thereof, with respect to the
receipt of such rent, or upon or with respect to the possession, leasing,
operation, management, maintenance, alteration, repair, use or occupancy by
Tenant of the Premises, or any portion thereof but not on Landlord's other
operations;
(d) any assessment, tax, fee, levy or charge upon this transaction or any
document to which Tenant is a party, creating or transferring an interest or an
estate in the Premises; and/or
(e) any assessment, tax, fee, levy or charge by any governmental agency related
to any transportation plan, fund or system (including assessment districts)
instituted within the geographic area of which the Building is a part.
Notwithstanding the foregoing, if at any time after the Commencement Date, the
amount of Real Property Taxes and Assessments decreases, then for purposes of
all subsequent Lease Years, including the Lease Year in which such decrease in
Real Property Taxes and Assessments occurs, Tenant's Operating Expense Allowance
shall be decreased by an amount equal to such decrease in Real Property Taxes
and Assessments.
3. ITEMS EXCLUDED FROM OPERATING EXPENSES. Notwithstanding the provisions of
--------------------------------------
Paragraphs 1 and 2 above to the contrary, "Operating Expenses" will not
include:
(a) Landlord's federal or state income, franchise, inheritance or estate taxes;
(b) any ground lease rental;
(c) costs incurred by Landlord for the repair of damage to the Building to the
extent that Landlord is reimbursed by insurance or condemnation proceeds or by
tenants, warrantors or other third persons;
(d) depreciation, amortization and interest payments, except as specifically
provided herein, and except on materials, tools, supplies and vendor-type
equipment purchased by Landlord to enable Landlord to supply services Landlord
might otherwise contract for with a third party, where such depreciation,
amortization and interest payments would otherwise have been included in the
charge for such third party's services, all as determined in accordance with
standard accounting practices;
(e) brokerage commissions, finders' fees, attorneys' fees, space planning costs
and other costs incurred by Landlord in leasing or attempting to lease space in
the Building;
(f) costs of a capital nature, including, without limitation, capital
improvements, capital replacements, capital repairs, capital equipment and
capital tools, all as determined in accordance with standard accounting
practices; provided, however, the capital expenditures set forth in Subparagraph
1(m) above will in any event be included in the definition of Operating
Expenses;
(g) interest, principal, points and fees on debt or amortization on any
mortgage, deed of trust or other debt encumbering the Building or the
Development;
(h) costs, including permit, license and inspection costs, incurred with respect
to the installation of tenant improvements for tenants in the Building
(including the original Tenant Improvements for the Premises), or incurred in
renovating or otherwise improving, decorating, painting or redecorating space
for tenants or other occupants of the Building, including space planning and
interior design costs and fees;
(i) attorneys' fees and other costs and expenses incurred in connection with
negotiations or disputes with present or prospective tenants or other occupants
of the Building; provided, however, that Operating Expenses will include those
attorneys' fees and other costs and expenses incurred in connection with
negotiations, disputes or claims relating to items of Operating Expenses,
enforcement of rules and regulations of the Building, and such other matters
relating to the maintenance of standards required of Landlord under the Lease;
(j) except for the administrative/management fees described in Subparagraph
1(h) above, costs of Landlord's general corporate overhead;
(k) all items and services for which Tenant or any other tenant in the Building
reimburses Landlord (other than through operating expense pass-through
provisions);
(l) electric power costs for which any tenant directly contracts with the local
public service company; and
(m) costs arising from Landlord's charitable or political contributions.
EXHIBIT "E"
-----------
Page 2
<PAGE>
EXHIBIT "E"
-----------
Page 3
<PAGE>
STANDARDS FOR UTILITIES AND SERVICES
------------------------------------
The following standards for utilities and services are in effect. Landlord
reserves the right to adopt nondiscriminatory modifications and additions
hereto.
Subject to the terms and conditions of the Lease and provided Tenant remains in
occupancy of the Premises, Landlord will provide or make available the following
utilities and services:
1. Provide non-attended automatic elevator facilities Monday through Friday,
except holidays, from 8 a.m. to 6 p.m., and have one elevator available for
Tenant's use at all other times.
2. On Monday through Friday, except holidays, from 8 a.m. to 6 p.m. and on
Saturday from 8 a.m. to 12 Noon (and other times for a reasonable additional
charge to be fixed by Landlord, which charge shall be $45.00 per hour per floor
during the original Lease Term), ventilate the Premises and furnish air
conditioning or heating on such days and hours, when in the reasonable judgment
of Landlord it may be required for the comfortable occupancy of the Premises.
The air conditioning system achieves maximum cooling when the window coverings
are extended to the full length of the window opening and adjusted to a 45
degree angle upwards. Landlord will not be responsible for room temperatures if
Tenant does not keep all window coverings in the Premises extended to the full
length of the window opening and adjusted to a 45 degree angle upwards whenever
the system is in operation. Tenant agrees to cooperate fully at all times with
Landlord, and to abide by all reasonable regulations and requirements which
Landlord may prescribe for the proper function and protection of said air
conditioning system. Tenant agrees not to connect any apparatus, device, conduit
or pipe to the chilled and hot water air conditioning supply lines of the
Building. Tenant further agrees that neither Tenant nor its servants, employees,
agents, visitors, licensees or contractors shall at any time enter the
mechanical installations or facilities of the Building or the Development or
adjust, tamper with, touch or otherwise in any manner affect said installations
or facilities. The cost of maintenance and service calls to adjust and regulate
the air conditioning system will be charged to Tenant if the need for
maintenance work results from either Tenant's adjustment of room thermostats or
Tenant's failure to comply with its obligations under this Exhibit, including
keeping window coverings extended to the full length of the window opening and
adjusted to a 45 degree angle upwards. Such work will be charged at hourly rates
equal to then-current journeyman's wages for air conditioning mechanics.
3. Landlord will make available to the Premises, 24 hours per day, seven days a
week, electric current as required by the Building standard office lighting and
fractional horsepower office business machines including copiers, personal
computers and word processing equipment in an amount not to exceed six (6) watts
per square foot per normal business day. Tenant agrees, should its electrical
installation or electrical consumption be in excess of the aforesaid quantity or
extend beyond normal business hours, to reimburse Landlord monthly for the
measured consumption at the average cost per kilowatt hour charged to the
Building during the period. If a separate meter is not installed at Tenant's
cost, such excess cost will be established by an estimate agreed upon by
Landlord and Tenant, and if the parties fail to agree, such cost will be
established by an independent licensed engineer selected in Landlord's
reasonable discretion, whose fee shall be shared equally by Landlord and Tenant.
Tenant agrees not to use any apparatus or device in, upon or about the Premises
(other than standard office business machines, personal computers and word
processing equipment) which may in any way increase the amount of such services
usually furnished or supplied to said Premises, and Tenant further agrees not to
connect any apparatus or device with wires, conduits or pipes, or other means by
which such services are supplied, for the purpose of using additional or unusual
amounts of such services without the written consent of Landlord. Should Tenant
use the same to excess, the refusal on the part of Tenant to pay upon demand of
Landlord the amount established by Landlord for such excess charge will
constitute a breach of the obligation to pay rent under this Lease and will
entitle Landlord to the rights therein granted for such breach. Tenant's use of
electric current will never exceed the capacity of the feeders to the Building,
or the risers or wiring installation and Tenants will not install or use or
permit the installation or use of any computer or electronic data processing
equipment in the Premises (except standard office business machines, personal
computers and word processing equipment) without the prior written consent of
Landlord.
4. Water will be available in public areas for drinking and lavatory purposes
only, but if Tenant requires, uses or consumes water for any purpose in addition
to ordinary drinking and lavatory purposes, of which fact Tenant constitutes
Landlord to be the sole judge, Landlord may install a water meter and thereby
measure Tenant's water consumption for all purposes. Tenant agrees to pay
Landlord for the cost of the meter and the cost of the installation thereof and
throughout the duration of Tenant's occupancy Tenant will keep said meter and
installation equipment in good working order and repair at Tenant's own cost and
expense, in default of which Landlord may cause such meter and equipment to be
replaced or repaired and collect the cost thereof from Tenant. Tenant agrees to
pay for water consumed, as shown on such meter, as and when bills are rendered,
and on default in making such payment, Landlord may pay such charges and collect
the same from Tenant. Any such costs or expenses incurred, or payments made by
Landlord for any of the reasons or purposes hereinabove stated will be deemed to
be additional rent payable by Tenant and collectible by Landlord as such.
5. Landlord will provide janitor service to the Premises, provided the same are
used exclusively as offices, and are kept reasonably in order by Tenant, and
unless otherwise agreed to by Landlord and Tenant no one other than persons
approved by Landlord shall be permitted to enter the Premises for such purposes.
If the Premises are not used exclusively as offices, they will be kept clean and
in order by Tenant, at Tenant's expense, and to the satisfaction of Landlord,
and by persons approved by Landlord. Tenant agrees to pay to Landlord the cost
of removal of any of Tenant's refuse and rubbish to the extent that the same
exceeds the refuse and rubbish usually attendant upon the use of the Premises as
offices.
6. Landlord reserves the right to stop service of the elevator, plumbing,
ventilation, air conditioning and electrical systems, when necessary, by reason
of accident or emergency or for repairs, alterations or improvements, when in
the judgment of Landlord such actions are desirable or necessary to be made,
until said repairs, alterations or improvements shall have been completed, and
Landlord will have no responsibility or liability for failure to supply elevator
facilities, plumbing, ventilating, air conditioning or electric service, when
prevented from so doing by strike or accident or by any cause beyond Landlord's
reasonable control, or by laws, rules, orders, ordinances, directions,
regulations or by reason of the requirements of any federal, state, county or
municipal authority or failure of gas, oil or other suitable fuel supply or
inability by exercise of reasonable diligence to obtain gas, oil or other
suitable fuel supply. It is expressly understood and agreed that any covenants
on Landlord's part to furnish any services pursuant to any of the terms,
covenants, conditions, provisions or agreements of this Lease, or to
EXHIBIT "F"
-----------
<PAGE>
perform any act or thing for the benefit of Tenant, will not be deemed breached
if Landlord is unable to furnish or perform the same by virtue of a strike or
labor trouble or any other cause whatsoever beyond Landlord's control.
EXHIBIT "F"
-----------
<PAGE>
ESTOPPEL CERTIFICATE
--------------------
The undersigned, ("Tenant"),
--------------------------------------------------
hereby certifies to , as follows:
---------------------------------------------
1. Attached hereto is a true, correct and complete copy of that certain lease
dated , 1993, between , a
--------- -----------------------------------
("Landlord") and Tenant (the "Lease"), regarding the premises located at
(the "Premises"). The Lease is now in full force and effect
- ---------------
and has not been amended, modified or supplemented, except as set forth in
Paragraph 4 below.
2. The Term of the Lease commenced on , 19 .
------------ --
3. The Term of the Lease will expire on , 19 .
----------- --
4. The Lease has: (Initial one)
( ) not been amended, modified, supplemented, extended, renewed or
assigned.
( ) been amended, modified, supplemented, extended, renewed or
assigned by the following described terms or agreements, copies of which are
attached hereto:
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------.
5. Tenant has accepted and is now in possession of the Premises.
6. Tenant and Landlord acknowledge that Landlord's interest in the Lease
will be assigned to and that no
-----------------------------------------
modification, adjustment, revision or cancellation of the Lease or
amendments thereto shall be effective unless written consent of
is obtained, and that until further notice,
- ---------------------------
payments under the Lease may continue as heretofore.
7. The amount of Monthly Base Rent is $ .
-----------
8. The amount of Security Deposit (if any) is $ . No other
-----------
security deposits have been made except as follows:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------.
9. Tenant is paying the full lease rental which has been paid in full as of
the date hereof. No rent or other charges under the Lease have been paid for
more than thirty (30) days in advance of its due date except as follows:
10. All work required to be performed by Landlord under the Lease has been
completed except as follows:
---------------------------------------------------
- -------------------------------------------------------------------------------.
11. There are no defaults on the part of the Landlord or Tenant under the Lease
except as follows:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------.
12. Neither Landlord nor Tenant has any defense as to its obligations under
the Lease and claims no set-off or counterclaim against the other party except
as follows:
--------------------------------------------------------------------
- -------------------------------------------------------------------------------.
13. Tenant has no right to any concession (rental or otherwise) or similar
compensation in connection with renting the space it occupies other than as
provided in the Lease except as follows:
---------------------------------------
- -------------------------------------------------------------------------------.
All provisions of the Lease and the amendments thereto (if any) referred to
above are hereby ratified.
The foregoing certification is made with the knowledge that
-------------------
is relying upon the representations herein made in funding a loan to Landlord in
purchasing the Premises.
IN WITNESS WHEREOF, this certificate has been duly executed and delivered by
the authorized officers of the undersigned as of , 19 .
---------------- --
TENANT:
- ----------------------------------------
a
---------------------------------------
By:
-------------------------------------
Print Name: SAMPLE ONLY
----------------------------
Title: [NOT FOR EXECUTION]
--------------------------------
By:
--------------------------------------
Print Name:
----------------------------
Title:
----------------------------
EXHIBIT "G"
-----------
<PAGE>
RULES AND REGULATIONS
---------------------
A. GENERAL RULES AND REGULATIONS. The following rules and regulations govern
-----------------------------
the use of the Building and the Development Common Areas. Tenant will be bound
by such rules and regulations and agrees to cause Tenant's Authorized Users, its
employees, subtenants, assignees, contractors, suppliers, customers and invitees
to observe the same.
1. Except as specifically provided in the Lease to which these Rules and
Regulations are attached, no sign, placard, picture, advertisement, name or
notice may be installed or displayed on any part of the outside or inside of the
Building or the Development without the prior written consent of Landlord.
Landlord will have the right to remove, at Tenant's expense and without notice,
any sign installed or displayed in violation of this rule. All approved signs
or lettering on doors and walls are to be printed, painted, affixed or inscribed
at the expense of Tenant and under the direction of Landlord by a person or
company designated or approved by Landlord.
2. If Landlord objects in writing to any curtains, blinds, shades, screens or
hanging plants or other similar objects attached to or used in connection with
any window or door of the Premises, or placed on any windowsill, which is
visible from the exterior of the Premises, Tenant will immediately discontinue
such use. Tenant agrees not to place anything against or near glass partitions
or doors or windows which may appear unsightly from outside the Premises
including from within any interior common areas.
3. Tenant will not obstruct any sidewalks, halls, passages, exits, entrances,
elevators, escalators, or stairways of the Development. The halls, passages,
exits, entrances, elevators and stairways are not open to the general public,
but are open, subject to reasonable regulations, to Tenant's business invitees.
Landlord will in all cases retain the right to control and prevent access
thereto of all persons whose presence in the reasonable judgment of Landlord
would be prejudicial to the safety, character, reputation and interest of the
Development and its tenants, provided that nothing herein contained will be
construed to prevent such access to persons with whom any tenant normally deals
in the ordinary course of its business, unless such persons are engaged in
illegal or unlawful activities. No tenant and no employee or invitee of any
tenant will go upon the roof of the Building.
4. Tenant will not obtain for use on the Premises ice, food, food vendors,
beverage, towel or other similar services or accept barbering or bootblacking
service upon the Premises, except at such reasonable hours and under such
reasonable regulations as may be fixed by Landlord. Landlord expressly reserves
the right to absolutely prohibit solicitation, canvassing, distribution of
handbills or any other written material, peddling, sales and displays of
products, goods and wares in all portions of the Development except as may be
expressly permitted under the Lease. Landlord reserves the right to restrict
and regulate the use of the common areas of the Development and Building by
invitees of tenants providing services to tenants on a periodic or daily basis
including food and beverage vendors. Such restrictions may include limitations
on time, place, manner and duration of access to a tenant's premises for such
purposes. Without limiting the foregoing, Landlord may require that such
parties use service elevators, halls, passageways and stairways for such
purposes to preserve access within the Building for tenants and the general
public.
5. Landlord reserves the right to require tenants to periodically provide
Landlord with a written list of any and all business invitees which periodically
or regularly provide goods and services to such tenants at the premises.
Landlord reserves the right to preclude all vendors from entering or conducting
business within the Building and the Development if such vendors are not listed
on a tenant's list of requested vendors.
6. Landlord reserves the right to exclude from the Building between the hours
of 6 p.m. and 8 a.m. the following business day, or such other hours as may be
established from time to time by Landlord, and on Sundays and legal holidays,
any person unless that person is known to the person or employee in charge of
the Building or has a pass or is properly identified. Tenant will be
responsible for all persons for whom it requests passes and will be liable to
Landlord for all acts of such persons. Landlord will not be liable for damages
for any error with regard to the admission to or exclusion from the Building of
any person. Landlord reserves the right to prevent access to the Building in
case of invasion, mob, riot, public excitement or other commotion by closing the
doors or by other appropriate action.
7. The directory of the Building or the Development will be provided
exclusively for the display of the name and location of tenants only and
Landlord reserves the right to exclude any other names therefrom.
8. All cleaning and janitorial services for the Development and the Premises
will be provided exclusively through Landlord, and except with the written
consent of Landlord, no person or persons other than those approved by Landlord
will be employed by Tenant or permitted to enter the Development for the purpose
of cleaning the same. Tenant will not cause any unnecessary labor by
carelessness or indifference to the good order and cleanliness of the Premises.
9. Landlord will furnish Tenant, free of charge, with two keys to each entry
door lock in the Premises. Landlord may make a reasonable charge for any
additional keys. Tenant shall not make or have made additional keys, and Tenant
shall not alter any lock or install any new additional lock or bolt on any door
of the Premises. Tenant, upon the termination of its tenancy, will deliver to
Landlord the keys to all doors which have been furnished to Tenant, and in the
event of loss of any keys so furnished, will pay Landlord therefor.
10. If Tenant requires telegraphic, telephonic, burglar alarm, antennae or
similar services, it will first obtain Landlord's approval, and comply with,
Landlord's reasonable rules and requirements applicable to such services, which
may include separate licensing by, and fees paid to, Landlord.
11. Freight elevator(s) will be available for use by all tenants in the
Building, subject to such reasonable scheduling as Landlord, in its discretion,
deems appropriate. No equipment, materials, furniture, packages, supplies,
merchandise or other property will be received in the Building or carried in the
elevators except between such hours and in such elevators as may be designated
by Landlord. Tenant's initial move in and subsequent deliveries of bulky items,
such as furniture, safes and similar items will, unless otherwise agreed in
writing by Landlord, be made during the hours of 6:00 p.m. to 6:00 a.m. or on
Saturday
EXHIBIT "H"
-----------
Page 1
<PAGE>
or Sunday. Deliveries during normal office hours shall be limited to
normal office supplies and other small items. No deliveries will be made which
impede or interfere with other tenants or the operation of the Building.
12. Tenant will not place a load upon any floor of the Premises which exceeds
the load per square foot which such floor was designed to carry and which is
allowed by law. Landlord will have the right to reasonably prescribe the
weight, size and position of all safes, heavy equipment, files, materials,
furniture or other property brought into the Building. Heavy objects will, if
considered necessary by Landlord, stand on such platforms as determined by
Landlord to be necessary to properly distribute the weight, which platforms will
be provided at Tenant's expense. Business machines and mechanical equipment
belonging to Tenant, which cause noise or vibration that may be transmitted to
the structure of the Building or to any space therein to such a degree as to be
objectionable to any tenants in the Building or Landlord, are to be placed and
maintained by Tenant, at Tenant's expense, on vibration eliminators or other
devises sufficient to eliminate noise or vibration. Tenant will be responsible
for all structural engineering required to determine structural load, as well as
the expense thereof. The persons employed to move such equipment in or out of
the Building must be reasonably acceptable to Landlord. Landlord will not be
responsible for loss of, or damage to, any such equipment or other property from
any cause, and all damage done to the Building by maintaining or moving such
equipment or other property will be repaired at the expense of Tenant.
13. Tenant will not use or keep in the Premises any kerosene, gasoline or
inflammable or combustible fluid or material other than those limited quantities
necessary for the operation or maintenance of office equipment. Tenant will not
use or permit to be used in the Premises any foul or noxious gas or substance,
or permit or allow the Premises to be occupied or used in a manner offensive or
objectionable to Landlord or other occupants of the Building by reason of noise,
odors or vibrations, nor will Tenant bring into or keep in or about the Premises
any birds or animals.
14. Tenant will not use any method of heating or air conditioning other than
that supplied by Landlord or otherwise existing prior to the date of this Lease
without Landlord's prior written consent.
15. Tenant will not waste electricity, water or air conditioning and agrees to
cooperate fully with Landlord to assure the most effective operation of the
Building's heating and air conditioning and to comply with any governmental
energy-saving rules, laws or regulations of which Tenant has actual notice, and
will refrain from attempting to adjust controls. Tenant will keep corridor
doors closed, and shall keep all window coverings pulled down.
16. Landlord reserves the right, exercisable without notice and without
liability to Tenant, to change the name and street address of the Building.
Without the prior written consent of Landlord, which Landlord may deny with or
without cause, Tenant will not use the name, photograph or likeness of the
Building or the Development in connection with or in promoting or advertising
the business of Tenant except as Tenant's address.
17. Tenant will close and lock the doors of its Premises and entirely shut off
all water faucets or other water apparatus, and lighting or gas before Tenant
and its employees leave the Premises. Tenant will be responsible for any damage
or injuries sustained by other tenants or occupants of the Building or by
Landlord for noncompliance with this rule.
18. The toilet rooms, toilets, urinals, wash bowls and other apparatus will
not be used for any purpose other than that for which they were constructed and
no foreign substance of any kind whatsoever shall be thrown therein. The
expense of any breakage, stoppage or damage resulting from any violation of this
rule will be borne by the tenant who, or whose employees or invitees, break this
rule. Cleaning of equipment of any type is prohibited. Shaving is prohibited.
19. Tenant will not sell, or permit the sale at retail of newspapers,
magazines, periodicals, theater tickets or any other goods or merchandise to the
general public in or on the Premises. Tenant will not use the Premises for any
business or activity other than that specifically provided for in this Lease.
Tenant will not conduct, nor permit to be conducted, either voluntarily or
involuntarily, any auction upon the Premises without first having obtained
Landlord's prior written consent, which consent Landlord may withhold in its
sole and absolute discretion.
20. Tenant will not install any radio or television antenna, loudspeaker,
satellite dishes or other devices on the roof(s) or exterior walls of the
Building or the Development. Tenant will not interfere with radio or television
broadcasting or reception from or in the Development or elsewhere.
21. Except for the ordinary hanging of pictures and wall decorations, Tenant
will not mark, drive nails, screw or drill into the partitions, woodwork or
plaster or in any way deface the Premises or any part thereof, except in
accordance with the provisions of the Lease pertaining to alterations. Landlord
reserves the right to direct electricians as to where and how telephone and
telegraph wires are to be introduced to the Premises. Tenant will not cut or
bore holes for wires. Tenant will not affix any floor covering to the floor of
the Premises in any manner except as approved by Landlord. Tenant shall repair
any damage resulting from noncompliance with this rule.
22. Tenant will not install, maintain or operate upon the Premises any vending
machines without the written consent of Landlord, which consent Landlord will
not unreasonably withhold.
23. Landlord reserves the right to exclude or expel from the Development any
person who, in Landlord's judgment, is intoxicated or under the influence of
liquor or drugs or who is in violation of any of the Rules and Regulations of
the Building.
24. Tenant will store all its trash and garbage within its Premises or in other
facilities provided by Landlord. Tenant will not place in any trash box or
receptacle any material which cannot be disposed of in the ordinary and
customary manner of trash and garbage disposal. All garbage and refuse disposal
is to be made in accordance with directions issued from time to time by
Landlord.
25. The Premises will not be used for lodging or for the storage of merchandise
held for sale to the general public, or for lodging or for manufacturing of any
kind, nor shall the Premises be used for any improper, immoral or objectionable
purpose. No cooking will be done or permitted on the Premises without
Landlord's consent, except the use by Tenant of Underwriters'
EXHIBIT "H"
-----------
Page 2
<PAGE>
Laboratory approved equipment for brewing coffee, tea, hot chocolate and similar
beverages shall be permitted, and the use of a microwave oven for employees use
will be permitted, provided that such equipment and use is in accordance with
all applicable federal, state, county and city laws, codes, ordinances, rules
and regulations.
26. Neither Tenant nor any of its employees, agents, customers and invitees may
use in any space or in the public halls of the Building or the Development any
hand truck except those equipped with rubber tires and side guards or such other
material-handling equipment as Landlord may approve. Tenant will not bring any
other vehicles of any kind into the Building.
27. Tenant agrees to comply with all safety, fire protection and evacuation
procedures and regulations established by Landlord or any governmental agency.
28. Tenant assumes any and all responsibility for protecting its Premises from
theft, robbery and pilferage, which includes keeping doors locked and other
means of entry to the Premises closed.
29. To the extent Landlord reasonably deems it necessary to exercise exclusive
control over any portions of the Common Areas for the mutual benefit of the
tenants in the Building or the Development, Landlord may do so subject to
reasonable, non-discriminatory additional rules and regulations.
30. Landlord may prohibit smoking in the Building and may require Tenant and
any of its employees, agents, clients, customers, invitees and guests who desire
to smoke, to smoke within designated smoking areas within the Development.
31. Tenant's requirements will be attended to only upon appropriate application
to Landlord's asset management office for the Development by an authorized
individual of Tenant. Employees of Landlord will not perform any work or do
anything outside of their regular duties unless under special instructions from
Landlord, and no employee of Landlord will admit any person (Tenant or
otherwise) to any office without specific instructions from Landlord.
32. These Rules and Regulations are in addition to, and will not be construed
to in any way modify or amend, in whole or in part, the terms, covenants,
agreements and conditions of the Lease. Landlord may waive any one or more of
these Rules and Regulations for the benefit of Tenant or any other tenant, but
no such waiver by Landlord will be construed as a waiver of such Rules and
Regulations in favor of Tenant or any other tenant, nor prevent Landlord from
thereafter enforcing any such Rules and Regulations against any or all of the
tenants of the Development.
33. Landlord reserves the right to make such other and reasonable and non-
discriminatory Rules and Regulations as, in its judgment, may from time to time
be needed for safety and security, for care and cleanliness of the Development
and for the preservation of good order therein. Tenant agrees to abide by all
such Rules and Regulations herein above stated and any additional reasonable and
non-discriminatory rules and regulations which are adopted. Tenant is
responsible for the observance of all of the foregoing rules by Tenant's
employees, agents, clients, customers, invitees and guests.
B. PARKING RULES AND REGULATIONS. The following rules and regulations govern
-----------------------------
the use of the parking facilities which serve the Building. Tenant will be
bound by such rules and regulations and agrees to cause its employees,
subtenants, assignees, contractors, suppliers, customers and invitees to observe
the same:
1. Tenant will not permit or allow any vehicles that belong to or are controlled
by Tenant or Tenant's employees, subtenants, customers or invitees to be loaded,
unloaded or parked in areas other than those designated by Landlord for such
activities. No vehicles are to be left in the parking areas overnight and no
vehicles are to be parked in the parking areas other than normally sized
passenger automobiles, motorcycles and pick-up trucks. No extended term storage
of vehicles is permitted.
2. Vehicles must be parked entirely within painted stall lines of a single
parking stall.
3. All directional signs and arrows must be observed.
4. The speed limit within all parking areas shall be five (5) miles per hour.
5. Parking is prohibited: (a) in areas not striped for parking; (b) in aisles
or on ramps; (c) where "no parking" signs are posted; (d) in cross-hatched
areas; and (e) in such other areas as may be designated from time to time by
Landlord or Landlord's parking operator.
6. Landlord reserves the right, without cost or liability to Landlord, to tow
any vehicle if such vehicle's audio theft alarm system remains engaged for an
unreasonable period of time.
7. Washing, waxing, cleaning or servicing of any vehicle in any area not
specifically reserved for such purpose is prohibited.
8. Landlord may refuse to permit any person to park in the parking facilities
who violates these rules with unreasonable frequency, and any violation of these
rules shall subject the violator's car to removal, at such car owner's expense.
Tenant agrees to use its best efforts to acquaint its employees, subtenants,
assignees, contractors, suppliers, customers and invitees with these parking
provisions, rules and regulations.
9. Parking stickers, access cards, or any other device or form of identification
supplied by Landlord as a condition of use of the parking facilities shall
remain the property of Landlord. Parking identification devices, if utilized by
Landlord, must be displayed as requested and may not be mutilated in any manner.
The serial number of the parking identification device may not be obliterated.
Parking identification devices, if any, are not transferable and any device in
the possession of an unauthorized holder will be void. Landlord reserves the
right to refuse the sale of monthly stickers or other parking identification
devices to Tenant or any of its agents, employees or representatives who
willfully refuse to comply with these rules and regulations and all unposted
city, state or federal ordinances, laws or agreements.
EXHIBIT "H"
-----------
Page 3
<PAGE>
10. Loss or theft of parking identification devices or access cards must be
reported to the management office in the Development immediately, and a lost or
stolen report must be filed by the Tenant or user of such parking identification
device or access card at the time. Landlord has the right to exclude any
vehicle from the parking facilities that does not have a parking identification
device or valid access card. Any parking identification device or access card
which is reported lost or stolen and which is subsequently found in the
possession of an unauthorized person will be confiscated and the illegal holder
will be subject to prosecution.
11. All damage or loss claimed to be the responsibility of Landlord must be
reported, itemized in writing and delivered to the management office located
within the Development within ten (10) business days after any claimed damage or
loss occurs. Any claim not so made is waived. Landlord is not responsible for
damage by water or fire, or for the acts or omissions of others, or for articles
left in vehicles. In any event, the total liability of Landlord, if any, is
limited to Two Hundred Fifty Dollars ($250.00) for all damages or loss to any
car. Landlord is not responsible for loss of use.
12. The parking operators, managers or attendants are not authorized to make or
allow any exceptions to these rules and regulations, without the express written
consent of Landlord. Any exceptions to these rules and regulations made by the
parking operators, managers or attendants without the express written consent of
Landlord will not be deemed to have been approved by Landlord.
13. Landlord reserves the right, without cost or liability to Landlord, to tow
any vehicles which are used or parked in violation of these rules and
regulations.
14. Landlord reserves the right from time to time to modify and/or adopt such
other reasonable and non-discriminatory rules and regulations for the parking
facilities as it deems reasonably necessary for the operation of the parking
facilities.
EXHIBIT "H"
-----------
Page 4
<PAGE>
[SAMPLE ONLY; NOT FOR EXECUTION]
--------------------------------
SATELLITE ANTENNA LICENSE AGREEMENT
-----------------------------------
This SATELLITE ANTENNA LICENSE AGREEMENT ("Agreement") is made as of the ___ day
of ____________, 199__ by and between KOLL CENTER IRVINE NUMBER TWO, a
California limited partnership ("Licensor"), and NEW CENTURY FINANCIAL
CORPORATION, a Delaware corporation ("Licensee").
R E C I T A L S :
A. Licensor is the owner of certain real property located at 18400 Von Karman
Avenue, Irvine, California ("Property"), and the office building ("Building")
and parking structure situated thereon.
B. Licensee is a tenant of Licensor in the Building pursuant to that certain
Office Building Lease dated _______________, 19___ (as amended, the "Lease"),
and Licensee desires to obtain permission to place a satellite antenna on the
roof of the Building.
C. The parties agree that Licensee's right to perform certain acts on the
Property or the Building are upon and subject to the terms, covenants, and
conditions herein set forth, and Licensee covenants as a material part of the
consideration for this Agreement to keep and perform each and all said terms,
covenants, and conditions and the parties further agree that this Agreement is
made upon condition of such performance.
NOW, THEREFORE, in consideration of the mutual promises hereinafter set forth
the parties hereto agree as follows:
Incorporation of Recitals. The foregoing Recitals are incorporated herein
-------------------------
by this reference.
Grant of License. Licensor hereby grants Licensee a license to place on
----------------
the roof of the Building, a satellite antenna, the specifications for which are
described in Exhibit "A" to this Agreement, together with related cabling and
hardware ("Satellite Antenna"). The Satellite Antenna shall be installed on the
roof of the Building at the location and in a manner described in Exhibit "B".
Term. The term of this Agreement shall be coterminous with the term of the
----
aforementioned Lease. Licensor, after the lapse of applicable cure periods,
shall have the right to terminate this Agreement in the event of a default
hereunder or under the Lease by Licensee, in addition to all other rights and
remedies available to Licensor at law or in equity.
Description of License. This Agreement shall not be construed as a lease,
----------------------
nor as a grant to Licensee of any present or any future right or interest in the
Property or Building, nor shall the expenditure of any sum of money by Licensee
for the purchase or lease of the Satellite Antenna, for the installation thereof
on the Building or for any fee paid to Licensor pursuant to this Agreement be
construed as granting Licensee any right to continue this Agreement against
Licensor's will. Licensee hereby assumes any and all costs, expenses,
liabilities and risks associated with the installation, use, maintenance and
removal of the Satellite Antenna, and restoration of the Building upon such
removal, and any other related costs and expenses resulting therefrom or
relating thereto. Licensee acknowledges that (i) Licensor retains the right to
install within the Property and use the roof of the Building for the
installation of other communication facilities (except that Licensor will not
intentionally interfere to an unreasonable extent with Licensee's use of the
Satellite Antenna), and (ii) the signal which is to be received and/or sent by
the Satellite Antenna may be lost or impaired as a result of on-going or future
construction of nearby buildings or parking facilities on or about the
development of which the Property is a part. Licensee hereby assumes any and
all risks associated with any loss or impairment of the signal, or any other
related cost or inconvenience resulting therefrom or relating thereto. Licensee
agrees not to enter into any agreements with any other entity or person where
such agreement may contain either express or implied terms with respect to any
right or obligation to maintain or continue this Agreement. Licensee agrees to
protect, defend, indemnify and hold Licensor free and harmless from and against
any obligation to any party which may claim any right as to the maintenance or
use of the Satellite Antenna, or the receipt or delivery of any signal
therefrom. The indemnity obligations of Licensee under this Agreement shall
survive the termination or expiration of this Agreement and the Lease.
Assignment. This Agreement is personal to Licensee. It is not assignable
----------
separately or together with any permitted subletting or assignment of the Lease,
if any, and any attempt to assign this Agreement will render it null and void.
License Fee. Licensee agrees to pay Licensor $250.00 per month, on the
-----------
first day of each month, in advance ("License Fee"), for every month in which
this Agreement is in effect. The License Fee shall be considered additional
rent due under the Lease. The License Fee shall be increased annually by 4%,
compounded.
Maintenance and Repair. Licensee shall be solely responsible for the costs
----------------------
of installing, maintaining, removing and repairing the Satellite Antenna.
Licensee agrees to maintain the Satellite Antenna in a clean, neat and sightly
condition. Additionally, Licensee shall upon the removal of the Satellite
Antenna, repair and restore the roof and any other affected portions of the
Building to their original condition prior to the installation of the Satellite
Antenna, including but not limited to the removal of any and all cables and the
repair and restoration of the Building caused thereby. Licensor in its
reasonable discretion shall have the right upon the termination of this
Agreement to require that all cables installed by Licensee in and through the
Building in connection with the installation and use of the Satellite Antenna
(which cables shall be shielded to prevent interference with other tenants'
cables) be left in place and abandoned to the benefit of Licensor. In the event
that Licensor elects abandonment of such cable, Licensor shall pay to Licensee
the sum of one dollar ($1.00) as payment in full for purchase of all cables
appurtenant to the installation of the Satellite Antenna.
Insurance. Licensee agrees to reimburse Licensor, upon demand, for any
---------
additional cost of insurance attributed to the installation or existence of the
Satellite Antenna on the Building. Additionally, Licensee and any contractors
(who shall be subject to Licensor's prior approval) retained by Licensee to
perform work on the Property shall maintain commercial liability insurance
including the hazards of premises and operations, independent contractors, and
blanket contractual liability (covering Licensee's indemnity contained herein),
in an amount of not less than $2,000,000 per occurrence and general aggregate.
Proof of said insurance shall be provided to Licensor before commencement of the
installation of the Satellite Antenna. Licensor shall be named as an additional
insured on a primary and non-contributory basis under Licensee's commercial
liability insurance. Said insurance shall not be cancelled or reduced without
Licensor being notified in writing at least thirty (30) days prior thereto.
EXHIBIT "I"
-----------
Page 1
<PAGE>
Utilities. Licensee shall pay for all utilities hook-up charges necessary
---------
for the installation of the Satellite Antenna, and shall pay for the maintenance
and service of said utilities. Licensor shall allow Licensee, at Licensee's
sole cost, to hook up the Satellite Antenna to the Building electrical system in
accordance with the provisions of the Lease and hereof, and under the
supervision of Licensor.
Governmental Approvals. Licensee shall obtain all governmental approvals
----------------------
and permits required for the installation and operation of the Satellite Antenna
and shall submit same to Licensor prior to the installation of the Satellite
Antenna (including, without limit, evidence that the Satellite Antenna and the
location thereof on the Building and all appurtenances thereto comply with all
local zoning and building codes), and Licensee agrees to maintain the same in
effect throughout the term of this Agreement. Licensee acknowledges that
Licensor has made no representations or warranties to Licensee concerning the
appropriateness of the Satellite Antenna under applicable building or zoning
codes.
Notice Before Installation. Licensee shall pay when due all claims for
--------------------------
labor or materials furnished or alleged to have been furnished in connection
with the Satellite Antenna or the installation thereof. Licensee agrees to give
Licensor not less than ten (l0) days notice prior to the commencement of any
work at the Building. All work performed in connection with the installation of
the Satellite Antenna is to be performed strictly in accordance with the plans
and specifications therefor as identified in Exhibits "A" and "B" attached
hereto. Licensor shall have the right to post notices of non-responsibility in
or on the Building as provided by law.
Removal. Upon termination of this Agreement for any reason whatsoever, or
-------
in the event Licensee otherwise elects to proceed as follows, Licensee shall
remove the Satellite Antenna, cables (unless Licensor elects otherwise, as
provided herein) and all other improvements associated therewith at Licensee's
own cost and expense, and Licensee shall repair any damage occasioned by the
installation or removal thereof. If Licensee fails to perform its obligations
pursuant to this Paragraph 12, Licensor may, at its option, perform Licensee's
obligations and put the same in good order and repair and upon demand, Licensee
will reimburse Licensor for such expenses with interest at the maximum legal
rate.
Indemnification. Licensee shall indemnify, defend, protect and hold
---------------
harmless Licensor against and from any and all claims arising from or relating
to (i) the Satellite Antenna and its related improvements and the installation,
operation, maintenance and repair thereof, (ii) any breach or default in the
performance of any obligation on Licensee's part to be performed under the terms
of this Agreement, or arising from or relating to any act, neglect, fault or
omission of Licensee relating to the Satellite Antenna, and (iii) electrical
power interruptions or interruptions with communication facilities of other
Building tenants. For the purposes hereof, "claims" shall be defined to include
without limit, obligations, liabilities, claims, liens, encumbrances, actions,
causes of action, losses, damages, costs, expenses and attorneys' fees and
costs; and in case any action or proceeding be brought against Licensor by
reason of any such claim, Licensee, upon notice from Licensor, shall defend the
same at Licensee's expense by counsel reasonably satisfactory to Licensor.
Licensee, as a material part of the consideration to Licensor, hereby assumes
all risk of damage to property or injury to person in, upon or about the
Building relative to the Satellite Antenna from any cause whatsoever except to
the extent of the sole gross negligence or willful misconduct of Licensor.
Entire Agreement. This Agreement contains the entire agreement between the
----------------
parties relating to the subject matter hereof. Any oral representations or
modifications concerning this Agreement shall be of no force in effect. Any
subsequent modification must be in writing, signed by all the parties.
Attorneys' Fees. In the event of any controversy, claim or dispute
---------------
relating to this Agreement, or breach hereof, the prevailing party shall be
entitled to recover from the losing party reasonable expenses, attorneys' fees
and all costs of suit.
Severability. Any provision of this Agreement which shall prove to be
------------
invalid, void or illegal in no way affects, impairs or invalidates any other
provision hereof, and such other provisions shall remain in full force and
effect.
Waiver. The waiver by Licensor of any breach of any term, covenant or
------
condition herein contained shall not be deemed to be a waiver of any subsequent
breach of the same or any other term, covenant or condition herein contained,
nor shall any custom or practice which may transpire between the parties in the
administration of the terms hereof be deemed a waiver of or in any way affect
the right of Licensor to insist upon the performance by Licensee in strict
accordance with said terms.
Time. Time is of the essence with respect to the performance of every
----
provision of this Agreement.
IN WITNESS HEREOF the parties hereto have executed this Agreement as of the
date first written above.
<TABLE>
<S> <C>
KOLL CENTER IRVINE NUMBER TWO NEW CENTURY FINANCIAL CORPORATION,
a California limited partnership a Delaware corporation
By: Connecticut General Life Insurance Company, By:
General Partner --------------------------------
Print Name:
---------------------
By: Cigna Investments, Inc., Print Title:
--------------------
Its Authorized Agent
By: By:
-------------------------------- -------------------------------
Print Name: Print Name:
--------------------------------- ------------------
Print Title: Print Title:
--------------------------------- ------------------
</TABLE>
[EXHIBITS "A" AND "B" NEED TO BE ATTACHED]
[SAMPLE ONLY; NOT FOR EXECUTION]
--------------------------------
EXHIBIT "I"
-----------
Page 2
<PAGE>
FORM LETTER OF CREDIT
---------------------
[BANK'S LETTERHEAD]
KOLL CENTER IRVINE NUMBER TWO
C/O KOLL
18500 VON KARMAN, SUITE 120
IRVINE, CA 92612
ATTN: 18400 BUILDING MANAGER
DEAR SIR:
WE HEREBY ESTABLISH AND ISSUE OUR IRREVOCABLE STANDBY LETTER OF CREDIT
NO. ______ (THE "CREDIT") IN YOUR FAVOR FOR THE ACCOUNT OF NEW CENTURY MORTGAGE
CORPORATION. WE HEREBY IRREVOCABLY AUTHORIZE YOU TO DRAW UPON US IN ONE OR MORE
SIGHT DRAFTS UP TO THE AGGREGATE AMOUNT OF: (A) FROM THE DATE OF ISSUANCE
HEREOF UNTIL DECEMBER 1, 1997: $1,000,000.00; AND (B) FROM DECEMBER 1, 1997
UNTIL THE FIRST ANNIVERSARY OF THE DATE OF ISSUANCE OF THIS CREDIT (THE "EXPIRY
DATE"): $1,221,320.00. THE STEP-UP IN CREDIT AMOUNT CONTEMPLATED BY THE
PRECEDING SENTENCE IS REFERRED TO IN THIS CREDIT AS THE "STEP-UP FUNCTION." .
YOUR DRAFT MUST BE ACCOMPANIED BY A WRITTEN CERTIFICATE STATING:
"NEW CENTURY FINANCIAL CORPORATION, OR ITS ASSIGN ("TENANT"), HAS FAILED
TO PAY RENT OR PERFORM ONE OR MORE OF ITS OBLIGATIONS UNDER THAT CERTAIN
OFFICE BUILDING LEASE (THE "LEASE") DATED _________________, 1997 EXECUTED
BY AND BETWEEN TENANT AND KOLL CENTER IRVINE NUMBER TWO OR TENANT HAS
FAILED TO REPLACE THIS LETTER OF CREDIT AS REQUIRED UNDER THE TERMS OF THE
LEASE. THE AMOUNT OF THE SIGHT DRAFT REPRESENTS MONIES DUE AND OWING BY
TENANT UNDER THE LEASE."
PARTIAL DRAWINGS WILL BE PERMITTED UNDER THIS CREDIT AND ALL DRAFTS
HEREON MUST BEAR THE DATE AND NUMBER OF THIS CREDIT. THIS CREDIT IS EFFECTIVE
IMMEDIATELY AND WE HEREBY ENGAGE WITH YOU THAT DRAFTS DRAWN HEREON AND IN
CONFORMITY WITH THE TERMS OF THIS CREDIT WILL BE DULY HONORED UPON PRESENTATION
SO LONG AS SUCH DRAFTS ARE PRESENTED ON OR BEFORE 4:45 P.M. CENTRAL TIME ON THE
EXPIRY DATE, AS THE EXPIRY DATE MAY BE AUTOMATICALLY EXTENDED PURSUANT TO THE
TERMS OF THE NEXT PARAGRAPH. THIS $1,221,320.00 CREDIT (WITHOUT THE STEP-UP
FUNCTION AND DECREASED ANNUALLY BY $244,000.00) SHALL BE DEEMED AUTOMATICALLY
EXTENDED WITHOUT AMENDMENT FOR ONE (1) YEAR FROM THE PRESENT AND ANY FUTURE
EXPIRY DATE , UNLESS AT LEAST THIRTY (30) DAYS PRIOR TO ANY SUCH PRESENT OR
FUTURE EXPIRY DATE WE SHALL NOTIFY YOU IN WRITING THAT WE ELECT NOT TO CONSIDER
THIS CREDIT RENEWED FOR SUCH ADDITIONAL PERIOD.
THIS CREDIT IS SUBJECT TO THE "UNIFORM CUSTOMS AND PRACTICES FOR
DOCUMENTARY CREDITS (1993 REVISION), INTERNATIONAL CHAMBER OF COMMERCE
PUBLICATION 500."
[NAME OF BANK]
By:
---------------------------------------
Authorized Officer
EXHIBIT "J"
-----------
<PAGE>
LOCATION OF RESERVED PARKING SPACES
-----------------------------------
[To Be Supplied]
EXHIBIT "K"
-----------
<PAGE>
OFFICE BUILDING LEASE
BETWEEN
KOLL CENTER IRVINE NUMBER TWO,
LANDLORD
AND
NEW CENTURY FINANCIAL CORPORATION,
TENANT
<PAGE>
OFFICE BUILDING LEASE
---------------------
TABLE OF CONTENTS
------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. BASIC LEASE TERMS................................................... 1
2. PREMISES AND COMMON AREAS........................................... 4
3. TERM................................................................ 4
4. POSSESSION.......................................................... 4
5. RENT................................................................ 5
6. OPERATING EXPENSES.................................................. 5
7. SECURITY DEPOSIT.................................................... 5
8. USE................................................................. 6
9. NOTICES............................................................. 6
10. BROKERS............................................................. 7
11. SURRENDER; HOLDING OVER............................................. 7
12. TAXES ON TENANT'S PROPERTY.......................................... 7
13. ALTERATIONS......................................................... 7
14. REPAIRS............................................................. 8
15. LIENS............................................................... 9
16. ENTRY BY LANDLORD................................................... 9
17. UTILITIES AND SERVICES.............................................. 9
18. ASSUMPTION OF RISK AND INDEMNIFICATION.............................. 10
19. INSURANCE........................................................... 10
20. DAMAGE OR DESTRUCTION............................................... 11
21. EMINENT DOMAIN...................................................... 12
22. DEFAULTS AND REMEDIES............................................... 13
23. LANDLORD'S DEFAULT.................................................. 14
24. ASSIGNMENT AND SUBLETTING........................................... 14
25. SUBORDINATION....................................................... 16
26. ESTOPPEL CERTIFICATE................................................ 17
27. INTENTIONALLY OMITTED............................................... 17
28. RULES AND REGULATIONS............................................... 17
29. MODIFICATION AND CURE RIGHTS OF LANDLORD'S MORTGAGEES AND LESSORS... 17
30. DEFINITION OF LANDLORD.............................................. 17
31. WAIVER.............................................................. 17
32. PARKING............................................................. 18
33. FORCE MAJEURE....................................................... 18
34. SIGNS............................................................... 19
35. LIMITATION ON LIABILITY............................................. 19
36. FINANCIAL STATEMENTS................................................ 19
37. QUIET ENJOYMENT..................................................... 19
38. MISCELLANEOUS....................................................... 19
39. EXECUTION OF LEASE.................................................. 20
SIGNATURE PAGE...................................................... 21
</TABLE>
<TABLE>
<CAPTION>
EXHIBITS:
<C> <S>
A-I Site Plan
A-II Outline of Floor Plan of Premises
B Rentable Square Feet and Usable Square Feet
C Work Letter Agreement
D Notice of Lease Term Dates and Tenant's Percentage
E Definition of Operating Expenses
F Standards for Utilities and Services
G Estoppel Certificate
H Rules and Regulations
I Satellite Antenna License Agreement
J Form of Letter of Credit
K Location of Reserved Parking Spaces
</TABLE>
<PAGE>
EXHIBIT 21.1
NEW CENTURY FINANCIAL CORPORATION
LIST OF SUBSIDIARIES
New Century Mortgage Corporation
<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.
KPMG Peat Marwick LLP
/s/
Orange County, California
April 17, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
FINANCIAL STATEMENTS AS OF AND FOR THE YEAR ENDED DECEMBER 31, 1996 AND
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF AND FOR THE PERIOD ENDED MARCH
31, 1997 (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 MAR-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 MAR-31-1997
<CASH> 3,041 3,747
<SECURITIES> 0 13,243
<RECEIVABLES> 57,990 113,162
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 63,018 118,349
<PP&E> 1,868 2,392
<DEPRECIATION> 248 402
<TOTAL-ASSETS> 64,638 133,582
<CURRENT-LIABILITIES> 3,778 123,664
<BONDS> 0 0
0 0
29 29
<COMMON> 3 3
<OTHER-SE> 4,371 6,718
<TOTAL-LIABILITY-AND-EQUITY> 64,638 133,582
<SALES> 11,630 10,012
<TOTAL-REVENUES> 14,505 12,585
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 10,259 6,731
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 1,941 1,808
<INCOME-PRETAX> 2,305 4,046
<INCOME-TAX> 970 1,699
<INCOME-CONTINUING> 1,335 2,347
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,335 2,347
<EPS-PRIMARY> 0 0
<EPS-DILUTED> 0 0
</TABLE>
