<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 18, 1997
REGISTRATION NO. 333-25483
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
NEW CENTURY FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 6162 33-0683629
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
ORGANIZATION)
</TABLE>
4910 BIRCH STREET, SUITE 100
NEWPORT BEACH, CALIFORNIA 92660
(714) 440-7030
(ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
BRAD MORRICE
NEW CENTURY FINANCIAL CORPORATION
4910 BIRCH STREET, SUITE 100
NEWPORT BEACH, CALIFORNIA 92660
(714) 440-7030
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
COPIES TO:
<TABLE>
<S> <C>
ROGER M. COHEN
DAVID A. KRINSKY BRUCE R. HALLETT
KAREN K. DREYFUS JAMES S. BRENNAN
O'MELVENY & MYERS LLP BROBECK, PHLEGER & HARRISON LLP
610 NEWPORT CENTER DRIVE, SUITE 1700 4675 MACARTHUR COURT, SUITE 1000
NEWPORT BEACH, CALIFORNIA 92660 NEWPORT BEACH, CALIFORNIA 92660
(714) 760-9600 (714) 752-7535
</TABLE>
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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- ------------------------------------------------------------------------------------------------
<CAPTION>
PROPOSED PROPOSED
AMOUNT MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE (1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value... 4,025,000 $10.50 $42,262,500 $12,806
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 under the Securities Act of 1933.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 18, 1997
3,500,000 SHARES
[LOGO OF NEW CENTURY FINANCIAL CORPORATION]
COMMON STOCK
Of the 3,500,000 shares of Common Stock offered hereby (the "Offering"),
2,900,000 are being sold by New Century Financial Corporation ("New Century" or
the "Company") and 600,000 are being sold by Cornerstone Fund I, L.L.C.
(individually, a "Selling Stockholder"). The Company will not receive any
proceeds from the sale of shares by the Selling Stockholder. Prior to the
Offering, there has been no public market for the Common Stock. It is currently
anticipated that the initial public offering price will be between $8.50 and
$10.50 per share. See "Underwriting" for a discussion of factors to be
considered in determining the initial public offering price.
Application has been made to have the Common Stock approved for quotation on
the Nasdaq National Market under the trading symbol "NCEN."
SEE "RISK FACTORS" COMMENCING ON PAGE 10 FOR A DISCUSSION OF MATERIAL RISKS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
Price to Underwriting Proceeds to Proceeds to Selling
Public Discount (1) Company (2) Stockholder
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share............. $ $ $ $
Total (3)............. $ $ $ $
</TABLE>
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(1) See "Underwriting" for information relating to indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $800,000.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
232,500 additional shares of Common Stock, and the Selling Stockholder and
Cornerstone Equity Partners, L.L.C. (collectively, the "Selling
Stockholders") have granted the Underwriters a 30-day option to purchase up
to 292,500 additional shares of Common Stock, on the same terms and
conditions as set forth above, solely to cover over-allotments, if any. If
such options are exercised in full, the total Price to Public will be $ ,
Underwriting Discount will be $ , Proceeds to Company will be $ and
Proceeds to Selling Stockholders will be $ .
The shares of Common Stock are offered by the Underwriters named herein,
subject to receipt and acceptance by them and subject to their right to reject
any order in whole or in part. It is expected that delivery of the certificates
representing such shares will be made against payment therefore at the offices
of Montgomery Securities on or about , 1997.
-----------
Montgomery Securities Piper Jaffray Inc.
, 1997
<PAGE>
[ARTWORK MAP OF THE UNITED STATES, INDICATING, AS OF MAY 31, 1997, (I) THE
RETAIL SALES OFFICES OF THE COMPANY LOCATED IN ARIZONA (3), CALIFORNIA (15),
COLORADO, HAWAII (2), ILLINOIS (2), KANSAS, MINNESOTA (2), MISSOURI (3),
NEVADA, NEW MEXICO, OHIO (3), OREGON, PENNSYLVANIA (2), UTAH, WASHINGTON AND
WISCONSIN; (II) THE WHOLESALE SALES OFFICES OF THE COMPANY LOCATED IN ARIZONA,
CALIFORNIA (3), COLORADO, FLORIDA, GEORGIA, HAWAII, INDIANA, MINNESOTA,
MISSOURI (3), NEVADA, NEW MEXICO, OHIO (3), PENNSYLVANIA (2), TEXAS (2) AND
WASHINGTON; (III) THE REGIONAL OPERATING CENTERS OF THE COMPANY LOCATED IN
SOUTHERN CALIFORNIA, NORTHERN CALIFORNIA AND CHICAGO; (IV) THE SEVENTEEN (17)
STATES IN WHICH THE COMPANY ORIGINATES LOANS BUT NO OFFICES ARE LOCATED
(ALABAMA, ARKANSAS, IDAHO, IOWA, KENTUCKY, LOUISIANA, MASSACHUSETTS, MICHIGAN,
MONTANA, NORTH CAROLINA, NORTH DAKOTA, OKLAHOMA, SOUTH CAROLINA, TENNESSEE,
VIRGINIA, WEST VIRGINIA AND WYOMING); AND (V) THE LOCATION OF THE COMPANY'S
HEADQUARTERS IN ORANGE COUNTY, CALIFORNIA.]
----------------
The Company intends to furnish its stockholders annual reports containing
financial statements audited by an independent accounting firm, and quarterly
reports containing unaudited financial information for the first three
quarters of each fiscal year.
----------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE,
PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE
COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and Financial Statements,
including the Notes thereto, appearing elsewhere in this Prospectus. Except as
otherwise specified, all information in this Prospectus assumes no exercise of
the Underwriters' over-allotment option (see "Underwriting") and does not
include (i) 2,000,000 shares reserved for issuance under the Company's 1995
Stock Option Plan (the "Stock Option Plan") as of the closing of the Offering,
(ii) 127,500 shares subject to options granted or to be granted to two
executive officers and one non-employee director of the Company outside the
Stock Option Plan and (iii) 333,333 shares reserved for issuance pursuant to
warrants granted or to be granted to Comerica Incorporated. Unless otherwise
indicated, all references in this Prospectus to the "Company" or "New Century"
are to New Century Financial Corporation and its subsidiary, New Century
Mortgage Corporation.
THE COMPANY
New Century is a specialty finance company engaged in the business of
originating, purchasing, selling and servicing subprime mortgage loans secured
primarily by first mortgages on single family residences. See "Risk Factors--
Subprime Mortgage Banking Industry." The Company originates loans through
independent loan brokers (the "Wholesale Division") and through direct
solicitation of borrowers (the "Retail Division"). From the commencement of
lending operations in February 1996 through March 31, 1997, the Company
originated and purchased $607.5 million in mortgage loans. The Company's loan
originations and purchases have grown from $4.3 million for the first quarter
of 1996 to $250.6 million for the first quarter of 1997. The Company's
principal strategy is to continue to increase loan originations through
geographic expansion, high levels of service to brokers through its Wholesale
Division and increased consumer marketing through its Retail Division. New
Century has also implemented a loan sales strategy that includes both
securitizations and whole loan sales in order to advance the Company's goal of
enhancing profitability while managing cash flows. See "Business--General."
The Company's borrowers generally have substantial equity in the property
securing the loan, but are considered "subprime" borrowers because they have
impaired or limited credit profiles or higher debt-to-income ratios than
traditional mortgage lenders allow. See "Business--Underwriting." The Company's
borrowers also include individuals who, due to self-employment or other
circumstances, have difficulty verifying their income, and individuals who
prefer the prompt and personalized service provided by the Company. These types
of borrowers are generally willing to pay higher loan origination fees and
interest rates than those charged by conventional lending sources. Because
these borrowers typically use the proceeds of the Company's loans to
consolidate and refinance debt and to finance home improvements, education and
other consumer needs, the Company believes that its loan volume will be less
dependent on general levels of interest rates or home sales and therefore less
cyclical than conventional mortgage lending. Although the Company's
underwriting guidelines include five levels of risk classification,
approximately 54.1% of the principal balance of the loans originated and
purchased by the Company in 1996 were to borrowers within the Company's two
highest credit grades. See "Business--Loan Production by Borrower Risk
Classification." One important consideration in underwriting subprime loans is
the nature and value of the collateral securing the loans. The Company believes
that the amount of equity present in the real estate securing its loans,
together with the fact that approximately 88.2% of its loans originated and
purchased in the first quarter of 1997 were secured by borrowers' primary
residences, mitigates the risks inherent in subprime lending. The maximum loan-
to-value ratio allowed for first mortgage borrowers in the Company's highest
credit grade is 90% and second mortgages offered through the Company's recently
formed alternative mortgage products division (the "Alternative Mortgage
Products Division") include loans with loan-to-value ratios of up to 125% for
borrowers with good credit histories. However, the average loan-to-value ratio
on loans originated and purchased by the Company in 1996 was approximately
71.5%. Approximately 97.3% and 98.4% of the loans originated and purchased by
the Company during 1996 and the first quarter of 1997, respectively, were
secured by first mortgages, and the remainder of the loans the Company
originated and purchased in such periods were secured by second mortgages. See
"Business--General."
3
<PAGE>
The Wholesale Division originates loans through independent loan brokers and
accounted for $159.1 million, or 63.5%, of the Company's loan production during
the first quarter of 1997. As of May 31, 1997, the Wholesale Division
originated loans through its three regional operating centers located in
Southern California, Northern California and Chicago and through 23 additional
sales offices located in 15 states. Because brokers conduct their own marketing
and employ their own personnel to complete loan applications and maintain
contact with borrowers, originating loans through the Wholesale Division allows
the Company to increase its loan volume without incurring the higher marketing,
labor and other overhead costs associated with increased retail originations.
See "Business--Loan Originations and Purchases, --Geographic Distribution." The
Company also purchases loans through its correspondent program (the
"Correspondent Program") which operates as part of its Wholesale Division.
Loans purchased through the Correspondent Program accounted for $17.1 million,
or 6.8%, of the Company's loan production during the first quarter of 1997. See
"Business--Correspondent Program."
The Retail Division originates loans through the direct solicitation of
borrowers and accounted for $74.4 million, or 29.7%, of the Company's loan
production during the first quarter of 1997. As of May 31, 1997, the Retail
Division originated loans through a network of 15 sales offices located in
California and 25 sales offices located in 15 other states. By creating a
direct relationship with the borrower, retail lending creates a more
sustainable loan origination franchise and provides the Company with greater
control over the lending process. The Company also receives the origination
fees paid by the borrower on loans originated through the Retail Division,
which offsets the higher costs of retail lending and may contribute to
increased profitability and cash flow. See "Business--Loan Originations and
Purchases, --Geographic Distribution." The Company's retail marketing includes
high-volume targeted direct mail and more traditional marketing activities
conducted by retail loan officers, who seek to identify potential borrowers
through referral sources as well as individual sales efforts. See "Business--
Marketing."
The Company's seven senior executives have substantial mortgage banking
experience and have previously directed the national expansion of several
conventional and subprime mortgage companies, and the Company's current
underwriters have an average of 10 years of subprime mortgage lending
experience. The Company believes that its experienced underwriting personnel
have the ability to analyze the specific characteristics of each loan
application and make appropriate credit judgments in conjunction with the
Company's underwriting guidelines. Furthermore, all loan originations presently
require two underwriting approvals. See "Business--Underwriting Standards." In
addition to its thorough underwriting process, the Company maintains strong
controls throughout the lending process, including subjecting all loans to a
series of pre-funding and post-funding audits to verify the accuracy of the
loan application data and to assure compliance with the Company's underwriting
policies, procedures and guidelines. The Company believes that its underwriting
and review processes provide the necessary support to continue the Company's
rapid loan origination growth while maintaining loan quality.
New Century sells its mortgage loans through securitizations as well as
through bulk sales of whole loans to institutional purchasers. During 1996, the
Company sold $298.7 million of loans through whole loan sales transactions at a
weighted average sales price equal to 105.0% of the original principal balance
of the loans sold. As of May 31, 1997, the Company has securitized $228.4
million of its mortgage loans through two securitization transactions. Each of
these securitizations has been credit enhanced by an insurance policy provided
through a monoline insurance company allowing the senior certificates in the
related trusts to receive ratings of "AAA" from Standard & Poor's Ratings
Services and "Aaa" from Moody's Investors Service, Inc. The Company intends to
securitize a majority of its loans while continuing to sell a substantial
portion of its loans through whole loan sale transactions. See "Business--Loan
Sales and Securitizations."
Until February 1997, the Company sold all of its loan production on a
servicing-released basis. In connection with its first securitization in
February 1997, the Company retained the servicing rights on the loans sold
through the securitization. While retaining servicing rights as the master
servicer on the securitized loans,
4
<PAGE>
the Company currently outsources its servicing operations to Advanta Mortgage
Corp. USA ("Advanta"). As of March 31, 1997, the Company's servicing portfolio
consisted of 3,110 loans with an aggregate principal balance of approximately
$346.4 million, of which 2,255 loans with an aggregate principal balance of
approximately $248.6 million were being serviced on an interim basis. The
Company intends to develop its own servicing capability in the future in order
to manage the servicing relationship with its borrowers and oversee the
performance of its loans more directly. See "--Recent Developments" and
"Business--Loan Servicing and Delinquencies."
GROWTH AND OPERATING STRATEGIES
Increasing Growth of Retail Production. The Company will emphasize the growth
of retail loan production during 1997 through geographic expansion and
increased consumer marketing efforts. The Company has opened 20 retail sales
offices during the first five months of 1997 and intends to open 10 or more
additional retail sales offices during the remainder of 1997. See "Business--
Geographic Distribution." The Company targets markets for expansion based on
demographics and its ability to recruit sales office managers and other
qualified personnel in that market. The Company's geographic expansion plans
require additional capital and human resources and there can be no assurance
the Company will successfully implement its expansion plans. See "Risk
Factors--Ability to Sustain Growth and Rapid Geographic Expansion." The Company
also intends to increase its consumer marketing, which includes the use of
direct mail, a loans-by-mail program and more traditional marketing methods,
such as referrals and individual loan officer sales efforts. The Company has
increased the number of targeted direct mail pieces sent to retail borrowers
from approximately 750,000 mailers in January 1997 to approximately 1.4 million
mailers in May 1997 and intends to increase the number of targeted direct mail
pieces to over 2 million per month by the end of 1997. See "Business--Growth
and Operating Strategies."
Continuing Growth of Wholesale Production. The Company will continue the
growth of its Wholesale Division, primarily through geographic expansion and
greater penetration in existing markets. The Company intends to continue its
geographic expansion through the development of lending operations in the
Southeast and Northeast regions of the country where the Company has had
limited activity. See "Business--Geographic Distribution." In connection with
its expansion, the Company plans to open 5 or more additional wholesale sales
offices in markets surrounding the Company's existing and planned regional
operations centers and to increase the total number of account executives from
42 as of May 31, 1997 to approximately 80 by the end of 1997. The Company's
geographic expansion plans require additional capital and human resources and
there can be no assurance the Company will successfully implement its expansion
plans. See "Risk Factors--Ability to Sustain Growth and Rapid Geographic
Expansion, --Growth and Operating Strategies."
Enhancing Profitability while Managing Cash Flow. New Century has implemented
a loan sales strategy that includes both securitizations and whole loan sales
in order to advance the Company's goal of enhancing profits while managing cash
flows. Loan sales through securitizations permit the Company to enhance
operating profits and to benefit from future cash flows generated by the
residual interests retained by the Company (the "residual interests"). Whole
loan sale transactions enable the Company to generate current cash flow,
protect against the potential volatility of the securitization market and
reduce the risks inherent in retaining residual interests in securitizations.
The Company continually evaluates different securitization and financing
strategies which may improve its profitability and/or cash flow position. See
"Business--Growth and Operating Strategies."
Regionalizing Operations and Incentivizing Performance. New Century is
implementing a strategy of regionalizing operations support, which will place
Company decision makers closer to local brokers, enable the Company to refine
its procedures to reflect local market practices and conditions and enable the
Company to provide a higher level of service to brokers. The Company's
compensation structure, which includes stock options and cash incentives based
on both loan volume and loan quality for a large number of key employees,
incentivizes its employees to achieve the Company's performance goals. The
Company believes its compensation structure also enables it to attract and
retain key employees. See "Business--Growth and Operating Strategies."
5
<PAGE>
Expanding Product Offerings. The Company frequently reviews its products and
pricing for competitiveness and introduces new products to meet the needs of
its borrowers, brokers and correspondents. The Company recently commenced loan
originations through its Alternative Mortgage Products Division which offers
loans to borrowers meeting conventional mortgage lending standards and offers a
broad selection of second mortgage products, including loans with loan-to-value
ratios of up to 125% for borrowers with good credit histories. The Company
believes that these mortgage products will enable the Company to increase loan
production from brokers and correspondents who have customers seeking such
products and from borrowers identified through the Company's retail marketing
whose needs are not satisfied by the mortgage products offered by the Retail
Division. The Alternative Mortgage Products Division maintains separate
underwriting and loan processing staffs and the Company expects that the
mortgage loans originated through its Alternative Mortgage Products Division
will be sold by the Company on a broker or correspondent basis, rather than
through securitizations or servicing-retained sales. See "Business--Growth and
Operating Strategies."
The Company's headquarters are located at 18400 Von Karman, Suite 1000,
Irvine, California 92612 and its telephone number is (714) 440-7030.
RECENT DEVELOPMENTS
Comerica Investment and Strategic Relationship. On May 30, 1997, the Company
sold 545,000 shares of Common Stock of the Company to Comerica Incorporated
("Comerica") for $4,087,500. Comerica is a bank holding company which had
assets of $34.9 billion at March 31, 1997 and the parent of Comerica Bank. In
connection with the sale of stock to Comerica, the Company and Comerica have
agreed to enter into certain arrangements concerning servicing and other
strategic relationships. In order to increase the likelihood of success of such
strategic relationships, the Company has issued warrants to purchase 100,000
shares of Common Stock to Comerica and has agreed to issue Comerica warrants to
purchase an additional 233,333 shares of Common Stock. The issuance of the
additional warrants is subject to the completion by Comerica of certain
performance events related to the strategic relationships. All of the warrants
are exercisable over five years at an exercise price equal to the initial
public offering price of the Company's Common Stock, subject to vesting in
equal installments on December 31, 1997, 1998 and 1999. Accelerated vesting
will occur upon (i) certain changes in control of the Company, or (ii) the
inclusion of the shares underlying the warrants in a registration statement,
subject to certain limitations, upon exercise of Comerica's registration
rights.
Pursuant to one of the strategic relationships, Comerica has agreed to act as
a sub-servicer for the Company, providing certain servicing functions with
respect to the Company's mortgage loans. The functions to be performed by
Comerica include payment processing, customer service, tax, insurance and
investor reporting. Comerica is a FNMA and FHLMC approved servicer and as of
March 31, 1997 serviced residential mortgage loans with a principal balance of
$4.1 billion and also serviced consumer loans with a principal balance of $4.4
billion. In connection with these arrangements, the Company will pay Comerica
one time set-up and removal fees for loans boarded on and removed from the
Comerica servicing system and a fixed monthly fee for each loan with respect to
which Comerica performs the specified subservicing functions.
The Company will continue to act as master servicer with respect to its
mortgage loans and intends to develop an in-house default management process,
including collections, delinquency management, foreclosure and REO disposition
services. The Company's senior management has substantial experience in
building and overseeing servicing operations, including subprime mortgage loan
default management, and plans to recruit additional personnel and install
appropriate systems before commencing servicing operations under the Comerica
agreement. This arrangement will allow the Company to utilize Comerica's
existing servicing expertise with respect to certain standardized servicing
functions, while allowing the Company to benefit from controlling the
collections and default management process. The Company will obtain approval of
any appropriate third parties, including rating agencies and monoline insurance
companies, before utilizing the new servicing platform for any
6
<PAGE>
existing or future securitizations. It is anticipated that servicing operations
under the Comerica agreement will begin by the end of 1997.
Comerica and the Company have also agreed to create a process to develop
leads for the Company's loan products through Comerica's existing bank and
mortgage company branch network. In consideration for the services to be
performed by Comerica with respect to such loans, the Company will pay Comerica
a fee based on the principal balance of the loans funded by the Company.
Comerica and the Company have also agreed to develop a process to identify
prospective Company borrowers within Comerica's existing consumer loan
portfolio and to develop a targeted list of such borrowers for the Company to
direct mail or telemarket. In connection with this arrangement, the Company
will pay Comerica a fee for the services performed by Comerica with respect to
each loan funded by the Company which was identified through Comerica's
consumer loan portfolio.
May 1997 Securitization. In May 1997, the Company completed its second public
securitization, involving approximately $129.3 million of loans. The May 1997
securitization was credit enhanced by an insurance policy provided through a
monoline insurance company allowing the senior certificates in the related
trust to receive ratings of "AAA" from Standard & Poor's Ratings Services and
"Aaa" from Moody's Investors Service, Inc.
Recent Loan Origination Volume. The Company originated and purchased $125.5
million in mortgage loans in the month of April 1997, including $34.2 million
through the Retail Division, $79.3 million through the Wholesale Division and
$12.0 million through the Correspondent Program. Total loan origination and
purchase volume in April represented an increase of approximately 50% over
average monthly volume during the first quarter of 1997.
THE OFFERING
<TABLE>
<C> <S>
Common Stock offered by the Company............. 2,900,000 shares
Common Stock offered by the Selling Stockholder. 600,000 shares
Common Stock outstanding after the Offering(1).. 13,892,373 shares
Use of Proceeds................................. To fund future loan
originations and purchases,
to fund securitization
transaction costs and for
general corporate purposes.
See "Use of Proceeds."
Nasdaq Symbol................................... "NCEN"
Risk Factors.................................... See "Risk Factors" for a
description of material risks
which should be considered
carefully in evaluating an
investment in the Common
Stock offered by this
Prospectus.
</TABLE>
- --------
(1) Excludes (i) 2,000,000 shares reserved for issuance under the Stock Option
Plan as of the closing of the Offering, including options to acquire
1,267,520 shares which have been granted under the Stock Option Plan, and
441,500 shares which will be granted upon the closing of the Offering, (ii)
options to acquire 127,500 shares which have been granted or will be
granted to two executive officers and one non-employee director of the
Company outside the Stock Option Plan and (iii) 333,333 shares reserved for
issuance pursuant to warrants granted or to be granted to Comerica.
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(NOVEMBER 17, 1995) FOR THE QUARTER ENDED
THROUGH FOR THE YEAR ENDED -----------------------------
DECEMBER 31, 1995 DECEMBER 31, 1996 MARCH 31, 1996 MARCH 31, 1997
------------------- ------------------ -------------- --------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Gain on sale of loans.. $ -- $11,630 $ -- $10,012
Servicing income....... -- 29 -- 302
Interest income........ 14 2,846 39 2,271
----- ------- ------ -------
Total revenues......... 14 14,505 39 12,585
Operating expenses...... 95 12,200 899 8,539
----- ------- ------ -------
Earnings (loss) before
income taxes
(benefit).............. (81) 2,305 (860) 4,046
Income taxes (benefit).. 1 970 (362) 1,699
===== ======= ====== =======
Net earnings (loss)..... $ (82) $ 1,335 $(498) $ 2,347
===== ======= ====== =======
Pro forma primary
earnings (loss) per
share(4)............... $ 0.10 $(0.05) $ 0.19
Pro forma fully diluted
earnings (loss) per
share(4)............... $ 0.10 $(0.05) $ 0.19
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1997
-------------- -----------------------
PRO FORMA
1995 1996 ACTUAL AS ADJUSTED(1)
------ ------- -------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Loans receivable held for sale, net..... $ -- $57,990 $113,162 $113,162
Residual interests in securitization.... -- -- 13,243 13,243
Total assets............................ 3,151 64,638 133,582 133,582
Borrowings under warehouse lines of
credit................................. -- 41,702 65,803 37,178
Borrowings under aggregation lines of
credit................................. -- 13,957 44,731 44,731
Residual financing ..................... -- -- 7,248 7,248
Other borrowings........................ -- 1,326 3,119 1,869
Total stockholders' equity.............. 3,068 4,403 6,750 36,625
</TABLE>
<TABLE>
<CAPTION>
AS OF OR FOR THE PERIOD
FROM INCEPTION AS OF OR FOR THE
(NOVEMBER 17, 1995) AS OF OR QUARTER ENDED
THROUGH FOR THE YEAR ENDED -----------------------------
DECEMBER 31, 1995 DECEMBER 31, 1996 MARCH 31, 1996 MARCH 31, 1997
----------------------- ------------------ -------------- --------------
<S> <C> <C> <C> <C>
OPERATING STATISTICS:
Loan origination and
purchase activities:
Wholesale
originations.......... $ -- $287,992 $2,292 $159,075
Retail originations.... -- 66,487 2,001 74,384(2)
Correspondent
purchases............. -- 2,460 -- 17,111
----- -------- ------ --------
Total loan originations
and purchases(3)...... $ -- $356,939 $4,293 $250,570
Average principal
balance per loan....... $ -- $ 106 $ 110 $ 108
Percent of loans secured
by first mortgages..... -- 97.3% 96.5% 98.4%
Weighted average initial
loan-to-value ratio.... -- 71.5% 72.5% 70.9%
Originations by product
type(3):
Adjustable-rate
mortgages ("ARMs").... $ -- $264,510 $2,090 $187,987
Fixed rate mortgages... -- 92,429 2,203 62,583
Weighted average
interest rates:
Fixed-rate............. -- 10.4% 9.8% 9.9%
ARMs................... -- 9.3% 9.0% 9.2%
Margin-ARMs............ -- 7.0% 5.7% 7.0%
Loan sales:
Loans sold through
whole loan
transactions(3)....... $ -- $298,713 $ -- $ 95,716
Loans sold through
securitizations....... -- -- -- 99,132
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
AS OF OR FOR THE QUARTER ENDED
--------------------------------------------------------------------------------
MARCH 31, 1996 JUNE 30, 1996 SEPTEMBER 30, 1996 DECEMBER 31, 1996 MARCH 31, 1997
-------------- ------------- ------------------ ----------------- --------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Gain on sale of loans.. $ -- $ 830 $ 2,658 $ 8,142 $ 10,012
Servicing income....... -- -- 10 19 302
Interest income........ 39 248 560 1,999 2,271
------ ------- -------- -------- --------
Total revenues......... 39 1,078 3,228 10,160 12,585
Operating expenses...... 899 1,620 2,721 6,960 8,539
------ ------- -------- -------- --------
Earnings (loss) before
income taxes
(benefit).............. (860) (542) 507 3,200 4,046
Income taxes (benefit).. (362) (225) 213 1,344 1,699
------ ------- -------- -------- --------
Net earnings (loss)..... $ (498) $ (317) $ 294 $ 1,856 $ 2,347
====== ======= ======== ======== ========
Pro forma primary
earnings (loss) per
share(4)............... $(0.05) $ (0.03) $ 0.02 $ 0.16 $ 0.19
Pro forma fully diluted
earnings (loss) per
share(4)............... $(0.05) $ (0.03) $ 0.02 $ 0.16 $ 0.19
OPERATING STATISTICS:
Loan origination and
purchase activities:
Wholesale
originations.......... $2,292 $45,412 $104,392 $135,896 $159,075
Retail originations.... 2,001 7,120 18,956 38,410 74,384(2)
Correspondent
purchases............. -- -- -- 2,460 17,111
------ ------- -------- -------- --------
Total loan originations
and purchases(3)...... $4,293 $52,532 $123,348 $176,766 $250,570
Average principal
balance per loan....... $ 110 $ 115 $ 103 $ 105 $ 108
Percent of loans secured
by first mortgages..... 96.5% 97.4% 96.8% 97.7% 98.4%
Weighted average initial
loan-to-value ratio.... 72.5% 71.5% 71.9% 71.1% 70.9%
Originations by product
type(3):
ARMs................... $2,090 $35,340 $ 93,473 $133,607 $187,987
Fixed-rate mortgages... $2,203 $17,192 $ 29,875 $ 43,159 62,583
Weighted average
interest rates:
Fixed-rate............. 9.8% 10.3% 10.6% 10.3% 9.9%
ARMs................... 9.0% 9.4% 9.2% 9.4% 9.2%
Margin-ARMs............ 5.7% 6.9% 6.9% 7.1% 7.0%
Loan sales:
Loans sold through
whole loan
transactions.......... $ -- $28,822 $ 79,419 $190,472 $ 95,716(5)
Loans sold through
securitizations....... $ -- $ -- $ -- $ -- $ 99,132
Staffing and offices:
Total employees........ 53 105 178 333 462
Total wholesale account
executives............ 4 16 25 34 46
Total retail loan
officers.............. 6 20 24 58 105
Total regional
operating centers..... 2 3 3 3 3
Total wholesale sales
offices............... 1 1 5 12 18
Total retail sales
offices............... 2 5 8 20 30
</TABLE>
- --------
(1) Adjusted to reflect (i) the exercise of 304,501 warrants at an average
price of $3.50 per share, (ii) the sale of 545,000 shares of Common Stock
to Comerica at a price of $7.50 per share, less estimated expenses payable
by the Company, and (iii) the sale of 2,900,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $9.50 per
share (after deducting the underwriting discount and estimated expenses
payable by the Company), and the application of the estimated net proceeds
therefrom to reduce outstanding balances under the Company's warehouse
facilities and repay approximately $1.25 million outstanding under the
Company's revolving line of credit. Adjustments have not been made to
reflect the impact should the Underwriters' over-allotment option be
exercised.
(2) Includes $634,000 of loans originated through the Alternative Mortgage
Products Division.
(3) Excludes non-refundable fees and direct costs associated with the
origination or purchase of mortgage loans.
(4) Pro forma earnings (loss) per share has been computed by dividing pro forma
net earnings by the pro forma weighted average number of shares
outstanding. The pro forma weighted average number of shares includes all
options and warrants issued below the estimated initial public offering
price within one year prior to the filing of the Registration Statement for
the initial public offering and is calculated using the treasury stock
method. Historical earnings per share is not presented because it is not
indicative of the ongoing entity.
(5) Includes $2.5 million of loans repurchased and resold by the Company in the
first quarter of 1997.
9
<PAGE>
RISK FACTORS
Prospective purchasers of the Common Stock offered hereby should consider
carefully the following factors, as well as the other information appearing
elsewhere in this Prospectus, in evaluating an investment in the Company. This
Prospectus may contain forward-looking statements which involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain
factors, including those set forth in the following risk factors and elsewhere
in this Prospectus.
LIMITED HISTORY OF OPERATIONS AND RAPID GROWTH
The Company commenced lending operations in February 1996 and has a limited
operating history. Although the Company has experienced rapid and substantial
growth in mortgage loan originations and total revenues since it commenced
operations, there can be no assurance that the Company can sustain these rates
of growth or that it will be able to create an infrastructure or recruit and
retain sufficient personnel to keep pace with a prolonged period of growth.
The inability of the Company to sustain or keep pace with its rate of growth
would have a material adverse effect on the Company's results of operations,
financial condition and business prospects. Unlike companies with longer and
more established operating histories, the historical financial and operating
performance of the Company may be of limited relevance in predicting future
performance. Since its incorporation in November 1995, the Company has
generated earnings for a limited period and there can be no assurance the
Company will generate earnings in the future. Further, the Company has
completed only two securitizations of its loans to date. There can be no
assurance that the Company will complete additional securitizations and the
failure to complete securitizations would have a material adverse effect on
the Company's results of operations, financial condition and business
prospects. See "Risk Factors--Ability to Sustain Growth."
LACK OF LOAN PERFORMANCE DATA
Prior to commencing its securitization program in February 1997, the Company
sold all of the loans it originated or purchased on a servicing-released
basis. The Company is unable to track the delinquency, loss and prepayment
experience of such loans in any meaningful fashion. Consequently, the Company
does not have representative historical delinquency, bankruptcy, foreclosure,
default or prepayment experience that may be referred to for purposes of
estimating the future delinquency, loss and prepayment experience of its
originated or purchased loans. Likewise, the Company does not have meaningful
delinquency, loss and prepayment data with respect to the loans included in
the Company's first and second securitizations, as these loans have been
outstanding for only a short period of time. In view of the Company's lack of
loan performance data, it is extremely difficult to validate the Company's
loss or prepayment assumptions used to calculate its gain on sale in
connection with its first and second securitizations or with future
securitizations. Any material difference between these assumptions and actual
performance could have a material adverse impact on the timing and/or receipt
of the Company's future revenues, the value of the residual interests held on
the Company's balance sheet and the Company's cash flow.
RAPID GEOGRAPHIC EXPANSION AND ABILITY TO SUSTAIN GROWTH
The Company has grown significantly since the commencement of lending
operations in February 1996 and no assurances can be given that the Company
can maintain this growth rate, successfully manage its infrastructure or
recruit and retain sufficient personnel. The Company intends to continue to
pursue a growth strategy for the foreseeable future, primarily through the
expansion of its Wholesale Division, Retail Division and Correspondent
Program. The growth strategy includes the planned geographic expansion of the
Wholesale and Retail Divisions through the opening of a substantial number of
new wholesale and retail sales offices in 1997 and the hiring of additional
personnel. Each of these expansion plans requires additional capital and human
resources and there can be no assurance that the Company will continue to
manage effectively its funding sources and information and operating systems,
that it will be able to successfully expand and operate such divisions and
programs profitably, that it will be able to identify and hire adequate
numbers of qualified employees to support its expansion plans or that
management will be able to manage the planned expansion effectively. In
addition,
10
<PAGE>
there can be no assurance that the Company will achieve its planned expansion
in a timely and cost-effective manner or, if achieved, that the expansion will
result in profitable operations. The failure of the Company to implement its
planned geographic expansion would have a material adverse effect on the
Company's results of operations, financial condition and business prospects.
The Company also plans to broaden its product offerings to include alternative
types of mortgage loans and other consumer loans. There can be no assurance
the Company can successfully broaden its product offerings and such failure to
broaden its product offerings could have a material adverse effect on the
Company's results of operations, financial condition and business prospects.
SUBPRIME MORTGAGE BANKING INDUSTRY
Lenders in the subprime mortgage banking industry make loans to borrowers
who have impaired or limited credit histories, limited documentation of income
and higher debt-to-income ratios than traditional mortgage lenders allow. The
subprime mortgage banking industry is subject to certain risks, including, but
not limited to, risks related to (i) making loans to lower credit grade
borrowers, (ii) increasing competition and (iii) the negative impact of
economic slowdowns or recessions. The failure of the Company to adequately
address the risks of subprime lending would have a material adverse impact on
the Company's results of operations, financial condition and business
prospects. See "Risk Factors--Risks Related to Lower Credit Grade Borrowers,
- --Economic Slowdown or Recession, --Competition."
RISKS RELATED TO LOWER CREDIT GRADE BORROWERS
Loans made to lower credit grade borrowers, including credit-impaired
borrowers, may entail a higher risk of delinquency and higher losses than
loans made to borrowers with better credit. Lower credit grade borrowers
include individuals who have impaired or limited credit profiles, including
open bankruptcies, limited documentation of income and/or higher debt-to-
income ratios than traditional mortgage lenders allow. Virtually all of the
Company's loans are made to borrowers who do not qualify for loans from
conventional mortgage lenders and approximately 20.5% of the loans originated
or purchased by the Company during the first quarter of 1997 were made to
borrowers in the Company's two lowest credit grade classifications. No
assurance can be given that the Company's underwriting criteria or methods
will afford adequate protection against the higher risks associated with loans
made to lower credit grade borrowers. In the event that loans sold by the
Company through securitizations or whole loan sales experience higher losses
than anticipated, the Company's results of operations, financial condition and
business prospects could be adversely affected. See "Business--Underwriting
Standards."
ACCESS TO FUNDING SOURCES
The Company requires access to short-term warehouse and aggregation credit
facilities in order to fund loan originations and purchases pending the
pooling and sale of such loans. The Company currently has an $85 million
warehouse line of credit led by First Bank National Association ("First
Bank"), which expires in May 1998, and has received a commitment letter from
First Bank proposing an increase in the Company's warehouse line limit to $150
million subject to the completion of the Offering. The Company intends to
agree to such proposal upon the closing of the Offering. The Company also has
a $175 million aggregation facility with Salomon Brothers ("Salomon"), which
may be terminated by Salomon on 28 days prior notice and a residual financing
agreement with Salomon pursuant to which Salomon will provide the Company with
financing upon the Company's retention of residual interests in
securitizations on which Salomon is the lead underwriter. The amount of
residual financing provided by Salomon upon each securitization is determined
pursuant to a formula set forth in the agreement and, in the event of a change
in the variables utilized by Salomon in determining such financing amount, the
Company may be required to repay some or all of any residual financing balance
outstanding. Any such repayment could have a material adverse effect on the
Company's results of operations, financial condition and business prospects.
The Company will need to add new credit facilities, as well as renew and
expand its existing credit facilities, in order to finance growing levels of
loan production and future securitization transactions.
Although the Company expects to be able to maintain and expand its existing
warehouse line of credit and aggregation facility, as well as its existing
residual financing arrangement, or to obtain replacement or additional
financing as the current arrangements expire or become fully utilized, there
can be no assurance that such
11
<PAGE>
financing will be available on favorable terms, if at all. In addition, there
can be no assurances that the Company will be able to continue to sell or
securitize its loans on favorable terms, if at all. To the extent that the
Company is unable to access adequate capital to fund its loan production or to
the extent that the Company is unable to access adequate capital to complete
the desired level of securitizations, the Company may have to curtail its loan
origination, purchase and securitization activities, which would have a
material adverse impact on the Company's ability to execute its growth and
operating strategies. The Company's results of operations, financial condition
and business prospects could suffer as a result. See "Management's Discussion
and Analysis of Results of Operations and Financial Condition--Liquidity and
Capital Resources."
LIQUIDITY; NEGATIVE CASH FLOW
The Company's business requires substantial cash to support its operating
activities and growth plans. The Company's growing negative operating cash
flow position is primarily a function of its securitization strategy and rapid
growth. The Company records a residual interest in securitization and
recognizes a gain on sale when it effects a securitization, but only receives
the cash representing such gain over the life of the loans securitized. As a
result of its strategy to significantly grow its loan origination, purchase
and securitization programs, the Company expects that its operating uses of
cash will substantially exceed its operating sources of cash. This gap will
continue to increase to the extent that the Company's securitization volumes
increase, whether due to increased volumes of loan production or as a result
of a continued shift towards securitization in its loan sales mix. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The Company intends to rely on secured and unsecured credit facilities
("credit facilities") and undertake public or private capital markets equity
or debt financings ("capital markets financings") in order to obtain funds to
finance the negative cash flow generated by its operations, securitization
strategy and expansion. There can be no assurances that the Company will be
able to renew, replace or add to its existing credit facilities, or that it
will be able to undertake capital markets financings on favorable terms, if at
all. If the Company is unable to obtain adequate financing, it may have to
curtail its growth plans or its securitization program. This may have a
significant adverse impact on the Company's results of operations, financial
condition and business prospects. In addition, to the extent that the Company
is unable to renew or expand its access to credit facilities, the Company may
have to undertake larger and/or more frequent capital markets financings than
anticipated. Capital markets financings may result in greater than anticipated
interest expense and shares outstanding, which may have a dilutive impact on
operating earnings or have a negative effect on the Company's financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
DEPENDENCE ON SECURITIZATIONS FOR FUTURE EARNINGS
The Company has completed only two securitizations to date and there can be
no assurance that the Company will complete additional securitizations. The
Company plans to pool and sell through securitizations a majority of the loans
it originates or purchases and expects that the gain on sale from such
securitizations will represent a significant portion of the Company's future
revenues and net earnings. The Company's ability to complete securitizations
of its loans will depend on a number of factors, including conditions in the
securities markets generally, conditions in the asset-backed securities market
specifically, the performance of the Company's portfolio of securitized loans
and the Company's ability to obtain credit enhancement. If the Company were
unable to securitize profitably a sufficient number of its loans in a
particular quarter, then the Company's revenues for such quarter would
decline, which could result in lower earnings or a loss reported for such
quarter. In addition, because the Company expects to use the proceeds
generated by securitizations to repay amounts outstanding under its warehouse
credit facility and aggregation facility, delays in closing a securitization
could adversely affect the Company's ability to access additional cash under
its credit facilities in order to fund additional loan origination and
purchases and could increase the Company's interest rate risk by increasing
the warehousing period for its loans.
12
<PAGE>
The Company relies on credit enhancements provided by monoline insurance
companies to guarantee senior certificates in the securitization trusts. Such
credit enhancements enable the Company to obtain an "AAA/Aaa" rating for such
senior certificates. If such insurance companies were unwilling to guarantee
the senior certificates in the Company's loan pools, the Company might be
unable to continue to sell its loans through securitizations, which could have
a material adverse effect on the Company's results of operations, financial
condition and business prospects. Although alternative structures to
securitization trusts may be available, there can be no assurances that the
Company can access these structures or that these structures will be
economically viable for the Company. The willingness of insurance companies to
credit enhance securitizations may also be adversely affected by any future
poor performance of the Company's securitization trusts or the securitization
trusts of others. The inability of the Company to complete future
securitizations for any reason would have a material adverse effect on the
Company's results of operations, financial condition and business prospects.
DEPENDENCE ON WHOLE LOAN SALES FOR FUTURE EARNINGS
The gain on sale generated by whole loan sales also represents a source of
the Company's future earnings. In 1996, the Company sold all of its loan
originations and purchases in the secondary market to a limited number of
institutional purchasers and plans to sell a significant number of loans it
originates or purchases through whole loan sales in the future. There can be
no assurance that such purchasers will continue to purchase the Company's
loans and to the extent that the Company could not successfully replace such
loan purchasers, the Company's results of operations, financial condition and
business prospects could be materially and adversely affected. Further,
adverse conditions in the asset-backed securitization market could negatively
impact the ability of the Company to complete whole loan sales, as many of the
Company's whole loan purchasers securitize the loans they purchase from the
Company.
RESIDUAL INTERESTS IN SECURITIZATIONS
The Company plans to derive a substantial portion of its revenue and
earnings by recognizing gain on sale of loans through securitizations. In a
securitization, the Company sells loans that it has originated or purchased to
a trust for a cash purchase price and an interest in the loans securitized
called residual interests. Management believes that it has made reasonable
estimates of the present value of the residual interests on its balance sheet.
The Company projects the expected cash flows over the life of the residual
interests, using prepayment and default assumptions that market participants
would use for similar financial instruments that are subject to prepayment,
credit and interest rate risks. The Company then determines the present value
of these cash flows using an interest rate commensurate with the risks
involved. If the Company's actual experience differs materially from the
assumptions used in the determination of the present value of the residual
interests, future cash flows and earnings could be negatively impacted. The
Company could also be required to reduce the fair value of its residual
interests on its balance sheet, which could decrease the residual financing
available to the Company under the Salomon residual financing facility.
Furthermore, because the Company does not have meaningful loan performance
data, the Company's assumptions are not based on the actual performance of its
loans but on available historical loss data for comparable portfolios of loans
and the specific characteristics of the loans included in the Company's
securitizations. To the Company's knowledge, there is currently no active
market for the sale of these residual interests. No assurance can be given
that the residual interests could be sold at their stated value, if at all.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Loan Sales and Securitizations."
The documents governing the Company's February and May 1997 securitizations
require the trustee to obtain certain over-collateralization levels through
initial funding or retention of residual interest distributions, which reduces
the principal balances of the senior certificates issued by the related trust
while diverting cash that would otherwise flow to the Company. The Company
continues to be subject to the risks of default and foreclosure following the
sale of loans through securitization to the extent such losses reduce the
residual interest distributions. If losses exceed the current period residual
interest distributions, an insurance policy will fund the losses and the
insurer will be reimbursed from future residual interest distributions. Over-
collateralization levels could change throughout the life of the
securitization based upon the loss and delinquency experience and other
13
<PAGE>
loan performance variables with respect to the securitized pool of loans,
which could negatively impact cash flows to the Company. Any such change in
the Company's cash flows could have a material adverse effect on the Company's
results of operations, financial condition and business prospects. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operation--Loan Sales and Securitizations."
DEPENDENCE ON WHOLESALE BROKERS
The Company depends primarily on independent mortgage brokers and, to a
lesser extent, on correspondent lenders, for the origination and purchase of
its wholesale mortgage loans, which constitute a significant portion of the
Company's loan production. These independent mortgage brokers deal with
multiple lenders for each prospective borrower. The Company competes with
these lenders for the independent brokers' business on pricing, service, loan
fees, costs and other factors. The Company's competitors also seek to
establish relationships with such brokers, who are not obligated by contract
or otherwise to do business with the Company. The Company's future results of
operations and financial condition may be vulnerable to changes in the volume
and cost of its wholesale loans resulting from, among other things,
competition from other lenders and purchasers of such loans.
ELIMINATION OF LENDER PAYMENTS TO BROKERS
Class-action lawsuits have been filed against a number of mortgage lenders
alleging that such lenders have violated the Federal Real Estate Settlement
Procedures Act ("RESPA") by making certain payments to independent mortgage
brokers. These lawsuits have generally been filed on behalf of a purported
nationwide class of borrowers and allege that payments made by a lender to a
broker in addition to payments made by the borrower to a broker are prohibited
by RESPA, and are therefore illegal. If these cases are resolved against the
lenders, it may cause an industry-wide change in the way independent mortgage
brokers are compensated. The Company's broker compensation programs permit
such payments. Future regulatory interpretations or judicial decisions may
require the Company to change its broker compensation programs or subject it
to material monetary judgments or other penalties. Any such changes or
penalties may have a material adverse effect on the Company's results of
operations, financial condition and business prospects. See "Business--
Regulation."
ECONOMIC SLOWDOWN OR RECESSION
The risks associated with the Company's business are more acute during
periods of economic slowdown or recession because these periods may be
accompanied by decreased demand for consumer credit and declining real estate
values. Declining real estate values reduce the ability of borrowers to use
home equity to support borrowings by negatively affecting loan-to-value ratios
of the home equity collateral. In addition, because the Company makes a
substantial number of loans to credit-impaired borrowers, the actual rates of
delinquencies, foreclosures and losses on such loans could be higher during
economic slowdowns. Any sustained period of increased delinquencies,
foreclosures or losses could adversely affect the Company's ability to sell
loans or the prices the Company receives for its loans.
CHANGES IN INTEREST RATES
The Company's profitability may be directly affected by changes in interest
rates, which affect the Company's ability to earn a spread between the
interest received on its loans and its funding costs. The revenues of the
Company may be adversely affected during any period of unexpected or rapid
change in interest rates. For example, a substantial and sustained increase in
interest rates could adversely affect the demand for the Company's products.
In addition, the Company's adjustable-rate mortgage loans have a life rate cap
above which the interest rate on the loan may not rise. In the event of
general interest rate increases, the rate of interest on these mortgage loans
could be limited, while the rate payable on the senior certificates
representing interests in a securitization trust into which such loans are
sold may be uncapped, which would reduce the amount of cash the Company
receives over the life of its residual interests, thereby requiring the
Company to reduce the fair value of such residual interests. Furthermore, a
significant decrease in interest rates could increase the rate at which
14
<PAGE>
loans are prepaid, which would also reduce the amount of cash the Company
receives over the life of its residual interests. Either of these events could
require the Company to reduce the fair value of its residual interests, which
would have a material adverse effect on the Company's results of operations,
financial condition and business prospects.
Adjustable-rate mortgage loans ("ARMs") (which include loans that have
initial fixed-rate terms of up to three years) originated or purchased by the
Company totaled $188.0 million in principal during the first quarter of 1997.
Substantially all such ARMs included an initial interest rate, or "teaser"
rate, significantly below the fully indexed interest rate at origination.
Borrowers may encounter financial difficulties as a result of increases in the
interest rate over the life of these loans or may prepay such loans earlier
than expected, which would reduce the amount of cash the Company receives over
the life of its residual interests and could require the Company to reduce the
fair value thereof, which would have a material adverse effect on the
Company's results of operations, financial condition and business prospects.
During periods of rising interest rates, the value and profitability of the
Company's loans may be negatively impacted, from the date of origination or
purchase until the date the Company sells or securitizes such loans. The
market values of fixed-rate mortgage loans are more sensitive to changes in
market interest rates than are the market values of ARMs. The Company from
time to time may use various hedging strategies to provide a level of
protection against such interest rate risks on its fixed-rate mortgage loans.
While the Company believes its hedging strategies are cost-effective and
provide some protection against interest rate risks, no hedging strategy can
completely protect the Company from such risks. No assurance can be given that
such hedging transactions will offset the risks of changes in interest rates,
and it is possible that there will be periods during which the Company could
incur losses after accounting for its hedging activities. Further, the Company
does not believe that hedging against the interest rate risks associated with
ARMs is cost effective and the Company does not utilize the hedging strategies
described above with respect to these loans, which constitute the majority of
the Company's loan production. See "Business--Interest Rate Risk Management."
QUARTERLY FLUCTUATIONS IN EARNINGS
The Company's revenues and net earnings have fluctuated in the past and are
expected to fluctuate in the future as a result of a number of factors,
including the size and timing of securitizations and whole loan sales,
expansion costs incurred by the Company and the volume of loan originations
and purchases. If the Company were unable to securitize profitably a
sufficient number of its loans in a particular quarter, or were unable to
complete a sufficient number of whole loan sales, then the Company's revenues
for such quarter would decline, which could result in lower earnings or a loss
reported for such quarter and have a material adverse effect on the Company's
results of operations, financial condition and business prospects.
COMPETITION
The Company faces intense competition in the business of originating,
purchasing and selling mortgage loans. Competition among industry participants
can take many forms, including convenience in obtaining a loan, customer
service, marketing and distribution channels, amount and term of the loan,
loan origination fees and interest rates. Many of the Company's competitors
are substantially larger and have considerably greater financial, technical
and marketing resources than the Company. The Company's competitors in the
industry include other consumer finance companies, mortgage banking companies,
commercial banks, credit unions, thrift institutions, credit card issuers and
insurance companies. In the future, the Company may also face competition from
government-sponsored entities, such as the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation. These government-
sponsored entities may enter the subprime mortgage market and target potential
customers in the Company's highest credit grades, who constitute a significant
portion of the Company's customer base.
The current level of gains realized by the Company and its competitors on
the sale of subprime mortgage loans could attract additional competitors into
this market. Certain large finance companies and conforming mortgage
originators have announced their intention to originate non-conforming
mortgage loans, and some of
15
<PAGE>
these large mortgage companies, thrifts and commercial banks have begun
offering non-conforming loan products to customers similar to the borrowers
targeted by the Company. In addition, establishing a broker-sourced loan
business requires a substantially smaller commitment of capital and human
resources than a direct-sourced loan business. This relatively low barrier to
entry permits new competitors to enter this market quickly and compete with
the Company's wholesale lending business.
Additional competition may lower the rates the Company can charge borrowers,
thereby potentially lowering the gain on future loan sales. Increased
competition may also reduce the volume of the Company's loan origination and
loan sales and increase the demand for the Company's experienced personnel and
the potential that such personnel will leave the Company for the Company's
competitors.
Fluctuations in interest rates and general and localized economic conditions
may also affect the competition the Company faces. Competitors with lower
costs of capital have a competitive advantage over the Company. During periods
of declining rates, competitors may solicit the Company's customers to
refinance their loans. In addition, during periods of economic slowdown or
recession, the Company's borrowers may face financial difficulties and be more
receptive to the offers of the Company's competitors to refinance their loans.
The Company plans to expand into new geographic markets, where it will face
additional competition from lenders already established in these markets.
There can be no assurance that the Company will be able to successfully
compete with these lenders.
CONTINGENT RISKS
Although the Company sells substantially all of the mortgage loans it
originates or purchases, the Company retains some degree of credit risk on
substantially all of the loans it sells. During the period of time that the
loans are held for sale, the Company is subject to the various business risks
associated with the lending business, including borrower default, foreclosure
and the risk that a rapid increase in interest rates would result in a decline
of the value of loans held for sale to potential purchasers.
In connection with its securitizations, the Company is required to
repurchase or substitute loans in the event of a breach of a representation or
warranty made by the Company. While the Company may have recourse to the
sellers of loans it purchased, there can be no assurance of the sellers'
abilities to honor their respective obligations to the Company. Likewise, in
connection with its whole loan sales, the Company enters agreements which
generally require the Company to repurchase or substitute loans in the event
of a breach of a representation or warranty made by the Company to the loan
purchaser, any misrepresentation during the mortgage loan origination process
or, in some cases, upon any fraud or early default on such mortgage loans. The
remedies available to a purchaser of mortgage loans from the Company are
generally broader than those available to the Company against the sellers of
such loans, and if a purchaser enforces its remedies against the Company, the
Company may not be able to enforce whatever remedies the Company may have
against such sellers.
In addition, borrowers, purchasers of the Company's loans, monoline
insurance carriers and trustees in the Company's securitization may make
claims against the Company arising from alleged breaches of fiduciary
obligations, misrepresentations, errors and omissions of employees, officers
and agents of the Company, including appraisers, incomplete documentation and
failure by the Company to comply with various laws and regulations applicable
to its business. Any claims asserted in the future may result in liabilities
or legal expenses that could have a material adverse effect on the Company's
results of operations, financial condition and business prospects.
RISKS ASSOCIATED WITH SERVICING
The Company currently contracts for the servicing of all loans it
originates, purchases and holds for sale with Advanta pursuant to an interim
servicing agreement (the "Advanta Interim Agreement"). In addition, Advanta
subservices each public securitization of the Company's loans pursuant to the
related pooling and
16
<PAGE>
servicing agreement and a corresponding subservicing agreement between the
Company and Advanta (the "Advanta Securitization Agreement"). As with any
external service provider, the Company is subject to risks associated with
insufficient or untimely services. Many of the Company's borrowers require
notices and reminders to keep their loans current and to prevent delinquencies
and foreclosures. Any failure of the servicer to adequately service the
Company's loans could cause a substantial increase in the Company's
delinquency or foreclosure rate, which could adversely affect the Company's
ability to access equity or debt capital resources, and which could therefore
have a material adverse effect on the Company's results of operations,
financial condition and business prospects.
Under the Advanta Interim Agreement and the Advanta Securitization
Agreement, if the Company terminates either of such agreements without cause
or transfers the servicing of any amount of the mortgage loans serviced by
Advanta to another servicer, the Company must pay Advanta certain penalties,
fees and costs. Depending on the size of the Company's loan portfolio serviced
by Advanta at any point in time, the termination or transfer penalties that
the Company would be obligated to pay Advanta may be substantial. With respect
to mortgage loans securitized by the Company, the Company will not be able to
terminate the servicer without the approval of the trustee for such
securitization.
On March 17, 1997, Advanta Corp., the parent of Advanta, announced that it
was considering strategic alternatives, including the possibility of selling
all or part of its businesses, as a result of increased losses from credit
card loans. Although the management of Advanta Corp. stated that its mortgage
business was performing well, there can be no assurance that a sale by Advanta
Corp. of all or some of its businesses, including its Advanta servicing
operations, would not have an adverse effect upon the servicing of the
Company's loans.
The Company intends to establish in-house servicing operations to service
the loans it originates and purchases and to engage Comerica to perform
specified servicing functions. See "Prospectus Summary--Recent Developments--
Comerica Investment and Strategic Relationship." There can be no assurance
that the Company will anticipate and respond effectively to all of the demands
that servicing its loans will have on the Company's management, infrastructure
and personnel. The failure of the Company to meet the challenges of servicing
its loans could have a material adverse effect on the Company's results of
operations, financial condition and business prospects. The Company will also
remain subject to risks associated with insufficient or untimely services from
Comerica as an external service provider. In addition, any change in servicing
operations may result in greater delinquencies and losses on related loans,
which would adversely impact the value of the residual interests held by the
Company in connection with its securitizations.
RISKS ASSOCIATED WITH HIGH LOAN-TO-VALUE LOAN PRODUCTS
The Company recently commenced loan originations through its Alternative
Mortgage Products Division which offers loans to borrowers meeting
conventional mortgage lending standards and offers a broad selection of second
mortgage products, including loans with loan-to-value ratios of up to 125%.
Although the Company acts as a broker or correspondent in the sale of all of
its high loan-to-value loan products, rather than selling such loans through
securitizations or servicing-retained sales, the Company is subject to the
risk of borrower default and foreclosure on these loans during the period of
time that the loans are held for sale or if the Company is required to
repurchase any such loans. To the extent that borrowers with high loan-to-
value ratios default on their loan obligations while the loans are held by the
Company, the Company would be unable to rely on equity in the collateral
property to reduce the Company's loss exposure. Under these circumstances, the
Company might be required to absorb any losses and such absorption, if the
losses exceed the Company's reserves for such losses, could have a material
adverse effect on the Company's financial condition, results of operations and
business prospects.
DEPENDENCE ON A LIMITED NUMBER OF KEY PERSONNEL
The Company is dependent upon the continued services of Robert K. Cole, Brad
A. Morrice, Edward F. Gotschall and Steven G. Holder, the Chief Executive
Officer, President, Chief Operating Officer--Finance/Administration and Chief
Operating Officer--Production/Operations of the Company, respectively. The
loss of their services could have a material adverse effect on the Company's
results of operations, financial
17
<PAGE>
condition and business prospects. The Company currently has a $1 million key-
man life insurance policy for each of these executive officers. In addition,
the Company has entered into employment agreements with Messrs. Cole, Morrice,
Gotschall and Holder. See "Management--Executive Compensation."
CONCENTRATION OF OPERATIONS IN CALIFORNIA
Approximately 49.8% of the dollar volume of loans originated or purchased by
the Company during the first quarter of 1997 were secured by properties
located in California. Although the Company has expanded its office network
outside California and plans further expansion outside California in the
future, the Company's sales loan originations and purchases may remain
concentrated in California for the foreseeable future. Consequently, the
Company's results of operations, financial condition and business prospects
are dependent on the California economy and its residential real estate
market. Over the last several years, the California economy experienced an
economic slowdown or recession and a sustained decline in the California real
estate market. Residential real estate market declines may adversely affect
the values of the properties securing mortgage loans. A decline in the value
of the mortgaged properties may result in the principal balances of such
loans, together with any primary financing on the mortgaged properties, to
equal or exceed the value of the mortgaged properties. In addition, California
is vulnerable to certain natural disaster risks, such as earthquakes and
mudslides. These disasters are not typically covered by the standard hazard
insurance policies maintained by borrowers and may adversely impact borrowers'
ability to repay loans made by the Company. The existence of adverse economic
conditions or the occurrence of such natural disasters in California could
have a material adverse effect on the Company's results of operations,
financial condition and business prospects. See "Business--Geographic
Distribution."
ENVIRONMENTAL LIABILITIES
The Company may acquire real property securing loans that are in default and
there is a risk that hazardous substances or waste, contaminants or pollutants
could be discovered on such properties after the Company acquires them. The
Company might be required to remove such substances from the affected
properties at its sole cost and expense, and the cost of such removal may
substantially exceed the value of the affected properties or the loans secured
by such properties. Furthermore, the Company may not have adequate remedies
against the prior owners or other responsible parties to recover its costs.
Finally, the Company may find it difficult or impossible to sell the affected
real properties either prior to or following any such removal.
LEGISLATIVE OR REGULATORY RISKS
The consumer financing industry is a highly regulated industry. The
Company's business is subject to extensive and complex rules and regulations
of, and examinations by, various federal, state and local government
authorities. These rules and regulations impose obligations and restrictions
on the Company's loan originations, credit activities and secured
transactions. In addition, these rules limit the interest rates, finance
charges and other fees the Company may assess, mandate extensive disclosure to
the Company's customers, prohibit discrimination and impose multiple
qualification and licensing obligations on the Company. The Company's loan
origination activities are subject to the laws and regulations in each of the
states in which those activities are conducted. For example, state usury laws
limit the interest rates the Company can charge on its loans. The Company's
lending activities are also subject to various federal laws, including the
Truth in Lending Act, the Homeownership and Equity Protection Act of 1994, the
Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Real Estate
Settlement Procedures Act and the Home Mortgage Disclosure Act. Failure to
comply with any of these requirements may result in, among other things, loss
of approved status, demands for indemnification or mortgage loan repurchases,
certain rights of rescission for mortgage loans, class action lawsuits,
administrative enforcement actions and civil and criminal liability.
Because the Company's business is highly regulated, the laws, rules and
regulations applicable to the Company are subject to regular modification and
change. In addition, various laws, rules and regulations currently are
proposed, which, if adopted, could impact the Company. There can be no
assurance that these
18
<PAGE>
proposed laws, rules and regulations, or other such laws, rules or
regulations, will not be adopted in the future. Such adoption could make
compliance much more difficult or expensive, restrict the Company's ability to
originate, broker, purchase or sell loans, further limit or restrict the
amount of commissions, interest and other charges earned on loans originated,
brokered, purchased or sold by the Company, or otherwise adversely affect the
results of operations, financial condition and business prospects of the
Company.
Government officials, including members of Congress, have from time to time
suggested the elimination of the mortgage interest deduction for federal
income tax purposes. Because many of the Company's loans are made to borrowers
for the purpose of consolidating consumer debt or financing other consumer
needs, the competitive advantages of tax deductible interest, when compared
with alternative sources of consumer financing, could be eliminated or
seriously impaired by such government action. Accordingly, the reduction or
elimination of these tax benefits could have a material adverse effect on the
demand for loans of the kind offered by the Company.
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation (the "Certificate of
Incorporation") and its Bylaws (the "Bylaws") include provisions that could
delay, defer or prevent a takeover attempt that may be in the best interest of
stockholders. These provisions include the ability of the Board of Directors
to issue up to 7,500,000 shares of preferred stock (the "Preferred Stock")
without any further stockholder approval, a classified Board of Directors and
requirements that (i) stockholders give advance notice with respect to certain
proposals they may wish to present for a stockholder vote, (ii) stockholders
act only at annual or special meetings and (iii) two-thirds of all directors
approve a change in the number of directors of the Company. Issuance of
Preferred Stock could also discourage bids for the Common Stock at a premium
as well as create a depressive effect on the market price of the Common Stock.
In addition, under certain conditions, Section 203 of the Delaware General
Corporation Law (the "DGCL") would prohibit the Company from engaging in a
"business combination" with an "interested stockholder" (in general, a
stockholder owning 15% or more of the Company's outstanding voting stock) for
a period of three years unless the business combination is approved in a
prescribed manner. See "Description of Capital Stock."
CONTROL BY CERTAIN STOCKHOLDERS
Upon completion of the Offering, the existing stockholders of the Company
will beneficially own an aggregate of approximately 74.8% of the outstanding
shares of Common Stock (approximately 71.5% following the completion of the
Offering assuming the exercise of the Underwriters' over-allotment option in
full). Accordingly, such persons, if they were to act in concert, would have
majority control of the Company, with the ability to approve certain
fundamental corporate transactions (including mergers, consolidations and
sales of assets) and to elect all members of the Board of Directors. See
"Beneficial Ownership of Securities and Selling Stockholders" and
"Management--Board of Directors."
POSSIBLE VOLATILITY OF STOCK PRICE; EFFECT OF FUTURE OFFERINGS ON MARKET PRICE
OF COMMON STOCK
The market price of the Common Stock may experience fluctuations that are
unrelated to the operating performance of the Company. In particular, the
price of the Common Stock may be affected by general market price movements as
well as developments specifically related to the consumer finance industry and
the financial services sector such as, among other things, interest rate
movements, quarterly variations or changes in financial estimates by
securities analysts and a significant reduction in the price of the stock of
another participant in the consumer finance industry. In addition, the
Company's operating income on a quarterly basis is significantly dependent
upon the successful completion of the Company's loan sales and securitizations
in the market, and the Company's inability to complete these transactions in a
particular quarter may have a material adverse impact on the Company's results
of operations for that quarter and could, therefore, negatively impact the
price of the Common Stock.
The Company may increase its capital by making additional private or public
offerings of its Common Stock, securities convertible into its Common Stock,
preferred stock or debt securities. The actual or perceived
19
<PAGE>
effect of such offerings may be the dilution of the book value or earnings per
share of the Common Stock outstanding, which may result in the reduction of
the market price of the Common Stock.
ABSENCE OF PUBLIC MARKET
There is currently no trading market for the Common Stock and there can be
no assurance that an active trading market for the Common Stock will develop.
Although an application has been made to have the Common Stock approved for
quotation on Nasdaq, there can be no assurance that an active public trading
market for the Common Stock will develop after the Offering or that, if
developed, it will be sustained. The public offering price of the Common Stock
offered hereby was determined by negotiations among the Company and
representatives of the Underwriters and may not be indicative of the price at
which the Common Stock will trade after the Offering. See "Underwriting."
Consequently, there can be no assurance that the market price for the Common
Stock will not fall below the public offering price.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
13,892,373 shares of Common Stock. The 3,500,000 shares of Common Stock
offered in the Offering (4,025,000 shares if the Underwriters' over-allotment
option in the Offering is exercised in full) will be immediately eligible for
sale in the public market without restriction beginning on the date of this
Prospectus. Future sales of substantial amounts of Common Stock after the
Offering, or the perception that such sales could occur, could adversely
affect the market price of the Common Stock. No prediction can be made as to
the effect, if any, that future sales of shares, or the availability of shares
for further sale, will have on the market price of the Common Stock.
Additionally, 2,000,000 shares of Common Stock will be reserved for issuance
under the Stock Option Plan as of the closing of the Offering, including
outstanding options to acquire 1,267,520 shares which have been granted and
options to acquire 441,500 shares which will be granted upon the closing of
the Offering. In addition, options to acquire 127,500 shares of Common Stock
were granted or will be granted to two executive officers and one non-employee
director of the Company outside the Stock Option Plan and 333,333 shares of
Common Stock will be reserved for issuance under the Comerica warrants, of
which warrants to purchase 100,000 shares have been issued. The Company
intends to file a registration statement under the Securities Act to register
such shares of Common Stock reserved for issuance under its Stock Option Plan,
thus permitting the resales of such shares by non-affiliates in the public
market without restriction under the Securities Act of 1933, as amended (the
"Securities Act"). Such registration statement is expected to be filed shortly
after the date of this Prospectus.
The remaining 10,392,373 shares (10,099,873 shares if the Underwriters'
over-allotment option in the Offering is exercised in full) of Common Stock
held by the existing stockholders of the Company are "restricted securities"
as that term is defined in Rule 144 promulgated under the Securities Act and
are eligible for sale subject to the holding period, volume and other
limitations imposed thereby. In addition, certain existing stockholders have
registration rights with respect to shares of Common Stock which they own or
have a right to acquire.
The Company, certain existing stockholders of the Company and the executive
officers and directors of the Company have agreed with the Underwriters that,
subject to certain conditions, for a period of 180 days following the
commencement of this Offering, they will not sell, contract to sell or
otherwise dispose of any shares of Common Stock or rights to acquire such
shares (other than pursuant to employee plans) without the prior written
consent of Montgomery Securities on behalf of the Underwriters. See
"Underwriting."
SUBSTANTIAL AND IMMEDIATE DILUTION
The initial public offering price is substantially higher than the net
tangible book value per share of Common Stock. Investors purchasing shares of
Common Stock in the Offering will be subject to immediate dilution of $6.87
per share in net tangible book value. See "Dilution."
20
<PAGE>
ABSENCE OF DIVIDENDS
The Company does not anticipate declaring or paying any cash dividends on
the Common Stock following the Offering. Future dividend policy will depend on
the Company's earnings, capital requirements, financial condition and other
factors considered relevant by the Board of Directors. In addition, the
Company is prohibited under the terms of its current warehouse facility from
paying dividends without the prior approval of First Bank. See "Dividend
Policy" and "Management's Discussion and Analysis of Financial Condition and
Results of Operation--Liquidity and Capital Resources."
FORWARD-LOOKING STATEMENTS
This Prospectus may contain forward-looking statements that may be
identified by the use of forward-looking terminology such as "may," "will,"
"should," "expect," "anticipate," "estimate" or "continue" or the negative
thereof or other variations thereon or comparable terminology. The matters set
forth under "Risk Factors" constitute cautionary statements identifying
important factors with respect to any forward-looking statements, including
certain risks and uncertainties, that could cause actual results to differ
materially from those in such forward-looking statements.
21
<PAGE>
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the Common
Stock offered hereby (assuming an initial public offering price of $9.50 per
share and after deducting the estimated underwriting discount and expenses
payable by the Company), are estimated to be approximately $24.8 million. The
Company intends to apply the net proceeds from the Offering in the following
manner: (i) to fund loan originations and purchases; (ii) to fund
securitization transaction costs; and (iii) for general corporate purposes,
including costs related to expansion of the Retail and Wholesale Divisions.
Until the time that such proceeds are utilized, the net proceeds will be
invested in high quality, short-term investment instruments such as short-term
corporate investment grade or United States Government interest-bearing
securities.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain any earnings for use in its
business and does not anticipate paying any cash dividends in the foreseeable
future. In addition, the Company is prohibited from paying dividends under its
current warehouse facility without the prior approval of First Bank. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
DILUTION
As of March 31, 1997, the Company had a net tangible book value of $11.8
million, or $1.07 per share of Common Stock, after adjusting the net tangible
book value and number of shares outstanding to reflect the exercise of
warrants to purchase 304,501 shares of Common Stock and the sale of 545,000
shares of Common Stock of the Company to Comerica. Net tangible book value per
share is determined by dividing the net tangible book value of the Company
(total tangible assets less total liabilities) by the number of shares of
Common Stock outstanding as of March 31, 1997. After giving effect to the sale
by the Company of the shares of Common Stock offered by the Company hereby at
an assumed initial public offering price per share of $9.50 (after deducting
the estimated underwriting discount and offering expenses), the Company's net
tangible book value as of March 31, 1997 would have been $36.6 million or
$2.63 per share of Common Stock. This represents an immediate increase in net
tangible book value of $1.56 per share to existing stockholders and an
immediate dilution of $6.87 per share to new investors purchasing shares in
the Offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................ $9.50
Pro forma net tangible book value per share before the Offer-
ing......................................................... $1.07
Increase per share attributable to new investors............. 1.56
-----
Pro forma net tangible book value per share after the Offer-
ing........................................................... 2.63 2.63
----- -----
Dilution per share to new investors............................ $6.87
=====
</TABLE>
22
<PAGE>
The following table sets forth on a pro forma basis, as of March 31, 1997,
the relative investments of all existing stockholders and new investors
purchasing shares of Common Stock from the Company in the Offering. The
calculations are based on an assumed initial public offering price of $9.50
per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------ ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1)...... 10,992,373 79.1% $ 8,303,254 23.2% $0.76
New investors.................. 2,900,000 20.9 27,550,000 76.8 9.50
---------- ----- ----------- ----- -----
Total...................... 13,892,373 100.0% $35,853,254 100.0% $2.58
========== ===== =========== ===== =====
</TABLE>
- --------
(1) Sales by the Selling Stockholder in the Offering will reduce the number of
shares held by existing stockholders to 10,392,373 shares, or 74.8% of the
total shares of Common Stock outstanding (10,099,873 shares, or 71.5% of
the total shares of Common Stock if the Underwriters' over-allotment
option is exercised in full), and will increase the number of shares held
by new investors to 3,500,000 shares, or 25.2% of the total shares of
Common Stock outstanding (4,025,,000 shares, or 28.5% of the total shares
of Common Stock if the Underwriters' over-allotment option is exercised in
full) after the Offering.
The foregoing table excludes (i) 2,000,000 shares reserved for issuance
under the Stock Option Plan as of the closing of the Offering, including
outstanding options to acquire 1,267,520 shares at a weighted average exercise
price of $5.17 per share which have been granted under the Stock Option Plan
and options to acquire 441,500 shares which will be granted upon the closing
of the Offering, (ii) options to acquire 120,000 shares at a weighted average
exercise price of $3.50 per share which have been granted to two executive
officers of the Company outside the Stock Option Plan, (iii) options to
acquire 7,500 shares at the initial public offering price which will be
granted to two non-employee directors of the Company outside the Stock Option
Plan, and (iv) 333,333 shares of Common Stock that will be reserved for
issuance pursuant to the Comerica warrants at the initial public offering
price, of which warrants to purchase 100,000 shares have been issued. To the
extent that any options of the Company are exercised, there will be further
dilution to new investors. See "Management--Stock Option Plan."
23
<PAGE>
CAPITALIZATION
The following table sets forth the pro forma capitalization of the Company
at March 31, 1997, after giving effect to the exercise of 304,501 warrants,
the sale of 545,000 shares of Common Stock to Comerica, the issuance of the
Common Stock offered hereby at an assumed public offering price of $9.50 per
share (after deducting the estimated underwriting discount and offering
expenses) and the application of the net proceeds to reduce borrowings under
warehouse and aggregation lines of credit and to repay approximately $1.25
million outstanding under the Company's revolving line of credit. This table
should be read in conjunction with the Company's Financial Statements and the
Notes thereto.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1997
--------------------
PRO FORMA
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
DEBT:
Borrowings under warehouse and aggregation lines of
credit................................................. $110,534 $ 81,909
Residual financing...................................... 7,248 7,248
Other borrowings........................................ 3,119 1,869
-------- --------
Total debt............................................ 120,901 91,026
-------- --------
STOCKHOLDERS EQUITY:
Preferred stock, $0.01 par value; 7,320,000 shares
authorized and 7,500,000 shares authorized pro forma as
adjusted; 5,820,000 shares issued and outstanding and
none issued and outstanding pro forma as adjusted...... $ 58 $ --
Common Stock, $0.01 par value per share; 12,963,778
shares authorized and 45,000,000 shares authorized pro
forma as adjusted; 528,618 shares issued and
outstanding and 13,892,373 shares issued and
outstanding pro forma as adjusted(1)................... 6 139
Additional paid-in capital.............................. 3,086 32,886
Retained earnings, restricted........................... 3,600 3,600
-------- --------
Total stockholders' equity............................ 6,750 36,625
-------- --------
Total capitalization.................................. $127,651 $127,651
======== ========
</TABLE>
- --------
(1) Excludes (i) 2,000,000 shares reserved for issuance under the Stock Option
Plan as of the closing of the Offering, including outstanding options to
acquire 1,267,520 shares at a weighted average exercise price of $5.17 per
share which have been granted and options to acquire 441,500 shares which
will be granted upon the closing of the Offering, (ii) options to acquire
120,000 shares at a weighted average exercise price of $3.50 per share
which have been granted to two executive officers of the Company outside
the Stock Option Plan, (iii) options to acquire 7,500 shares at the
initial public offering price which will be granted to two non-employee
directors of the Company outside the Stock Option Plan, and (iv) 333,333
shares of Common Stock that will be reserved for issuance pursuant to the
Comerica warrants at the initial public offering price, of which warrants
to purchase 100,000 shares have been issued.
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated statements of operations and balance
sheet data as of December 31, 1996 and 1995 and for the year ended December
31, 1996 and for the period from November 17, 1995 (inception) to December 31,
1995 have been derived from the Company's financial statements audited by KPMG
Peat Marwick LLP, independent auditors, whose report with respect thereto
appears elsewhere herein. The following selected statements of operations and
balance sheet data as of March 31, 1996, June 30, 1996, and September 30, 1996
and March 31, 1997 and for the quarters ended March 31, 1996, June 30, 1996,
September 30, 1996, December 31, 1996 and March 31, 1997 have been derived
from the unaudited financial statements of the Company and include all
adjustments, consisting only of normal recurring accruals, which management
considers necessary for a fair presentation of such financial information for
those periods. Such selected financial data should be read in conjunction with
those financial statements and the notes thereto and with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" also
included elsewhere herein.
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM INCEPTION
(NOVEMBER 17, 1995) FOR THE FOR THE QUARTER ENDED
THROUGH YEAR ENDED -----------------------------
DECEMBER 31, 1995 DECEMBER 31, 1996 MARCH 31, 1996 MARCH 31, 1997
--------------------- ----------------- -------------- --------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Gain on sale of loans.. $ -- $11,630 $ -- $10,012
Servicing income....... -- 29 -- 302
Interest income........ 14 2,846 39 2,271
----- ------- ------ -------
Total revenues........ 14 14,505 39 12,585
Operating Expenses...... 95 12,200 899 8,539
----- ------- ------ -------
Earnings (loss) before
income taxes (benefit). (81) 2,305 (860) 4,046
Income taxes (benefit).. 1 970 (362) 1,699
----- ------- ------ -------
Net earnings (loss)..... $ (82) $ 1,335 $ (498) $ 2,347
===== ======= ====== =======
Pro forma primary
earnings (loss) per
share(4)............... $ 0.10 $(0.05) $ 0.19
Pro forma fully diluted
earnings (loss) per
share(4)............... $ 0.10 $(0.05) $ 0.19
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31, 1997
-------------- -----------------------
PRO FORMA
1995 1996 ACTUAL AS ADJUSTED(1)
------ ------- -------- --------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Loans receivable held for sale, net..... $ -- $57,990 $113,162 $113,162
Residual interests in securitization.... -- -- 13,243 13,243
Total assets............................ 3,151 64,638 133,582 133,582
Borrowings under warehouse lines of
credit................................. -- 41,702 65,803 37,178
Borrowings under aggregation lines of
credit................................. -- 13,957 44,731 44,731
Residual financing...................... -- -- 7,248 7,248
Other borrowings........................ -- 1,326 3,119 1,869
Total stockholders' equity.............. 3,068 4,403 6,750 36,625
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
AS OF OR FOR THE
PERIOD FROM INCEPTION AS OF OR FOR THE
(NOVEMBER 17, 1995) QUARTER ENDED
THROUGH AS OF OR FOR THE YEAR ENDED -----------------------------
DECEMBER 31, 1995 DECEMBER 31, 1996 MARCH 31, 1996 MARCH 31, 1997
--------------------- --------------------------- -------------- --------------
<S> <C> <C> <C> <C>
OPERATING STATISTICS:
Loan origination and
purchase activities:
Wholesale originations. $ -- $287,992 $2,292 $159,075
Retail originations.... -- 66,487 2,001 74,384(2)
Correspondent
purchases............. -- 2,460 -- 17,111
-------- -------- ------ --------
Total loan originations
and purchases(3)..... $ -- $356,939 $4,293 $250,570
Average principal
balance per loan....... $ -- $ 106 $ 110 $ 108
Percent of loans secured
by first mortgages..... -- 97.3% 96.5% 98.4%
Weighted average initial
loan-to-value ratio.... -- 71.5% 72.5% 70.9%
Originations by product
type(3):
ARMs................... $ -- $264,510 $2,090 $187,987
Fixed-rate mortgages... -- 92,429 2,203 62,583
Weighted average
interest rates:
Fixed-rate mortgages... -- 10.4% 9.8% 9.9%
ARMs................... -- 9.3% 9.0% 9.2%
Margin-ARMs............ -- 7.0% 5.7% 7.0%
Loan sales:
Loans sold through
whole loan
transactions(4)....... $ -- $298,713 $ -- $ 95,716
Loans sold through
securitizations....... -- -- -- 99,132
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
AS OF OR FOR THE QUARTER ENDED
--------------------------------------------------------------------------------
MARCH 31, 1996 JUNE 30, 1996 SEPTEMBER 30, 1996 DECEMBER 31, 1996 MARCH 31, 1997
-------------- ------------- ------------------ ----------------- --------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Gain on sale of loans.. $ -- $ 830 $ 2,658 $ 8,142 $ 10,012
Servicing income....... -- -- 10 19 302
Interest income........ 39 248 560 1,999 2,271
------ ------- -------- -------- --------
Total revenues......... 39 1,078 3,228 10,160 12,585
Operating Expenses...... 899 1,620 2,721 6,960 8,539
------ ------- -------- -------- --------
Earnings (loss) before
income taxes (benefit). (860) (542) 507 3,200 4,046
Income taxes (benefit).. (362) (225) 213 1,344 1,699
------ ------- -------- -------- --------
Net earnings (loss)..... $ (498) $ (317) $ 294 $ 1,856 $ 2,347
====== ======= ======== ======== ========
Pro forma primary
earnings (loss) per
share(4)............... $(0.05) $ (0.03) $ 0.02 $ 0.16 $ 0.19
Pro forma fully diluted
earnings (loss) per
share(4)............... $(0.05) $ (0.03) $ 0.02 $ 0.16 $ 0.19
OPERATING STATISTICS:
Loan origination
activities:
Wholesale originations. $2,292 $45,412 $104,392 $135,896 $159,075
Retail originations.... 2,001 7,120 18,956 38,410 74,384(2)
Correspondent
purchases............. -- -- -- 2,460 17,111
------ ------- -------- -------- --------
Total loan originations
and purchases(3)...... $4,293 $52,532 $123,348 $176,766 $250,570
Average principal
balance per loan....... $ 110 $ 115 $ 103 $ 105 $ 108
Percent of loans secured
by first mortgages..... 96.5% 97.4% 96.8% 97.7% 98.4%
Weighted average initial
loan-to-value ratio.... 72.5% 71.5% 71.9% 71.1% 70.9%
Originations by product
type(3):
ARMs................... $2,090 $35,340 $ 93,473 $133,607 $187,987
Fixed-rate mortgages... $2,203 $17,192 $ 29,875 $ 43,159 $ 62,583
Weighted average
interest rates:
Fixed-rate mortgages... 9.8% 10.3% 10.6% 10.3% 9.9%
ARMs................... 9.0% 9.4% 9.2% 9.4% 9.2%
Margin-ARMs............ 5.7% 6.9% 6.9% 7.1% 7.0%
Loan sales:
Loans sold through
whole loan
transactions.......... $ -- $28,822 $ 79,419 $190,472 $ 95,716(5)
Loans sold through
securitizations....... $ -- $ -- $ -- $ -- $ 99,132
Staffing and offices:
Total employees........ 53 105 178 333 462
Total wholesale account
executives............ 4 16 25 34 46
Total retail loan
officers.............. 6 20 24 58 105
Total regional
operating centers..... 2 3 3 3 3
Total wholesale sales
offices............... 1 1 5 12 18
Total retail sales
offices............... 2 5 8 20 30
</TABLE>
- -------
(1) Adjusted to reflect (i) the exercise of 304,501 warrants at an average
price of $3.50 per share, (ii) the sale of 545,000 shares of Common Stock
to Comerica at a price of $7.50 per share, less estimated expenses payable
by the Company, and (iii) the sale of 2,900,000 shares of Common Stock
offered hereby at an assumed initial public offering price of $9.50 per
share (after deducting the underwriting discount and estimated expenses
payable by the Company), and the application of the estimated net proceeds
therefrom to reduce outstanding balances under the Company's warehouse
facilities and repay approximately $1.25 million outstanding under the
Company's revolving line of credit. Adjustments have not been made to
reflect the impact should the Underwriters' over-allotment option be
exercised.
(2) Includes $634,000 of loans originated through the Alternative Mortgage
Products Division.
(3) Excludes non-refundable fees and direct costs associated with the
origination or purchase of mortgage loans.
(4) Pro forma earnings (loss) per share has been computed by dividing pro
forma net earnings by the pro forma weighted average number of shares
outstanding. The pro forma weighted average number of shares includes all
options and warrants issued below the estimated initial public offering
price within one year prior to the filing of the Registration Statement
for the initial public offering and is calculated using the treasury stock
method. Historical earnings per share is not presented because it is not
indicative of the ongoing entity.
(5) Includes the $2.5 million of loans repurchased and resold by the Company
in the first quarter of 1997.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the preceding
Selected Consolidated Financial and Other Data and the Company's Financial
Statements and the Notes thereto and the other financial data included
elsewhere in this Prospectus.
GENERAL
New Century is a specialty finance company engaged in the business of
originating, purchasing, selling and servicing subprime mortgage loans secured
primarily by first mortgages on single family residences. See "Risk Factors--
Subprime Mortgage Banking Industry." The Company originates and purchases
loans through its Wholesale and Retail Divisions. From the commencement of
lending operations in February 1996 through March 31, 1997, the Company
originated and purchased $607.5 million in mortgage loans. The Company's loan
originations and purchases have grown from $4.3 million for the first quarter
of 1996 to $250.6 million for the first quarter of 1997. New Century's
borrowers generally have substantial equity in the property securing the loan,
but have impaired or limited credit profiles or higher debt-to-income ratios
than traditional mortgage lenders allow. The Company's borrowers also include
individuals who, due to self-employment or other circumstances, have
difficulty verifying their income, as well as individuals who prefer the
prompt and personalized service provided by the Company. Because these
borrowers typically use the proceeds of the Company's loans to consolidate and
refinance debt, and to finance home improvements, education and other consumer
needs, the Company believes that its loan volume will be less dependent on
general levels of interest rates or home sales and therefore less cyclical
than conventional mortgage lending.
LOAN ORIGINATIONS AND PURCHASES
As of March 31, 1997, the Company's Wholesale Division was operating through
three regional operating centers located in Southern California, Northern
California and Chicago, and through 18 additional sales offices located in 13
states. The Wholesale Division funded $159.1 million in loans, or 63.5%, of
the Company's total loan production during the first quarter of 1997. As of
March 31, 1997, the Retail Division was operating through 13 retail sales
offices in California, and 17 retail sales offices in 13 other states. The
Retail Division funded $74.4 million in loans, or 29.7%, of total loan
production during the first quarter of 1997. The Company expects to increase
the percentage of loans originated within the Retail Division in the future.
See "Risk Factors--Ability to Sustain Growth and Rapid Geographic Expansion."
Under the Correspondent Program, established in December 1996, the Company
purchases closed loans from other mortgage bankers and financial institutions.
This program is designed to complement wholesale production efforts and
accounted for $17.1 million, or 6.8%, of the Company's total loan production
during the first quarter of 1997.
28
<PAGE>
The following table summarizes the Company's loan originations and purchases
for the periods shown.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996 FOR THE QUARTER ENDED MARCH 31, 1997
------------------------------------------ -------------------------------------------
WHOLESALE RETAIL CORRESPONDENT TOTAL WHOLESALE RETAIL(1) CORRESPONDENT TOTAL
--------- ------- ------------- -------- --------- --------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal balance (in
thousands)............. $287,992 $66,487 $2,460 $356,939 $159,075 $74,384 $17,111 $250,570
Number of loans......... 2,611 745 22 3,378 1,486 687 154 2,327
Average principal
balance (in thousands). $ 110 $ 89 $ 112 $ 106 $ 107 $ 108 $ 111 $ 108
Weighted average
interest rates:
Fixed-rate............. 10.5% 10.1% 10.2% 10.4% 10.0% 9.7% 10.5% 9.9%
ARMs................... 9.4% 9.1% 10.3% 9.3% 9.4% 8.4% 10.1% 9.2%
Margin-ARMs............ 7.0% 6.9% 7.5% 7.0% 7.1% 7.0% 6.6% 7.0%
Weighted average initial
loan-to-value ratio(2). 71.4% 72.0% 67.8% 71.5% 70.5% 72.4% 68.7% 70.9%
Percentage of loans:
ARMs................... 79.2% 51.2% 94.5% 74.1% 81.8% 58.5% 84.5% 75.0%
Fixed-rate............. 20.8% 48.8% 5.5% 25.9% 18.2% 41.5% 15.5% 25.0%
Percentage of loans
secured by first and
second mortgages:
Percentage of loans
secured by first
mortgages............. 98.1% 93.8% 99.0% 97.3% 99.4% 95.7% 100.0% 98.4%
Percentage of loans
secured by second
mortgages............. 1.9% 6.2% 1.0% 2.7% 0.6% 4.3% -- 1.6%
</TABLE>
- --------
(1) Includes $634,000 of loans originated through the Alternative Mortgage
Products Division.
(2) The weighted average initial loan-to-value ratio of a loan secured by a
first mortgage is determined by dividing the amount of the loan by the
appraised value of the mortgaged property at origination. The weighted
average initial loan-to-value ratio of a loan secured by a second mortgage
is determined by taking the sum of the first and second mortgages and
dividing by the appraised value of the mortgaged property at origination.
The Company has increased its loan origination volume on a quarterly basis
in large part as a result of the significant expansion of the Wholesale and
Retail Divisions. The following table sets forth the quarterly loan production
results, the number of office locations and the number of sales professionals
at the end of each quarter by division:
<TABLE>
<CAPTION>
AS OF OR FOR THE QUARTER ENDED
--------------------------------------------------------------------------------
MARCH 31, 1996 JUNE 30, 1996 SEPTEMBER 30, 1996 DECEMBER 31, 1996 MARCH 31, 1997
-------------- ------------- ------------------ ----------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
WHOLESALE
Volume................. $2,292 $45,412 $104,392 $135,896 $159,075
Offices (including
regional operating
centers).............. 3 4 8 15 21
Account Executives..... 4 16 25 34 46
RETAIL
Volume................. $2,001 $ 7,120 $ 18,956 $ 38,410 $ 74,384(1)
Offices................ 2 5 8 20 30
Loan Officers.......... 6 20 24 58 105
CORRESPONDENT
Volume................. $ -- $ -- $ -- $ 2,460 $ 17,111
TOTAL
Volume................. $4,293 $52,532 $123,348 $176,766 $250,570
Offices................ 5 9 16 35 51
</TABLE>
- --------
(1) Includes $634,000 of loans originated through the Alternative Mortgage
Products Division.
29
<PAGE>
LOAN SALES AND SECURITIZATIONS
The Company completed the sale of loans through securitization in February
and May 1997 and anticipates that significant revenue will be generated from
the sale of mortgage-backed securities created through securitization
transactions in future periods. In a securitization, the Company sells loans
that it has originated or purchased to a trust for a cash purchase price and
an interest in the securitized loans called residual interests. The cash
purchase price is raised through the sale of senior certificates by the trust.
Following the securitization, purchasers of senior certificates receive the
principal collected, including prepayments, and the investor pass-through
interest rate on the principal balance, while the Company receives the cash
flows from the residual interests, after payment of servicing fees, guarantor
fees and other trust expenses, and provided that specified over-
collateralization requirements are met.
Residual interests in real estate mortgage investment conduits are recorded
on the Company's balance sheet as a result of the sale of loans through
securitization. At the closing of the securitization, the Company removes from
its balance sheet the mortgage loans held for sale and adds to its balance
sheet (i) the cash received and (ii) the estimated fair value of the residual
interests, which consists of (a) an over-collateralization amount ("OC") and
(b) a net interest receivable. ("NIR"). The excess of cash received and assets
retained by the Company over the carrying value of the loans sold, less
transaction costs, equals the gain on sale of loans recorded by the Company.
The recorded values of these residual interests are amortized as distributions
are received from the trust holding the respective loan pool.
Each OC represents the portion of the loans which are held by the trust as
over-collateralization for the senior certificates sold and, along with a
certificate guarantor insurance policy provided by a monoline insurance
company, serves as credit enhancement to the senior certificate holders. Each
OC initially consists of the excess of the principal balance of the
securitized loans less the principal balance of the senior certificates sold
to investors, which was 3% in the February 1997 securitization and 3.25% in
the May 1997 securitization. Each OC is required to be maintained at a
specified target level of the principal balance of the senior certificates,
which may be increased significantly in the event delinquencies and/or losses
exceed certain specified levels. Cash flows received by the trust in excess of
the obligations of the trust to the senior certificate holders and others are
deposited into the over-collateralization account until the target OC is
reached, at which point distributions of excess cash are made to the Company
as the holder of the residual interests.
The Company allocates the basis in the mortgage loans between the portion of
the mortgage loans sold through mortgage-backed securities (i.e., the senior
certificates) and the portion retained (i.e., the residual interests) based on
the relative fair values of those assets on the date of the sale. The Company
may recognize gains or losses attributable to the change in the fair value of
the residual interests, which are recorded at estimated fair value and
accounted for as "held-for-trading" securities. The Company is not aware of an
active market for the purchase or sale of residual interests; accordingly, the
Company estimates the fair value of the residual interests by calculating the
present value of the estimated expected future cash flows using a discount
rate commensurate with the risks involved. For its February and May 1997
securitizations, the Company utilized discount rates of approximately 16.0%.
Each NIR is determined by using the amount of the excess of the weighted
average coupon on the loans sold over the sum of: (i) the coupon on the senior
certificates, (ii) a servicing fee paid to the servicer of the loans, (iii)
estimated losses to be incurred on the portfolio of loans securitized over the
estimated lives of the loans and (iv) other expenses and revenues, which
includes anticipated prepayment penalties. The significant assumptions used by
the Company to estimate NIR cash flows are anticipated prepayments and
estimated credit losses. The Company estimates prepayments by evaluating
historical prepayment performance of comparable loans and the impact of trends
in the industry. The Company's prepayment estimates have resulted in estimated
average lives of its mortgage loans of between four and five years. The
Company estimates credit losses using available historical loss data for
comparable portfolios of loans and the specific characteristics of the loans
included in the Company's securitizations. For purposes of calculating the NIR
for its February and May 1997
30
<PAGE>
securitizations, the Company assumed that aggregate credit losses as a
percentage of the original principal balances of the respective securitized
loan portfolios will total approximately 3%.
There are no assurances that actual performance of any of the Company's
securitized loan portfolios will be consistent with the Company's estimates
and assumptions. To the extent that actual prepayment speeds, losses or market
discount rates materially differ from the Company's estimates, the estimated
value of its residual interests may increase or decrease, which would have a
material impact on the Company's results of operations, financial condition
and liquidity. See "Risk Factors--Residual Interests in Securitizations."
RESULTS OF OPERATIONS
Quarter Ended March 31, 1997 Compared to Quarter Ended March 31, 1996
The Company began lending operations in February 1996. Accordingly, results
for the first quarter of 1996 primarily reflect costs incurred in the startup
of operations. In the first quarter of 1996, total loan origination volume was
$4.3 million, total revenues were $39,000 and total expenses were $899,000.
The Company did not sell any loans during the first quarter of 1996.
For the first quarter of 1997, total loan origination volume was $250.6
million and total loan sales were $194.8 million, including the Company's
initial securitization of $99.1 million. Total revenues for the first quarter
of 1997 were $12.6 million, and consisted primarily of gain on sale of loans
of $10.0 million and interest income on invested cash and loans held for sale
of $2.3 million. Total expenses for the first quarter of 1997 were $8.5
million, and consisted of personnel expense of $3.5 million, general and
administrative expenses of $2.0 million, interest expense of $1.8 million,
advertising and promotion expense of $842,000, servicing expense of $234,000
and professional services expense of $156,000.
Net earnings for the first quarter of 1997 were $2.3 million compared to a
net loss for the first quarter of 1996 of $498,000.
Year Ended December 31, 1996 Compared to Period from November 17, 1995
(inception) to December 31, 1995
From the date of incorporation, November 17, 1995, through December 31,
1995, the primary focus of the Company was on the development of policies and
procedures and on the hiring of key employees. The Company did not generate
significant revenue during this period except $14,000 in interest income on
invested cash, and incurred operating expenses of $95,000. In addition, the
Company deferred certain organizational expenses totaling $59,000 during this
period.
Total revenues for 1996 were $14.5 million and consisted primarily of gain
on sale of loans of $11.6 million and interest income on invested cash and
loans held for sale of $2.8 million. Gain on sale of loans was recorded on the
sale of $298.7 million of mortgage loans, which represented 83.7% of total
loan originations for the year. Interest income was recorded primarily on
loans held for sale, which totaled $58.0 million as of December 31, 1996, and
which averaged $32.4 million for the year based on quarterly average balances.
Total expenses, excluding $4.3 million of origination costs deducted
directly from the gain on sale of loans, were $12.2 million, and consisted of
personnel expenses of $6.1 million, general and administrative expenses of
$2.5 million, interest expense of $1.9 million, advertising and promotion
expense of $1.2 million, servicing expense of $269,000 and professional
services expense of $282,000. Expenses for 1996 increased as compared to 1995
due primarily to (i) the increase in staffing from eight employees as of
December 31, 1995 to 333 employees as of December 31, 1996, (ii) the opening
of three regional operating centers, (iii) the opening of 32 sales offices and
(iv) costs incurred in connection with the growing volume of loan
originations.
Net earnings for 1996 were $1.3 million as compared to a net loss for 1995
of $82,000.
31
<PAGE>
Comparison of Quarters Ended March 31, 1996, June 30, 1996, September 30,
1996, December 31, 1996, and March 31, 1997
Revenues. Total revenues consisted of gain on sale of loans, interest income
on invested cash and loans held for sale and servicing revenues. Total
revenues were $39,000, $1.1 million, $3.2 million, $10.2 million and $12.6
million for the first, second, third and fourth quarters of 1996 and the first
quarter of 1997, respectively. The quarterly increase in total revenues
reflected the Company's significant increase in loan originations and
purchases since the commencement of lending operations in February 1996, and
was due primarily to (i) quarterly increases in gain on sale of loans
resulting from increases in total loans sold, (ii) quarterly increases in
interest income resulting from the increasing balance of loans held for sale
during each successive quarter, and (iii) increases in servicing revenue
resulting from the retention of servicing rights on a portion of loans sold
through whole loan transactions during the third quarter of 1996, and the
retention of servicing rights on the Company's initial securitization of $99.1
million of loans in February 1997, including income derived from the Company's
residual interest in securitization.
The Company has implemented a loan sales strategy that includes both
securitizations and whole loan sales to advance the Company's goal of
enhancing profitability while managing cash flows. The timing of specific loan
sales may not always correlate to the timing of loan originations due to
market conditions or other factors which may impact the value of loans, such
as the size of the loan pools to be sold. The amount of loans sold in the
fourth quarter of 1996 exceeded 100% of loan originations during such quarter
due to the accumulation of loans originated in prior quarters for final sale.
The following table sets forth the amount of loans sold through whole loan
sales transactions and securitizations, and the components of the gain on sale
of loans for the periods indicated.
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
--------------------------------------------------------------------------------
MARCH 31, 1996 JUNE 30, 1996 SEPTEMBER 30, 1996 DECEMBER 31, 1996 MARCH 31, 1997
-------------- ------------- ------------------ ----------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total loans sold through
whole loan transactions
and securitizations.... $-- $28,822 $79,419 $190,472 $194,848
Total loans sold as a
percentage of loan
originations........... -- 54.9% 64.4% 107.8% 77.8%
Gain on sale of loans:
Gain from whole loan
sale transactions and
securitizations, net.. $-- $ 1,034 $ 3,749 $ 10,269 $ 11,903
Unrealized gain on
held-for-trading
securities............ -- -- -- -- 1,267
Provision for
repurchase losses..... -- (20) (80) (606) (495)
Non-refundable loan
fees.................. -- 559 1,106 1,883 3,311
Premiums paid.......... -- (76) (739) (1,158) (1,803)
Origination costs...... -- (667) (1,378) (2,246) (4,171)
---- ------- ------- -------- --------
Gain on sale of loans.. $-- $ 830 $ 2,658 $ 8,142 $ 10,012
==== ======= ======= ======== ========
</TABLE>
Gains or losses from whole loan sales of mortgage loans are recognized at
the date of settlement and are based on the difference between the selling
price and the carrying value of the related loans sold including the value of
servicing rights. Gains or losses from securitizations are recognized at the
date of settlement and are equal to the excess of cash received and assets
retained by the Company, over the carrying value of the loans sold, less
transaction costs. Gain from whole loan sales transactions and securitizations
increased quarterly as a result of increases in the amount of loans sold, and
increased as a percentage of total loans sold through whole
32
<PAGE>
loan sales transactions and securitizations as a result of increasing premiums
received by the Company resulting from, among other things, increases in the
size of loan pools sold, and the impact of the Company's initial
securitization in February 1997.
The Company maintains an allowance for estimated losses related to possible
off-balance sheet recourse associated with the potential repurchase of loans
which were previously sold through whole loan sales transactions. The
Company's determination of the level of allowance for repurchase losses is
based upon historical experience, level of repurchase requests from investors,
the Company's evaluation of potential repurchase liability during the course
of its own review and industry statistics for projected losses related to
representations and warranties made to whole loan purchasers of similar loans.
This provision is charged against gain on sale of loans and credited to the
allowance for repurchase losses in other liabilities. The Company's primary
repurchase risk arises when the borrower fails to make the early payments on
their loans. The establishment of a provision for losses of $20,000, $80,000,
$606,000 and $495,000 in the second, third and fourth quarters of 1996 and the
first quarter of 1997, respectively, reflects the significant increase in
whole loan sales activities during those quarters. The Company charged off,
net of recoveries, $0, $0, $50,000, $556,000 and $375,000 for the first,
second, third and fourth quarters of 1996 and the first quarter of 1997,
respectively.
Non-refundable loan fees are generated primarily from origination fees paid
by retail borrowers, and, to a lesser extent, from fees paid by loan brokers
within the Wholesale Division and are deferred and recognized as an adjustment
to gain on sale of loans when the loans are sold. The quarterly increase in
non-refundable loan fees was due to quarterly increases in loan origination
volume primarily within the Retail Division.
Purchase premiums represent payments made by the Company to independent loan
brokers and loan correspondents in connection with the origination and
purchase of loans and are deferred and recognized as an adjustment to gain on
sale of loans when the loans are sold. The quarterly increase in purchase
premiums is primarily due to quarterly increases in loan origination volume
within the Wholesale Division.
Direct costs associated with the origination of mortgage loans, which
include commissions and certain other compensation costs, are deferred and
recognized as an adjustment to gain on sale of loans when the loans are sold.
The quarterly increase in direct origination costs is the result of increases
in commission and staffing costs related to the quarterly increases in loan
origination volume.
Interest income reflects interest earned on invested cash and loans held for
sale, and was $39,000, $248,000, $560,000, $2.0 million and $2.3 million for
the first, second, third and fourth quarters of 1996 and the first quarter of
1997, respectively. The quarterly increase in interest income is the result of
increases in the average amount of loans held for sale, which increased as a
result of the Company's increasing loan origination volume. The average amount
of loans held for sale, calculated based on beginning of quarter and end of
quarter balances, was $2.1 million, $16.1 million, $49.9 million, $64.9
million and $85.6 million for the first, second, third and fourth quarters of
1996 and the first quarter of 1997, respectively.
Servicing income reflects servicing fees received on loans sold or
securitized by the Company on which the Company has retained ownership of the
servicing rights. While the Company sold primarily all of its loans through
whole loan sales transactions on a servicing-released basis during 1996, the
Company retained ownership of the servicing rights on approximately $17.3
million in loans sold in September 1996 and $99.1 million in loans securitized
in February 1997.
Expenses. Total expenses, excluding origination costs deducted directly from
the gain on sale of loans, were $899,000, $1.6 million, $2.7 million, $7.0
million and $8.5 million for the first, second, third and fourth quarters of
1996 and the first quarter of 1997, respectively. The quarterly increase in
total expenses is the result of the significant expansion of the Company's
operations since the commencement of lending operations in February 1996.
Beginning in the fourth quarter of 1996, the Company accelerated its
geographic expansion, adding 19 new retail and wholesale sales offices in the
fourth quarter of 1996 and 16 new sales offices in the first quarter of
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1997. The Company expenses the start-up costs associated with opening new
sales offices, and, therefore during periods of significant expansion, the
Company's operating expenses may increase more rapidly than the Company's
revenues, the recognition of which are dependent on the timing and volume of
loan sales and securitizations. To help achieve the Company's objective of
break-even levels of operations within two to four months after opening a
wholesale sales office and five to eight months after opening a retail sales
office, the Company plans to (i) focus initial hiring efforts on experienced
sales professionals, (ii) utilize existing regional and/or corporate
operations personnel to support the sales office locations, (iii) provide
direct mail and/or telemarketing support to accelerate sales activity and (iv)
minimize initial operating costs through the use of short term leases of
executive suites and equipment. The following table sets forth the components
of the Company's expenses for the periods indicated.
<TABLE>
<CAPTION>
AS OF AND FOR THE QUARTER ENDED
--------------------------------------------------------------------------------
MARCH 31, 1996 JUNE 30, 1996 SEPTEMBER 30, 1996 DECEMBER 31, 1996 MARCH 31, 1997
-------------- ------------- ------------------ ----------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Personnel............... $584 $ 845 $1,350 $3,304 $ 3,545
General and
administrative expense. 144 322 592 1,398 1,954
Interest expense........ 14 169 346 1,412 1,808
Advertising and
promotion.............. 106 199 297 567 842
Servicing............... -- 24 57 188 234
Professional expenses... 51 61 79 91 156
---- ------ ------ ------ -------
Total expenses........ $899 $1,620 $2,721 $6,960 $ 8,539
==== ====== ====== ====== =======
Total end of quarter
staffing............... 53 105 178 333 462
Total offices........... 5 9 16 35 51
</TABLE>
Personnel expense includes employee base salaries and benefits costs plus
incentive bonus awards paid and accrued, but excludes a portion of commissions
and certain personnel costs directly related to originations, which are
deferred and recognized as an adjustment to gain on sale of loans when the
loans are sold. Personnel expense increased quarterly due to the significant
increase in staffing required to process the quarterly growth in loan
origination and purchase volume, which increased from $4.3 million for the
first quarter of 1996 to $250.6 million for the first quarter of 1997, and to
support the opening of new offices.
General and administrative expense includes costs associated with facilities
leases, furniture and equipment, depreciation, equipment leases, postage and
couriers, stationery and supplies, telephone expense, travel expense and other
general business expenses. General and administrative expense increased
quarterly due to an increase in (i) lease expense related to the growth in the
number of branch offices, (ii) postage and courier expense and stationery and
supplies expense directly related to the growth in loan origination volume,
and (iii) depreciation of furniture and equipment and equipment lease expense
required to support the increased number of offices and personnel.
Interest expense includes interest costs related to the Company's warehouse,
aggregation and residual financing facilities and other short-term borrowings,
and interest costs related to long-term borrowings secured by the Company's
furniture and equipment. Interest expense has increased quarterly due to
(i) increases in the average outstanding balance of the warehouse and
aggregation facilities, (ii) increases in long-term borrowings, and (iii)
residual financing obtained in connection with the Company's February 1997
securitization.
Advertising and promotion expense primarily reflects the cost of the
Company's direct-mail marketing and, to a lesser extent, other promotional
costs associated with loan origination activities. Advertising and promotion
expense increased quarterly primarily due to an increase in the number of
mailings supporting the Company's growth in retail sales offices. Total
mailings were approximately 250,000, 720,000, 1.6 million, 1.9 million and 2.8
million for the first, second, third and fourth quarters of 1996 and the first
quarter of 1997, respectively.
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<PAGE>
Servicing expense reflects initial setup fees, monthly sub-servicing costs
and other fees paid to Advanta. Servicing expense increased quarterly due
primarily to the growth in loan origination volume.
Professional expenses include legal expenses, accounting fees and other
consulting costs. Professional expenses increased quarterly due to (i)
increased legal fees required to support the increased lending activity,
(ii) increased accounting fees resulting from the growth of the Company and
relating to the Company's initial securitization, and (iii) consulting costs
incurred to assist the Company's multi-state licensing efforts and the ongoing
development of the Company's quality control and compliance programs.
The Company incurred net losses of $498,000 and $317,000 for the first and
second quarters of 1996, respectively, primarily as a result of the
significant costs associated with the startup of operations. The Company
recorded net earnings of $294,000, $1.9 million and $2.3 million for the third
and fourth quarters of 1996 and the first quarter of 1997, respectively, as
the growth in loan origination volume and related loan sales activities
resulted in increasing levels of revenue from gain on sale of loans and
interest income.
LIQUIDITY AND CAPITAL RESOURCES
The Company requires access to short-term warehouse and aggregation credit
facilities in order to fund loan originations and purchases pending the
pooling and sale of such loans. The Company currently has an $85 million
warehouse line of credit led by First Bank which expires in May 1998 and has
received a commitment letter from First Bank proposing an increase in the
Company's warehouse line limit to $150 million subject to the completion of
the Offering. The Company intends to agree to such proposal upon the closing
of the Offering. The Company utilizes the First Bank warehouse line to finance
the actual funding of its loan originations and purchases. The Company also
has a $175 million aggregation facility with Salomon, which is subject to
renewal by Salomon on a monthly basis. After loans are funded by the Company
utilizing the First Bank warehouse line and all loan documentation is
complete, the loans are transferred to the Salomon aggregation facility,
generally within 15 days after funding, where they are held until a loan sale
is completed. The First Bank warehouse line is generally paid down upon the
transfer of loans to the Salomon aggregation facility. The Salomon aggregation
facility, and in some cases the First Bank warehouse line, are paid down with
the proceeds of loan sales and securitizations. The Company expects to add new
credit facilities, as well as renew and expand its existing credit facilities,
in order to finance its growing levels of loan production.
The Company also has a residual financing agreement with Salomon pursuant to
which Salomon will provide the Company with financing upon the Company's
retention of residual interests in securitizations on which Salomon is the
lead underwriter. The amount of residual financing provided by Salomon upon
each securitization is determined pursuant to a formula set forth in the
agreement and, in the event of a change in the variables utilized by Salomon
in determining such financing amount, the Company may be required to repay
some or all of any residual financing balance outstanding. The Company will
need to add new credit facilities, as well as renew and expand this credit
facility in order to finance future securitization transactions.
The Company's business requires substantial cash to support its operating
activities and growth plans. The Company's growing negative operating cash
flow position is primarily a function of its securitization strategy and rapid
growth. The Company records a residual interest in securitization and
recognizes a gain on sale when it effects a securitization, but only receives
the cash representing such gain over the life of the loans securitized. In
order to support its loan origination, purchase and securitization programs,
the Company is required to make significant cash investments that include the
funding of: (i) fees paid to brokers and correspondents in connection with
generating loans through wholesale and correspondent lending activities; (ii)
fees and expenses incurred in connection with the securitization and sale of
loans including over-collateralization requirements for securitization; (iii)
commissions paid to sales employees to originate loans; (iv) the difference
between the amount funded per loan and the amount advanced under its current
warehouse facility; and (v) income tax payments arising from the recognition
of gain on sale of loans. The Company also requires cash to fund ongoing
operating and administrative expenses, including sub-servicing expenses
incurred in the servicing of the Company's loans, capital expenditures and
debt service. The Company's sources of operating cash flow include:
35
<PAGE>
(i) the premium advance component of the Salomon aggregation facility; (ii)
premiums obtained in whole loan sales; (iii) mortgage origination income and
fees; (iv) interest income on loans held for sale; (v) excess cash flow from
securitization trusts; and (vi) cash servicing income. As a result of its
strategy to significantly grow its loan origination, purchase and
securitization programs, the Company expects that its operating uses of cash
will substantially exceed its operating sources of cash. This gap will
continue to increase to the extent that the Company's securitization volumes
increase, whether due to increased volumes of loan production or as a result
of a continued shift towards securitization in its loan sales mix. However,
the Company believes that its cash flow profile will improve over time as its
rate of loan production growth moderates and the balance of its residual
interests and the size of its servicing portfolio increases.
The Company intends to rely on credit facilities and undertake capital
markets financings in order to generate funds to finance the negative cash
flow generated by its operations, securitization and growth plans. The
Company's current credit facilities include: (i) the First Bank warehouse
line; (ii) the Salomon aggregation facility; (iii) the Salomon residual
financing facility; and (iv) $5.0 million of long-term secured and unsecured
credit facilities with First Bank.
First Bank has expanded participation in the $85 million warehouse line
facility to include Guaranty Federal Bank, F.S.B. As of March 31, 1997, the
Company's outstanding balance under the warehouse line was $65.8 million. The
facility provides for an advance rate equal to the lesser of 97% of the
principal balance of loans originated or purchased, or 97% of the acquisition
price and a rate of interest equal to the one-month LIBOR plus 1.50%. The
availability of funds under this facility is subject to the Company's
continued compliance with certain operating and financial covenants, including
(i) leverage covenants based on the ratio of outstanding borrowings to net
worth, (ii) cash covenants requiring minimum liquidity at each month end equal
to $1.5 million, (iii) restrictions on changes in the Company's business, (iv)
restrictions on selling any asset other than in the ordinary course of
business and (v) restrictions on additional financing or guaranteeing the debt
obligation of any other entity without prior approval.
The Salomon aggregation facility provides for the financing of up to $175
million in loans originated or purchased by the Company at an advance rate
equal to the lesser of market value as determined by Salomon, or 105% of the
principal balance of the loans and a rate of interest generally equal to the
one-month LIBOR plus 1.25%. As of March 31, 1997, amounts payable by the
Company under this aggregation facility were $44.7 million. The Salomon
residual financing facility provides for the financing of an amount calculated
pursuant to a formula set forth in the agreement based on the amount of
residual interests retained by the Company in a covered securitization and a
rate of interest equal to the one-month LIBOR plus 1.25%. No significant
financial or operating covenants have been imposed by Salomon in connection
with the aggregation or residual financing facilities. In November 1996, the
Company commited to provide Salomon with a first right to purchase whole loans
from the Company and/or to have Salomon lead underwrite loans sold through
securitization by the Company in an aggregate amount of $500 million. In May
1997 the Company fulfilled all such volume commitments to Salomon.
The Company has a discretionary, non-revolving $2.5 million line of credit
with an affiliate of First Bank secured by the Company's furniture and
equipment. Advances under this facility are made periodically at the
discretion of the lender, and bear interest at a fixed rate established at the
time of each advance for a term of three years. As of March 31, 1997, amounts
payable under this facility were $1.9 million, and the weighted average
interest rate was 9.0%.
In March 1997, the Company established a $2.5 million unsecured line of
credit with First Bank for working capital purposes and has received a
commitment letter from First Bank proposing an increase in the Company's
working capital line to $5.0 million upon the completion of the Offering. The
Company intends to agree to such proposal upon the closing of the Offering. As
of March 31, 1997, amounts payable under this facility were $1.25 million and
the interest rate was 10.25%. Outstanding balances under this line of credit
bear interest at a variable rate 1.75% above First Bank's "reference rate"
plus 1.75%, which, at March 31, 1997, was 8.5%, and funds may be borrowed on a
revolving basis. The working capital facility is subject to the same covenants
as the
36
<PAGE>
warehouse line and has the same expiration date. As a sublimit under the
working capital line of credit, First Bank has provided the Company with a
$1.2 million letter of credit required by the landlord under the lease on the
Company's new executive and administrative offices. See "Business--
Properties."
The Company anticipates that the net proceeds from the Offering, together
with the funds available under its credit facilities, will be sufficient to
fund its operations for the next 12 months, if the Company's future operations
are consistent with management's expectations. If more favorable advance rates
are arranged on warehouse facilities, aggregation facilities, or residual
financing, or more funds are made available under the furniture and equipment
financing facility or working capital line, or if the Company increases the
percentage of sales through whole loan transactions, the timing of additional
liquidity needs would be extended. In the event the Offering is not
consummated, however, the Company would have to arrange alternative financing,
and possibly increase the amount of loans sold through whole loan transactions
to maintain adequate liquidity.
INCOME TAXES
The Company accounts for income taxes using the asset and liability method.
Under the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
ACCOUNTING CONSIDERATIONS
In June 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 125 (FASB 125), "Accounting
for Transfer and Servicing of Financial Assets and Extinguishment of
Liabilities." FASB 125 addresses the accounting for all types of
securitization transactions, securities lending and repurchase agreements,
collateralized borrowing arrangements and other transactions involving the
transfer of financial assets. FASB 125 distinguishes transfers of financial
assets that are sales from transfers that are secured borrowings. FASB 125 is
generally effective for transactions that occur after December 31, 1996, and
it is to be applied prospectively. FASB 125 will require the Company to
allocate its basis in the mortgage loans between the portion of the mortgage
loans sold through mortgage backed securities and the portion retained (the
residual interests) based on the relative fair values of those portions on the
date of sale. The pronouncement requires the Company to account for residual
interests as "held-for-trading" securities which are to be recorded at fair
value in accordance with SFAS No. 115. The Company adopted FASB 125 on January
1, 1997 and there was no material impact on the Company's financial position
or results of operations.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128 (FASB No. 128), "Earnings
Per Share." FASB No. 128 supersedes APB Opinion No. 15 (APB No. 15), "Earnings
Per Share" and specifies the computation, presentation, and disclosure
requirements for earnings per share (EPS) for entities with publicy held
common stock or potential common stock. FASB No. 128 was issued to simplify
the computation of EPS and to make the U.S. standard more compatible with the
EPS standards of other countries and that of the International Accounting
Standards Committee (IASC). It replaces the presentation of primary EPS with a
presentation of basic EPS and fully diluted EPS with diluted EPS.
Basic EPS, unlike primary EPS, excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Diluted EPS is computed similarly to fully diluted EPS under APB No. 15.
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<PAGE>
FASB No. 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted. After adoption, all prior-period EPS data presented shall be
restated to conform with FASB No. 128. The Company has determined that this
statement will increase the earnings per share computation under basic EPS as
compared to primary EPS.
FASB No. 129, "Disclosure of Information about Capital Structure," is
effective for financial statements for periods ending after December 15, 1997.
It is not expected that the issuance of FASB No. 129 will require significant
revision of prior disclosures since the Statement lists required disclosures
that had been included in a number of previously existing separate statements
and opinions.
38
<PAGE>
BUSINESS
This Prospectus may contain forward-looking statements which involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those discussed in "Risk Factors."
GENERAL
New Century is a specialty finance company engaged in the business of
originating, purchasing, selling and servicing subprime mortgage loans secured
primarily by first mortgages on single family residences. The Company
originates loans through its Wholesale and Retail Divisions. From the
commencement of lending operations in February 1996 through March 31, 1997,
the Company originated and purchased $607.5 million in mortgage loans. The
Company's loan originations and purchases have grown from $4.3 million for the
first quarter of 1996 to $250.6 million for the first quarter of 1997. The
Company's principal strategy is to continue to increase loan originations
through geographic expansion, high levels of service to brokers through its
Wholesale Division and increased consumer marketing through its Retail
Division. New Century has also implemented a loan sales strategy that includes
both securitizations and whole loan sales in order to advance the Company's
goal of enhancing profitability while managing cash flows.
The Company's borrowers generally have substantial equity in the property
securing the loan, but have impaired or limited credit profiles or higher
debt-to-income ratios than traditional mortgage lenders allow. The Company's
borrowers also include individuals who, due to self-employment or other
circumstances, have difficulty verifying their income, and individuals who
prefer the prompt and personalized service provided by the Company. These
types of borrowers are generally willing to pay higher loan origination fees
and interest rates than those charged by conventional lending sources. Because
these borrowers typically use the proceeds of the Company's loans to
consolidate and refinance debt and to finance home improvements, education and
other consumer needs, the Company believes that its loan volume will be less
dependent on general levels of interest rates or home sales and therefore less
cyclical than conventional mortgage lending. Although the Company's
underwriting guidelines include five levels of credit risk classification,
approximately 54.1% of the principal balance of the loans originated and
purchased by the Company in 1996 were to borrowers within the Company's two
highest credit grades. One important consideration in underwriting subprime
loans is the nature and value of the collateral securing the loans. The
Company believes that the amount of equity present in the real estate securing
its loans, together with the fact that approximately 88.2% of its loans
originated or purchased in the first quarter of 1997 were secured by
borrowers' primary residences, mitigates the risks inherent in subprime
lending. The average loan-to-value ratio on loans originated and purchased by
the Company in 1996 was approximately 71.5%. Approximately 97.3% and 98.4% of
the loans originated and purchased by the Company during 1996 and the first
quarter of 1997, respectively, were secured by first mortgages, and the
remainder of the loans the Company originated and purchased for such periods
were secured by second mortgages.
The Wholesale Division originates loans through independent loan brokers and
accounted for $159.1 million, or 63.5%, of the Company's loan production
during the first quarter of 1997. As of May 31, 1997, the Wholesale Division
originated loans through its three regional operating centers located in
Southern California, Northern California and Chicago and through 23 additional
sales offices located in 15 states. The Company believes that it has been
successful in penetrating the broker market by providing prompt, consistent
service, which includes (i) utilizing experienced subprime underwriting
personnel to evaluate the specific characteristics of each loan application,
(ii) issuing a conditional loan approval or denial promptly, generally within
24 hours after receipt of an application from a broker, (iii) utilizing teams
of account executives in the field and account managers in the office to
actively assist brokers in completing approved transactions, (iv) providing
brokers with access to the Company's decision-making personnel, (v) locating
Company personnel in geographic proximity to their broker customers,
(vi) avoiding the imposition of unnecessary conditions on loan approvals, and
(vii) consistently funding loans in accordance with the approved terms,
generally within 15 to 20 days following conditional approval.
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<PAGE>
The Retail Division originates loans through the direct solicitation of
borrowers and accounted for $74.4 million, or 29.7%, of the Company's loan
production during the first quarter of 1997. As of May 31, 1997, the Retail
Division originated loans through a network of 15 sales offices located in
California and 25 sales offices located in 15 other states. The Company's
retail marketing includes high-volume targeted direct mail and more
traditional marketing activities conducted by retail loan officers, who seek
to identify potential borrowers through referral sources as well as individual
sales efforts. By creating a direct relationship with the borrower, retail
lending creates a more sustainable loan origination franchise and provides the
Company with greater control over the lending process. The Company also
receives the origination fees paid by the borrower on loans originated through
the Retail Division, which offsets the higher costs of retail lending and may
contribute to increased profitability and cash flow.
The Company began purchasing closed loans from other mortgage bankers and
financial institutions ("correspondents") in late 1996. In early 1997, the
Company expanded this program to include the purchase of small, bulk packages
of loans from correspondents. Correspondent purchases totaled $17.1 million,
or 6.8%, of the Company's total loan production during the first quarter of
1997. Purchasing closed loans through the Correspondent Program allows the
Company to supplement its own loan production with limited overhead expenses.
Loans purchased by the Company under the Correspondent Program must be
originated in accordance with the Company's underwriting guidelines and
currently all such loans are re-underwritten by the Company prior to purchase.
By focusing on the purchase of individual loans on a flow basis and small bulk
purchases, the Company believes that its Correspondent Program complements its
existing marketing efforts to brokers and enables the Company to increase loan
production on a cost-effective basis. The Company plans to expand its
Correspondent Program through marketing efforts by its broker account
executives and through targeted marketing to selected financial institutions
and mortgage bankers.
The Company's seven senior executives have substantial mortgage banking
experience and have previously directed the national expansion of several
conventional and subprime mortgage companies. The senior management team has
broad and complementary skills, including expertise in subprime originations,
subprime underwriting, loan administration, servicing and collections,
secondary marketing, capital markets, finance, legal/regulatory affairs and
public company management. Furthermore, the Company's current underwriters
have an average of 10 years of subprime mortgage lending experience and all
loans presently require two underwriting approvals. The experience of its
underwriting personnel allows the Company to exercise flexibility within its
underwriting process based on the specific characteristics of each loan
application. In addition, all appraisals are reviewed by qualified Company
personnel or a qualified appraiser retained by the Company. Along with its
thorough underwriting process, the Company maintains strong corporate controls
throughout the lending process, including subjecting all loans to a series of
pre- and post-funding audits to verify the accuracy of the loan application
data and to assure compliance with the Company's underwriting policies,
procedures and guidelines. The Company believes that its underwriting and
review processes provide the necessary support to continue the Company's rapid
loan origination growth while maintaining loan quality.
New Century sells its mortgage loans through securitizations as well as
through bulk sales of whole loans to institutional purchasers. During 1996,
the Company sold $298.7 million of loans through whole loan sales transactions
at a weighted average sales price equal to 105.0% of the original principal
balance of the loans sold. As of May 31, 1997, the Company has securitized
$228.4 million of its mortgage loans through two securitization transactions.
Each of these securitizations has been credit enhanced by an insurance policy
provided through a monoline insurance company allowing the senior certificates
in the related trusts to receive ratings of "AAA" from Standard & Poor's
Ratings Services and "Aaa" from Moody's Investors Service, Inc. The Company
intends to securitize a majority of its loans while continuing to sell a
substantial portion of its loans through whole loan sale transactions.
Until February 1997, the Company sold all of its loan production on a
servicing-released basis. Starting with its first securitization in February
1997, the Company has retained the servicing rights on the loans sold through
its securitizations. While retaining servicing rights as the master servicer
on the securitized loans, the Company currently outsources its servicing to
Advanta. This strategy has allowed the Company to focus its
40
<PAGE>
own management efforts and capital investments on expanding loan production
and developing related loan processing, secondary marketing and administrative
operations. Advanta currently conducts all of the Company's servicing
operations, including interim servicing on loans held for sale, interim
servicing of loans sold to whole loan purchasers pending a servicing transfer
and servicing on loans for which the servicing rights are retained by the
Company through securitization. As of March 31, 1997, the Company's servicing
portfolio consisted of 3,110 loans with an aggregate principal balance of
approximately $346.4 million, of which 999 loans with an aggregate principal
balance of $112.2 million were held for sale and serviced on an interim basis,
1,256 loans with an aggregate principal balance of $136.4 million were
serviced on an interim basis for the whole loan purchasers thereof and 855
loans with an aggregate principal balance of $97.8 million had been
securitized. The Company intends to develop its own servicing capability in
the future in order to manage the servicing relationship with its borrowers
and oversee the performance of its loans more directly. See "Recent
Developments--Comerica Investment and Strategic Relationship."
GROWTH AND OPERATING STRATEGIES
Increasing Growth of Retail Production. The Company will emphasize the
growth of retail loan production during 1997 through geographic expansion and
increased consumer marketing efforts. The Company has opened 20 retail sales
offices during the first five months of 1997 and intends to open 10 or more
additional retail sales offices during the remainder of 1997. The Company
targets markets for expansion based on demographics and its ability to recruit
sales office managers and other qualified personnel in particular markets and
has not yet identified the exact locations of its planned additional retail
sales offices. The expansion costs for new sales offices are generally
mitigated by leasing short-term executive suite space until revenues are
generated by the office, at which time the Company leases permanent space.
Controlling the costs of expansion permits the Company to enter and, if
necessary, exit new geographic markets quickly with limited financial impact.
The Company intends to coordinate the opening of each new retail sales office
with direct mail advertising with the goals of generating revenues for each
such office within 60 to 90 days after opening and achieving break-even
operations within five to eight months. The Company's geographic expansion
plans require additional capital and human resources and there can be no
assurance the Company will successfully implement its expansion plans. See
"Risk Factors--Ability to Sustain Growth and Rapid Geographic Expansion." The
Company also intends to increase its consumer marketing, which includes the
use of direct mail, a loans-by-mail program and more traditional marketing
methods, such as referrals and individual loan officer sales efforts. The
Company has increased the number of targeted direct mail pieces to retail
borrowers from approximately 750,000 mailers in January 1997 to approximately
1.4 million mailers in May 1997 and intends to increase the number of targeted
direct mail pieces to over 2 million per month by the end of 1997. See
"Business--Marketing."
Continuing Growth of Wholesale Production. The Company will continue the
growth of its Wholesale Division, primarily through geographic expansion and
greater penetration in existing markets by providing continued high levels of
service to brokers. The Company intends to continue its geographic expansion
through the development of lending operations in the Southeast and Northeast
regions of the country. In connection with its expansion, the Company plans to
open 5 or more additional wholesale sales offices in markets surrounding the
Company's existing and planned regional operations centers and to increase the
total number of account executives from 42 as of May 31, 1997 to approximately
80 by the end of 1997. The Company has developed its National Call Center, a
centralized telemarketing group that contacts mortgage brokers in areas where
New Century does not currently have a wholesale sales office, to expand into
new markets. The Company intends to target markets where the National Call
Center program is particularly successful for the opening of new wholesale
sales offices. The Company's geographic expansion plans require additional
capital and human resources and there can be no assurance the Company will
successfully implement its expansion plans. See "Risk Factors--Ability to
Sustain Growth and Rapid Geographic Expansion."
The Company believes that providing prompt, consistent service is the reason
for its success with wholesale brokers. As a result, management has created a
customer service oriented culture at the Company. By providing a high level of
service, the Company seeks to maximize the number of potential loans closed in
the short term and establishes the basis for repeat business, referrals and
other future lending opportunities. The Company
41
<PAGE>
expects to improve service to brokers by (i) regionalizing certain wholesale
operational support activities, (ii) continuing improvements in the Company's
computer and other support systems, which are expected to improve the
Company's speed, efficiency and consistency in processing loan applications,
and (iii) expanding product offerings to provide brokers with a broader
selection of borrowing alternatives for their customers.
Enhancing Profitability while Managing Cash Flow. New Century has
implemented a loan sales strategy that includes both securitizations and whole
loan sales in order to advance the Company's goal of enhancing profits while
managing cash flows. Loan sales through securitizations permit the Company to
enhance operating profits and to benefit from future cash flows generated by
the residual interests retained by the Company. Whole loan sale transactions
enable the Company to generate current cash flow, protect against the
potential volatility of the securitization market and reduce the risks
inherent in retaining residual interests. The Company's strategy is to enhance
earnings by securitizing loans with characteristics which the securitization
market considers most favorable. At the same time, the Company seeks to
enhance earnings and cash flows from whole loan sales by tailoring the
composition of its whole loan pools to meet the investment preferences of
specific buyers. The Company may in the future increase or decrease the
percentage of loans sold through securitizations based on economic conditions,
secondary market conditions and available financial resources.
The Company manages its cash flows in several ways, including selling a
significant portion of its loans through whole loan sales which result in the
receipt of cash gains at the time of sale. The Company also manages its cash
flow through the use of a variety of funding sources, including the receipt of
advance rates in excess of par on its loan aggregation facility and borrowing
against the value of the residual interests received in its securitization.
The residual interests retained by the Company constitute an investment which
the Company believes will provide attractive investment returns and future
cash flow. Further, the Company believes that its cash flow profile will
improve over time as its rate of loan production growth moderates and the
balance of its residual interests and the size of its servicing portfolio
increases. The Company continually evaluates different securitization and
financing strategies which may improve its profitability and/or cash flow
position.
Regionalizing Operations and Incentivizing Performance. New Century is
implementing a strategy of regionalizing operations support, which will place
Company decision makers closer to local brokers, enable the Company to refine
its procedures to reflect local market practices and conditions and enable the
Company to provide a higher level of service to brokers. The Company's
compensation structure, which includes stock options and cash incentives based
on both loan volume and loan quality for a large number of key employees,
incentivizes its personnel to achieve the Company's performance goals. The
Company believes its compensation structure also enables it to attract and
retain key employees. In addition, the Company believes that its operations
support compensation structure and the experience of its senior management,
underwriting personnel and many members of its support staff, together with
their ability to recruit and retain additional qualified personnel, provide
fundamental support for the Company's growth and operating strategies.
Expanding Product Offerings. The Company frequently reviews its products and
pricing for competitiveness and introduces new products to meet the needs of
its borrowers, brokers and correspondents. The Company recently commenced loan
originations through its Alternative Mortgage Products Division which offers
loans to borrowers meeting conventional mortgage lending standards and offers
a broad selection of second mortgage products, including loans with loan-to-
value ratios of up to 125% for borrowers with good credit histories. The
Company believes that offering these high loan-to-value products is beneficial
to the Company because a number of its competitors are offering such products
and they generate fee-based cash income for the Company. The Company also
believes that these mortgage products will enable the Company to increase loan
production from brokers and correspondents who have customers seeking such
products and from borrowers identified through the Company's retail marketing
whose needs are not satisfied by the mortgage products offered by the Retail
Division. The Alternative Mortgage Products Division maintains separate
underwriting and loan processing staffs and the Company expects that the
mortgage loans originated through its Alternative Mortgage Products Division
will be sold by the Company on a broker or correspondent basis, rather than
through securitizations or servicing-retained sales. Finally, the Company is
evaluating the introduction of other categories of consumer loans to its
product offerings, thereby expanding its consumer base and diversifying its
product mix.
42
<PAGE>
MARKETING
Retail Division. The Company emphasizes high-volume targeted direct mail but
also uses a variety of other marketing activities to attract borrowers for the
Retail Division. Using its database screening, the Company selects the
potential customers to whom it sends direct mail. The Company's database
screening involves a detailed marketing analysis intended to identify current
homeowners who are likely to be qualified candidates for the Company's loan
products. Factors considered by the Company in identifying homeowners for its
mailing list include the length of time the homeowner has owned the home and
the individual's credit profile. Longer periods of homeownership increase the
likelihood that the homeowner has substantial equity in the home and will
satisfy the Company's loan-to-value requirements. Aspects of an individual's
credit profile, such as credit problems, limited credit history and prior
borrowings from consumer finance companies, also indicate that the individual
is a likely candidate for the Company's loan programs.
The Company tracks the success of its marketing efforts and regularly
assesses the accuracy of its database screening in identifying likely
candidates for its products. By limiting the mailing of direct mail pieces to
likely borrowers, the Company believes it more efficiently utilizes its
marketing expenditures. The Company has increased the number of targeted
direct mail pieces to retail borrowers from approximately 750,000 mailers in
January 1997 to approximately 1.4 million mailers in May 1997 and intends to
increase the number of targeted direct mail pieces to over 2 million per month
by the end of 1997.
Under the Company's recently initiated loans-by-mail program, the Company
utilizes its direct marketing methodology in markets where the Company does
not currently maintain a sales office. The Company will target markets where
the loans-by-mail program is particularly successful for the opening of new
retail sales offices. The Company also will continue to emphasize retail loan
generation through more traditional marketing methods, such as referrals and
individual loan officer sales efforts, and intends to provide each sales
office with an increased promotional budget to support these activities. In
addition, the Company has initiated an "outbound" telemarketing strategy to
augment the lead generation capabilities of direct marketing and is evaluating
television and radio advertising.
Wholesale Division. The Company's wholesale marketing strategy is focused on
the sales efforts of its account executives, supported by the Company's
commitment to providing prompt, consistent service to brokers and their
customers. The Company expects that its growth in wholesale originations will
stem primarily from increasing the number of account executives, increasing
the number of markets served by such account executives and continuing efforts
to improve the service provided to brokers and their customers. The Company
will utilize the resources of its National Call Center to contact and
establish relationships with brokers with whom the Company is not currently
doing business in areas New Century has targeted for expansion. To date, the
Company has not engaged in mass distribution of loan program information to
the broker community, advertised in broker-focused publications or undertaken
other similar marketing techniques to reach new brokers, but the Company will
utilize some or all of these and other marketing techniques in the future.
LOAN ORIGINATIONS AND PURCHASES
The Company originates loans primarily through its Wholesale and Retail
Divisions and purchases loan through its Correspondent Program. The Wholesale
Division originates loans through a network of independent mortgage brokers,
the Retail Division solicits loans directly from prospective borrowers and the
Correspondent Program purchases loans from mortgage banking and financial
institution correspondents that originate, underwrite and fund the loans prior
to their sale to the Company. All of the Company's loans are secured by first
or second mortgages on one-to-four single family residences.
Wholesale Division. The Wholesale Division funded $159.1 million in loans,
or 63.5% of the Company's total loan production, during the first quarter of
1997. As of May 31, 1997, the Wholesale Division was operating through three
regional operating centers located in Southern California, Northern California
and Chicago and through 23 additional sales offices located in Arizona,
California (3), Colorado, Florida, Georgia, Hawaii, Indiana, Minnesota,
Missouri (3), Nevada, New Mexico, Ohio (3), Pennsylvania (2), Texas (2) and
Washington,
43
<PAGE>
employing a total of 42 account executives. As of March 31, 1997, the Company
had approximately 950 approved mortgage brokers and in the first quarter of
1997 originated loans through approximately 500 brokers. During the first
quarter of 1997, New Century's 10 largest producing brokers originated
approximately 17% of the Company's loans, with the largest broker accounting
for approximately 4%.
In wholesale originations, the broker's role is to identify the applicant,
assist in completing the loan application form, gather necessary information
and documents and serve as the Company's liaison with the borrower through the
lending process. The Company reviews and underwrites the applications
submitted by the broker, approves or denies the application, sets the interest
rate and other terms of the loan and, upon acceptance by the borrower and
satisfaction of all conditions imposed by the Company, funds the loan. Because
brokers conduct their own marketing and employ their own personnel to complete
loan applications and maintain contact with borrowers, originating loans
through the Wholesale Division allows the Company to increase its loan volume
without incurring the higher marketing, labor and other overhead costs
associated with increased retail originations.
Loan applications generally are submitted by mortgage brokers to an account
executive in one of the Company's sales offices. The application is then
forwarded to the closest regional operating center where the loan is logged-in
for RESPA and other regulatory compliance purposes, underwritten and, in most
cases, conditionally approved or denied within 24 hours of receipt. Because
mortgage brokers generally submit individual loan files to several prospective
lenders simultaneously, the Company attempts to respond to each application as
quickly as possible. If approved, a "conditional approval" will be issued to
the broker with a list of specific conditions to be met (for example, credit
verifications and independent third-party appraisals) and additional documents
to be supplied prior to the funding of the loan. An account manager and the
originating New Century account executive will work directly with the
submitting mortgage broker to collect the requested information and to meet
the underwriting conditions and other requirements. In most cases, the Company
funds loans within 15-20 days after approval of the loan application.
The following table sets forth selected information relating to wholesale
loan originations excluding loans purchased through the Company's
Correspondent Program during the periods shown:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
--------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1996 1996 1996 1996 1997
--------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Principal balance (in
thousands)............. $2,292 $45,412 $104,392 $135,896 $159,075
Average principal
balance per loan (in
thousands)............. $ 115 $ 123 $ 109 $ 108 $ 107
Combined weighted
average initial loan-
to-value ratio......... 71.0% 71.8% 72.0% 70.8% 70.5%
Percent of first
mortgage loans......... 93.5% 98.0% 97.7% 98.5% 99.4%
Property securing loans:
Owner occupied......... 95.0% 88.3% 86.9% 88.7% 87.7%
Non-owner occupied..... 5.0% 11.7% 13.1% 11.3% 12.3%
Weighted average
interest rate:
Fixed-rate............. 9.8% 10.2% 10.8% 10.5% 10.0%
ARMs................... 8.3% 9.4% 9.2% 9.4% 9.4%
Margin--ARMs........... 5.7% 6.9% 7.0% 7.1% 7.1%
</TABLE>
Retail Division. During the first quarter of 1997, the Company originated
$74.4 million in loans, or 29.7% of its total loan production, through its
Retail Division. As of May 31, 1997, the Retail Division employed 134 retail
loan officers, located in 40 sales offices in Arizona (3), California (15),
Colorado, Hawaii (2), Illinois (2), Kansas, Minnesota (2), Missouri (3),
Nevada, New Mexico, Ohio (3), Oregon, Pennsylvania (2), Utah, Washington and
Wisconsin. By creating a direct relationship with the borrower, retail lending
provides a more sustainable loan origination franchise and greater control
over the lending process while generating loan origination fees to offset the
higher costs of retail lending, which contributes to profitability and cash
flow.
In connection with the Company's direct mail activities, the Company's
database screening activities are directed by a centralized staff who create a
targeted mailing list for each geographic market and oversee the completion of
mailings by a third party mailing vendor. All calls or written inquiries from
potential borrowers
44
<PAGE>
which result from the mailings are received at a centralized location, where
the Company's telemarketing staff interviews the borrower, makes a preliminary
evaluation of the borrower's credit and the value of the collateral property
and refers qualified leads to loan officers in the retail sales office closest
to the borrower. Under the loans-by-mail program, the qualified leads are
referred to a centralized staff of loan officers who utilize document and
signing services to exchange documentation with the borrower.
The following table sets forth selected information relating to retail loan
originations during the periods shown:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
-------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1996 1996 1996 1996 1997
--------- -------- ------------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Principal balance (in
thousands)............. $2,001 $7,120 $18,956 $38,410 $74,384
Average principal
balance per loan (in
thousands)............. $ 105 $ 82 $ 81 $ 95 $ 108
Combined weighted
average initial loan-
to-value ratio......... 74.2% 70.0% 71.8% 72.3% 72.4%
Percent of first
mortgage loans......... 100.0% 93.6% 91.9% 94.6% 95.7%
Property securing loans:
Owner occupied......... 100.0% 92.0% 92.7% 93.9% 90.0%
Non-owner occupied..... -- 8.0% 7.3% 6.1% 10.0%
Weighted average
interest rates:
Fixed-rate............. 9.7% 10.4% 10.3% 10.0% 9.7%
ARMs................... 9.7% 9.2% 9.3% 8.9% 8.4%
Margin--ARMs........... 5.6% 6.6% 6.8% 7.0% 7.0%
</TABLE>
Correspondent Program. The Company began purchasing closed loans from other
mortgage bankers and financial institutions through its Correspondent Program
in late 1996. In early 1997, the Company expanded this program to include the
purchase of small, bulk packages of loans from correspondents. Correspondent
purchases totaled $17.1 million, or 6.8%, of the Company's total loan
production during the first quarter of 1997. Purchasing closed loans through
the Correspondent Program allows the Company to supplement its own loan
production with limited overhead expenses. Loans purchased by the Company
under the Correspondent Program must be originated in accordance with the
Company's underwriting guidelines and all such loans are currently re-
underwritten by the Company prior to purchase. By focusing on the purchase of
individual loans on a flow basis and small bulk purchases, the Company
believes that its Correspondent Program complements its existing marketing
efforts to brokers and enables the Company to increase loan production on a
cost-effective basis. The Company plans to expand its Correspondent Program
through marketing efforts by its broker account executives and through
targeted marketing to selected financial institutions and mortgage bankers.
The Company reviews an application for approval from each lender seeking to
participate in the Correspondent Program. The Company analyzes the mortgage
banker's underwriting guidelines and financial condition, including its
licenses and financial statements. New Century requires each mortgage banker
to enter into a purchase and sale agreement with customary representations and
warranties regarding the loans such mortgage banker will sell to the Company,
thereby providing the Company with representations and warranties that are
comparable to those given by the Company to its loan purchasers.
PRODUCT TYPES
General. The Company offers both fixed-rate and adjustable-rate loans, as
well as loans with an interest rate that is initially fixed for a period of
time and subsequently converts to an adjustable-rate. Most of the ARMs
originated by the Company are offered at a low initial interest rate,
sometimes referred to as a "teaser" rate. At each interest rate adjustment
date, the Company adjusts the rate, subject to certain limitations on the
amount of any single adjustment, until the rate charged equals the fully
indexed rate. There can be no assurance, however, that the interest rate on
these loans will reach the fully indexed rate if the loans are pre-paid or in
cases of foreclosure. The Company's borrowers fall into five subprime risk
classifications and products are available at different interest rates and
with different origination and application points and fees depending on the
particular
45
<PAGE>
borrower's risk classification (see "Business--Underwriting Standards").
Borrowers may choose to increase or decrease their interest rate through the
payment of different levels of origination fees and many of the Company's
fixed-rate borrowers, in particular, choose to "buy down" their interest rate
through the payment of additional origination fees. The Company's maximum loan
amounts are generally $500,000 with a loan-to-value ratio of up to 85%. The
Company does, however, offer larger loans with lower loan-to-value ratios on a
case-by-case basis, and also offers products that permit a loan-to-value ratio
of up to 90% for selected borrowers with a Company risk classification of
"A+." Loans originated or purchased by the Company in 1996 had an average loan
amount of approximately $105,666 and an average loan-to-value ratio of
approximately 71.5%. Unless prohibited by state law or otherwise waived by the
Company upon the payment by the related borrower of higher origination fees
and a higher interest rate, the Company generally imposes a prepayment penalty
on the borrower. Approximately 66.2% of the loans the Company originated or
purchased during the first quarter of 1997 provided for the payment by the
borrower of a prepayment charge in limited circumstances on certain full or
partial prepayments.
Alternative Mortgage Products Division. The Company frequently reviews its
products and pricing for competitiveness and introduces new products to meet
the needs of its borrowers, brokers and correspondents. The Company recently
commenced loan originations through its Alternative Mortgage Products Division
which offers loans to borrowers meeting conventional mortgage lending
standards and also offers a broad selection of second mortgage products,
including loans with loan-to-value ratios of up to 125% for borrowers with
good credit histories. The Alternative Mortgage Products Division maintains
separate underwriting and loan processing staffs and the Company expects that
the mortgage loans originated through its Alternative Mortgage Products
Division will be sold by the Company on a broker or correspondent basis,
rather than through securitizations or servicing-retained sales. The Company
is evaluating the introduction of certain other categories of consumer loans
to its product offerings, thereby expanding its consumer base and diversifying
its product mix.
UNDERWRITING STANDARDS
New Century originates or purchases its mortgage loans in accordance with
the underwriting criteria (the "Underwriting Guidelines") described below. The
loans the Company originates or purchases generally do not satisfy
conventional underwriting standards, such as those utilized by the Federal
National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC"); therefore, the Company's loans are likely to result in
rates of delinquencies and foreclosures that are higher, and may be
substantially higher, than those rates experienced by portfolios of mortgage
loans underwritten in a more traditional manner. The Underwriting Guidelines
are intended to evaluate the credit history of the potential borrower, the
capacity of the borrower to repay the proposed loan, the value of the security
property and the adequacy of such property as collateral for the proposed
loan. Based upon the underwriter's review of the loan application and related
data and application of the Underwriting Guidelines, the loan terms, including
interest rate and maximum loan-to-value, are determined.
The Company utilizes only experienced underwriters and the Company's chief
credit officer (the "Chief Credit Officer") must approve the hiring of all
underwriters, including those located in the regional operations centers. The
Company's underwriters are required to have had either substantial subprime
underwriting experience with a consumer finance company or other subprime
lender or substantial experience with the Company in other aspects of the
subprime mortgage finance industry before becoming part of the Company's
underwriting department. As of March 31, 1997, the Company employed 17
underwriters with an average of 10 years of subprime mortgage lending
experience. All underwriters participate in ongoing training, including
regular supervisory critiques of each underwriter's work. The Company believes
that its experienced underwriting personnel have the ability to analyze the
specific characteristics of each loan application and make appropriate credit
judgments. In addition, the Company believes that by effectively employing its
training program, its underwriters efficiently review and evaluate loan
packages while understanding and adhering to the Company's Underwriting
Guidelines.
46
<PAGE>
Underwriters are not given approval authority until their work has been
reviewed by the Chief Credit Officer for a period of time and deemed
satisfactory. Thereafter, the Chief Credit Officer re-evaluates the authority
levels of all underwriting personnel on an ongoing basis. All approved loans
currently require a second underwriting approval. The Company believes that
these controls and procedures constitute an important part of the Company's
infrastructure and commitment to loan quality.
On a case-by-case basis, exceptions to the Underwriting Guidelines are made
where compensating factors exist. For example, it may be determined that an
applicant warrants a risk category upgrade, a debt service-to-income ratio
exception, a pricing exception, a loan-to-value exception or an exception from
certain requirements of a particular risk category (collectively called an
"upgrade" or an "exception"). An upgrade or exception may generally be allowed
if the application reflects certain compensating factors, among others: low
loan-to-value; a maximum of one 30-day late payment on all mortgage loans
during the last 12 months; stable employment or ownership of the current
residence for five or more years; and above average physical condition of the
property securing the loan. An upgrade or exception may also be allowed if the
applicant places a down payment through escrow of at least 20% of the purchase
price of the mortgaged property, or if the new loan reduces the applicant's
monthly aggregate mortgage payment by 25% or more. Accordingly, certain
mortgagors may qualify in a more favorable risk category than would apply in
the absence of such compensating factors. In limited circumstances, the
underwriters may exercise judgment to make exceptions to the Underwriting
Guidelines where no compensating factors exist.
Each loan applicant completes an application that includes information with
respect to the applicant's liabilities, income, credit history, employment
history and personal information. The Underwriting Guidelines require a credit
report on each applicant from a credit reporting company. The report typically
contains information relating to such matters as credit history with local and
national merchants and lenders, installment debt payments and any record of
defaults, bankruptcies, repossessions or judgments. All mortgaged properties
are appraised by qualified independent appraisers prior to funding of the
loan. Such appraisers inspect and appraise the subject property and verify
that it is in acceptable condition. The Company requires that all mortgaged
properties be in at least "average" condition. Following each appraisal, the
appraiser prepares a report that includes a market value analysis based on
recent sales of comparable homes in the area and, when deemed appropriate,
replacement cost analysis based on the current cost of constructing a similar
home. All appraisals are required to conform to the Uniform Standards of
Professional Appraisal Practice adopted by the Appraisal Standards Board of
the Appraisal Foundation and are generally on forms acceptable to FNMA and
FHLMC. The Underwriting Guidelines require a review of the appraisal by a
qualified employee of the Company or by a qualified appraiser retained by the
Company.
The Underwriting Guidelines include three levels of applicant documentation
requirements, referred to as the "Full Documentation," "Limited Documentation"
and "Stated Income Documentation" programs. Under each of the programs, the
Company reviews the applicant's source of income, calculates the amount of
income from sources indicated on the loan application or similar
documentation, reviews the credit history of the applicant, calculates the
debt service-to-income ratio to determine the applicant's ability to repay the
loan, reviews the type and use of the property being financed, and reviews the
property. In determining the ability of the applicant to repay the loan, the
Company's underwriters use (i) a qualifying rate that is equal to the stated
interest rate on fixed-rate loans, (ii) the initial interest rate on loans
which provide for two or three years of fixed payments before the initial
interest rate adjustment or (iii) one percent above the initial interest rate
on other adjustable-rate loans. The Underwriting Guidelines require that
mortgage loans be underwritten in a standardized procedure which complies with
applicable federal and state laws and regulations and requires the Company's
underwriters to be satisfied that the value of the property being financed, as
indicated by an appraisal and a review of the appraisal, currently supports
the outstanding loan balance. In general, the maximum loan amount for mortgage
loans originated under the programs is $500,000; however, larger loans may be
approved on a case-by-case basis. The Underwriting Guidelines permit one-to-
four-family residential property loans to have loan-to-value ratios at
origination of generally up to 80%, or up to 90% for borrowers in the
Company's highest credit grade categories, depending on, among other things,
the purpose of the mortgage loan, a borrower's credit
47
<PAGE>
history, repayment ability and debt service-to-income ratio, as well as the
type and use of the property. With respect to mortgage loans secured by
mortgaged properties acquired by a borrower under a "lease option purchase,"
the loan-to-value of the related mortgage loan is based on the lower of the
appraised value at the time of origination of such mortgage loan or the sale
price of the related mortgaged property if the "lease option purchase price"
was set less than six months prior to origination. If the "lease option
purchase price" was set six months or more prior to origination, the loan-to-
value is based on the appraised value at the time of origination.
Under the Full Documentation program, applicants generally are required to
submit two written forms of verification of stable income for at least twelve
months. Under the Limited Documentation program, one such form of verification
is required for twelve months. Under the Stated Income Documentation program,
an applicant may be qualified based upon monthly income as stated on the
mortgage loan application if the applicant meets certain criteria. All the
foregoing programs require that with respect to salaried employees there be a
telephone verification of the applicant's employment. Verification of the
source of funds required to be deposited by the applicant into escrow in the
case of a purchase money loan is generally required under the Full
Documentation program guidelines and on all purchase loans where the loan-to-
value ratio is greater than 70%. No such verification is required under any of
the programs where the loan-to-value ratio is less than 70%.
The Company's categories and criteria for grading the credit history of
potential borrowers is set forth in the table below. Generally, borrowers in
lower credit grades are less likely to satisfy the repayment obligations of a
mortgage loan and, therefore, are subjected to more stringent underwriting
criteria and more limited loan-to-value ratios and are charged higher interest
rates and loan origination fees. Loans made to lower credit grade borrowers,
including credit-impaired borrowers, entail a higher risk of delinquency and
may result in higher losses than loans made to borrowers who use conventional
mortgage sources. The Company believes that the amount of equity present in
the collateral securing its loans generally mitigates these risks.
48
<PAGE>
UNDERWRITING GUIDELINES(1)
<TABLE>
<CAPTION>
A+ RISK A- RISK B RISK C RISK C- RISK
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Existing mortgage
history................ Maximum one Maximum Maximum four Unlimited Unlimited
30-day late three 30-day 30-day late number of 30- and 60-
payment and late payments and 30- and 60- day late
no 60-day payments and one 60-day day late payments and
late no 60-day late payment payments and a maximum of
payments late within last maximum of two 90-day
within last payments 12 months if two 90-day late
12 months; within last LTV is 75% late payments and
must be 12 months if or less; no payments one 120-day
current at LTV is 75% 60-day late within last late payment
application or less; two payments if 12 months if if LTV is
time 30-day late LTV is over LTV is 70% more than
payments in 75%; not or less; 65%; if LTV
last 12 required to maximum two is 65% or
months if be current 60-day late less, there
LTV is over at payments or may be a
75%; not application one 90-day current
required to time late payment notice of
be current if LTV is default; not
at over 70%; required to
application not required be current
time to be at
current at application
application time
time
Other credit............ No open Minor Prior Significant Significant
collection derogatory defaults prior defaults
accounts or items acceptable; defaults acceptable;
charge-offs allowed; not not more acceptable; open charge-
open after more than than $1,000 generally, offs or
funding $500 in open in open not more collection
collection collection than $2,500 amounts may
accounts or accounts or in open remain open
charge-offs charge-offs collection after
open after open after accounts or funding
funding funding charge-offs
open after
funding
Bankruptcy filings...... Generally, Generally, Generally, Generally, Bankruptcy,
no no no no notice of
bankruptcy bankruptcy bankruptcy bankruptcy sale filing,
or notice of or notice of or notice of or notice of notice of
default default default default default
filings in filings in filings in filings in filing or
last 3 years last 3 years last 2 years last 18 foreclosure
months permitted on
a case by
case basis
Debt service to income 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
49
<PAGE>
Division are underwritten to the standards of the intended buyers thereof and
utilize information not considered by the Company in its standard Underwriting
Guidelines, including credit scores. In addition, the Alternative Mortgage
Products Division maintains separate underwriting and loan processing staffs.
New Century commenced receiving applications for mortgage loans under its
regular lending program in February 1996 and during 1996 sold all of its loans
on a whole loan, servicing-released basis. Accordingly, the Company (whether
as an originator or purchaser of mortgage loans) does not currently have
representative historical delinquency, bankruptcy, foreclosure or default
experience that may be referred to for purposes of estimating the future
delinquency and loss experience of its mortgage loans. However, the Company
recently established reporting systems to track such data for the loans
included in its February and May 1997 securitizations and expects to have this
data in the future with respect to the loans the Company securitizes.
LOAN PRODUCTION BY BORROWER RISK CLASSIFICATION
The following table sets forth information concerning the Company's
principal balance of fixed rate and adjustable rate loan production by
borrower risk classification for the periods shown:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE FOR THE
--------------------------------------------- YEAR ENDED QUARTER ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1996 1996 1996 1996 1997
--------- -------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
A+ Risk Grade:
Percent of total
purchases and
origination........... 25.1% 20.2% 23.4% 19.3% 21.0% 20.2%
Combined weighted
average initial loan-
to-value ratio........ 75.7 74.6 73.5 72.7 73.3 73.0
Weighted average
interest rate:
Fixed-rate............. 9.9 9.8 9.8 9.9 9.8 9.5
ARMs................... 8.5 8.7 8.2 8.6 8.4 8.7
Margin-- ARMs.......... 5.8 6.4 6.4 6.7 6.5 6.8
A- Risk Grade:
Percent of total
purchases and
origination........... 39.8% 35.9% 32.4% 32.8% 33.2% 36.1%
Combined weighted
average initial loan-
to-value ratio........ 74.3 72.9 73.6 73.2 73.3 72.4
Weighted average
interest rate:
Fixed-rate............. 9.5 10.1 10.4 9.9 10.1 9.6
ARMs................... 9.4 9.0 9.0 8.8 8.9 8.7
Margin--ARMs........... 5.9 6.7 6.8 6.9 6.8 6.8
B Risk Grade:
Percent of total
purchases and
origination........... 26.7% 21.0% 22.0% 24.1% 22.9% 23.2%
Combined weighted
average initial loan-
to-value ratio........ 65.3 69.7 73.4 71.9 72.0 71.2
Weighted average
interest rate:
Fixed-rate............. 10.1 10.4 10.7 10.5 10.5 10.3
ARMs................... 9.2 9.5 9.3 9.4 9.4 9.4
Margin--ARMs........... 5.3 7.0 7.0 7.2 7.1 7.2
C Risk Grade:
Percent of total
purchases and
origination........... 4.1% 14.8% 13.9% 14.3% 14.1% 12.1%
Combined weighted
average initial loan-
to-value ratio........ 80.0 70.1 69.0 68.1 68.8 68.6
Weighted average
interest rate:
Fixed-rate............. -- 11.5 12.4 11.0 11.6 10.8
ARMs................... 8.3 9.7 10.2 10.3 10.2 10.0
Margin--ARMs........... 6.0 7.1 7.5 7.5 7.4 7.4
C- Risk Grade:
Percent of total
purchases and
origination........... 4.3% 8.1% 8.3% 9.5% 8.8% 8.4%
Combined weighted
average initial loan-
to-value ratio........ 75.0 65.4 62.2 63.3 63.3 62.3
Weighted average
interest rate:
Fixed-rate............. -- 10.8 12.2 12.3 11.9 11.4
ARMs................... 9.4 11.5 11.1 11.1 11.1 10.6
Margin--ARMs........... 5.0 7.5 7.6 7.7 7.6 7.5
</TABLE>
50
<PAGE>
GEOGRAPHIC DISTRIBUTION
The following table sets forth aggregate dollar amounts (in thousands) and
the percentage of all loans originated or purchased by the Company by state
for the periods shown:
<TABLE>
<CAPTION>
FOR THE QUARTER ENDED FOR THE FOR THE
----------------------------------------------------------- YEAR ENDED QUARTER ENDED
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, MARCH 31,
1996 1996 1996 1996 1996 1997
------------ ------------- -------------- -------------- -------------- --------------
$ % $ % $ % $ % $ % $ %
------ ----- ------- ----- -------- ----- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California.............. $4,122 96.0% $44,205 84.1% $ 75,565 61.3% $ 98,952 56.0% $222,844 62.4% $124,698 49.8%
Illinois................ -- -- -- -- 23,250 18.8% 32,671 18.5% 55,921 15.7% 44,674 17.8%
Ohio.................... -- -- -- -- 2,990 2.4% 10,814 6.1% 13,804 3.9% 13,190 5.3%
Arizona................. -- -- 1,717 3.3% 5,315 4.3% 11,120 6.3% 18,152 5.1% 15,451 6.2%
Colorado................ 101 2.4% 3,970 7.6% 5,558 4.5% 6,790 3.8% 16,419 4.6% 12,980 5.2%
Utah.................... 70 1.6% 1,726 3.3% 3,394 2.8% 6,176 3.5% 11,366 3.2% 9,316 3.7%
Other................... -- -- 914 1.7% 7,276 5.9% 10,243 5.8% 18,433 5.1% 30,261 12.0%
------ ----- ------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total.................. $4,293 100.0% $52,532 100.0% $123,348 100.0% $176,766 100.0% $356,939 100.0% $250,570 100.0%
</TABLE>
LOAN SALES AND SECURITIZATIONS
The Company currently intends to securitize a majority of the loans
originated or purchased by the Company and to sell a substantial portion of
its loans in bulk sales to institutional purchasers of whole loans.
Whole Loan Sales. Until February 1997, the Company followed a strategy of
selling for cash all of its loan originations and purchases in the secondary
market through loan sales in which the Company disposes of its entire economic
interest in the loans (including servicing rights) for a cash price that
represents a premium over the principal balance of the loans sold. During
1996, the Company sold $298.7 million of loans through whole loan sales
transactions at a weighted average sales price equal to 105.0% of the original
principal balance of the loans sold. The Company did not sell any loans
through securitization during this period; however, substantially all of the
loans sold during this period were ultimately securitized by the purchasers
thereof.
The Company seeks to maximize its premium on whole loan sale revenue by
closely monitoring institutional purchasers' requirements and focusing on
originating or purchasing the types of loans that meet those requirements and
for which institutional purchasers tend to pay higher premiums. During 1996,
the Company sold loans to seven institutional purchasers, two of which
purchased approximately 83.6% of the loans sold by the Company.
Whole loan sales are made on a non-recourse basis pursuant to a purchase
agreement containing customary representations and warranties by the Company
regarding the underwriting criteria applied by the Company and the origination
process. The Company, therefore, may be required to repurchase or substitute
loans in the event of a breach of its representations and warranties. In
addition, the Company sometimes commits to repurchase or substitute a loan if
a payment default occurs within the first month following the date the loan is
funded, unless other arrangements are made between the Company and the
purchaser. The Company is also required in some cases to repurchase or
substitute a loan if the loan documentation is alleged to contain fraudulent
misrepresentations made by the borrower. See "Risk Factors--Dependence on
Whole Loan Sales for Future Earnings."
Securitizations. The Company completed the sale of loans through
securitization in February and May 1997 and anticipates that significant
revenue from gain on the sale of loans will be generated from the sale of
mortgage backed securities created through securitization transactions in
future periods. In a securitization, the Company sells loans that it has
originated or purchased to a trust for a cash purchase price and an interest
in the loans securitized called residual interests. The cash purchase price is
raised through an offering of senior certificates by the trust. Following the
securitization, purchasers of senior certificates receive the principal
collected, including prepayments, and the investor pass-through interest rate
on the principal balance, while the Company receives the cash flows from the
residual interests, after payment of servicing fees, guarantor fees and
51
<PAGE>
other trust expenses and provided the specified over-collateralization
requirements are met. The Company recognizes gain on sale of the loans, which
represents the excess of the estimated fair value of the residual interests,
less closing and underwriting costs, over the carrying value of the loans
sold, in the fiscal quarter in which such loans are sold. Concurrent with
recognizing such gain on sale, the Company records the residual interests as
assets on its balance sheet. The recorded values of these residual interests
are amortized as distributions are received from the trust holding the
respective loan pool.
With respect to the aforementioned securitizations, the Company arranged for
the related trusts to purchase credit enhancements for the senior certificates
in the related trusts in the form of insurance policies provided by one
AAA/Aaa rated monoline insurance company and, as a result, the senior
certificates in each trust received a rating of "AAA" from Standard & Poor's
Ratings Services and "Aaa" from Moody's Investors Service, Inc.
There are no assurances that actual performance of any of the Company's
securitized loan portfolios will be consistent with the Company's estimates
and assumptions. To the extent that actual prepayment speeds, losses or market
discount rates materially differ from the Company's estimates, the estimated
value of its residuals may increase or decrease, which may have a material
impact on the Company's results of operations, financial condition and
liquidity. See "Risk Factors--Dependence on Securitizations for Future
Earnings,--Residual Interests in Securitizations,--Liquidity; Negative Cash
Flow."
LOAN SERVICING AND DELINQUENCIES
Servicing. The Company subcontracts with Advanta, a third party subservicer,
to conduct its servicing operations, which has allowed the Company to increase
the volume of its loan originations and purchases without incurring related
overhead investments in servicing operations. During the period from the date
the Company originates or purchases loans and the date the Company sells these
loans, which generally ranges from thirty to ninety days (the "Interim
Period"), the Company is responsible for servicing the loans it originates and
purchases. In some cases, whole loan purchasers may request that the Company,
through Advanta, continue to service the loans purchased for an interim period
following the sale. In April 1996, the Company entered into the Advanta
Interim Agreement to service loans during the Interim Period, including any
interim period following the sale of the loans. In addition, Advanta currently
services or subservices loans sold through each public securitization of the
Company's loans pursuant to the Advanta Securitization Agreement.
According to Advanta's Annual Report on Form 10-K for the year ended
December 31, 1996, Advanta's servicing portfolio at December 31, 1996 was
approximately $6.4 billion in loans. Servicing includes collecting and
remitting loan payments, making required advances, accounting for principal
and interest, holding escrow or impound funds for payment of taxes and
insurance, and, if applicable, contacting delinquent borrowers and supervising
foreclosures and property dispositions in the event of unremedied defaults in
accordance with the Company's guidelines.
Advanta Interim Agreement. Under the Advanta Interim Agreement, New Century
is obligated to pay Advanta an annual servicing fee on the declining principal
balance of each loan serviced and a set-up fee for each loan delivered to
Advanta for servicing, and to reimburse Advanta for certain customary costs
and expenses. Such expenses include costs for the preservation, restoration
and protection of the mortgaged properties secured by the Company's loans, any
enforcement or judicial proceedings, including foreclosures, related to such
mortgaged properties, the management and liquidation of the mortgaged
properties if they are acquired in satisfaction of a defaulted mortgage loan,
the maintenance of hazard insurance and the payment of property taxes and
mortgage insurance premiums. If claims are not made or paid under applicable
insurance policies or if coverage thereunder has ceased, the Company will
suffer a loss to the extent that proceeds from liquidation of the mortgaged
property, after reimbursement of Advanta's expenses in the sale, are less than
the principal balance of the related mortgage loan.
The Company may terminate the Advanta Interim Agreement upon the occurrence
of one or more of the events specified in the Advanta Interim Agreement
generally relating to Advanta's proper and timely
52
<PAGE>
performance of its duties and obligations under such agreement. Either the
Company or Advanta may terminate the Advanta Interim Agreement without cause
upon 90 days' prior written notice to the other party; provided, that if the
Company terminates such agreement without cause, the Company must pay Advanta
all reasonable costs associated with the transfer of the Company's loans to
another servicer. In addition, if the Company transfers servicing of any
amount of mortgage loans being serviced by Advanta to another servicer, the
Company must pay Advanta up to $50 per mortgage loan transferred.
As is customary in the mortgage loan servicing industry, Advanta is entitled
to retain any late payment charges, penalties and assumption fees collected in
connection with the mortgage loans. Advanta also receives any benefit derived
from interest earned on collected principal and interest payments between the
date of collection and the date of remittance to the Company and from interest
earned on escrow funds. However, the Company retains the benefit of any
prepayment penalties collected on the loans. Under the Advanta Interim
Agreement, Advanta is required to remit to the Company no later than the 20th
day of each month all principal and interest collected from borrowers during
the prior monthly reporting period.
Advanta Securitization Agreement. Under the Advanta Securitization
Agreement, the Company is obligated to pay Advanta a monthly servicing fee on
the declining principal balance of each loan serviced and a set-up fee for
each loan delivered to Advanta for servicing. Advanta is required to pay all
expenses related to the performance of its duties under the Advanta
Securitization Agreement. Further, Advanta is required to make advances of
taxes and required insurance premiums that are not collected from borrowers
with respect to any mortgage loan, only if it determines that such advances
are recoverable from the mortgagor, insurance proceeds or other sources with
respect to such mortgage loan. If such advances are made, Advanta generally
will be reimbursed prior to the Company receiving the remaining proceeds.
Advanta also will be entitled to reimbursement by the Company for expenses
incurred by it in connection with the liquidation of defaulted mortgage loans
and in connection with the restoration of mortgaged property. If claims are
not made or paid under applicable insurance policies or if coverage thereunder
has ceased, the Company will suffer a loss to the extent that the proceeds
from liquidation of the mortgaged property, after reimbursement of Advanta's
expenses in the sale, are less than the principal balance of the related
mortgage loan.
Under the Advanta Securitization Agreement, if the Company terminates such
agreement without cause or transfers the servicing of any amount of the
mortgage loans serviced by Advanta to another servicer, the Company must pay
Advanta certain penalties, fees and costs. Depending on the size of the
Company's loan portfolio serviced by Advanta at any point in time, the
termination or transfer penalties that the Company would be obligated to pay
Advanta may be substantial. With respect to mortgage loans securitized by the
Company, the Company will not be able to terminate the servicer without the
approval of the trustee for such securitization.
As is customary in the mortgage loan servicing industry, Advanta is entitled
to retain any late payment charges, penalties and assumption fees collected in
connection with the mortgage loans, net of pre-payment penalties, which accrue
to the Company. Advanta receives any benefit derived from interest earned on
collected principal and interest payments between the date of collection and
the date of remittance to the Company and from interest earned on tax and
insurance impound funds. Under the Advanta Securitization Agreement, Advanta
is generally required to remit all principal and interest scheduled to be
collected from borrowers during the prior monthly reporting period generally
no later than the 18th day of each month.
The Company currently outsources its servicing operations to Advanta because
this arrangement has allowed the Company to increase the volume of its loan
originations and purchases without incurring related overhead investments in
servicing operations. The Company intends to develop its own servicing
capability in order to manage the relationship with its borrowers and oversee
the performance of its loans more directly. See "Recent Developments--Comerica
Investment and Strategic Relationship."
Delinquencies and Foreclosures. Loans originated or purchased by the Company
are secured by mortgages, deeds of trust, security deeds or deeds to secure
debt, depending upon the prevailing practice in the state in which the
property securing the loan is located. Depending on local law, foreclosure is
effected by
53
<PAGE>
judicial action or nonjudicial sale, and is subject to various notice and
filing requirements. In general, the borrower, or any person having a junior
encumbrance on the real estate, may cure a monetary default by paying the
entire amount in arrears plus other designated costs and expenses incurred in
enforcing the obligation during a statutorily prescribed reinstatement period.
Generally, state law controls the amount of foreclosure expenses and costs,
including attorneys fees, which may be recovered by a lender. After the
reinstatement period has expired without the default having been cured, the
borrower or junior lienholder no longer has the right to reinstate the loan
and may be required to pay the loan in full to prevent the scheduled
foreclosure sale. Where a loan has not yet been sold or securitized, the
Company will generally allow a borrower to reinstate the loan up to the date
of foreclosure sale.
Although foreclosure sales are typically public sales, third-party
purchasers rarely bid in excess of the lender's lien because of the difficulty
of determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus, the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the sum of the principal amount
outstanding under the loan, accrued and unpaid interest and the expenses of
foreclosure. Depending on market conditions, the ultimate proceeds of the sale
may not equal the lender's investment in the property.
New Century commenced receiving applications for mortgage loans under its
regular lending program in February 1996 and during 1996 sold all of its loans
on a whole loan, servicing-released basis. Accordingly, the Company (whether
as an originator or purchaser of mortgage loans) does not have representative
historical delinquency, bankruptcy, foreclosure or default experience that may
be referred to for purposes of estimating the future delinquency and loss
experience of its mortgage loans. Likewise, the Company does not have
meaningful delinquency, loss and prepayment data with respect to the loans
included in the Company's first securitization, as these loans have been
outstanding for only a short period of time.
INTEREST RATE RISK MANAGEMENT
The Company's profits depend, in part, on the difference, or "spread,"
between the effective rate of interest received by the Company on the loans it
originates or purchases and the interest rates payable by the Company under
its warehouse financing facilities or for securities issued in its
securitizations. The spread can be adversely affected because of interest rate
increases during the period from the date the loans are originated or
purchased until the closing of the sale or securitization of such loans.
The Company from time to time may use various hedging strategies to provide
a level of protection against interest rate risks on its fixed-rate mortgage
loans. These strategies may include selling short and selling forward United
States Treasury securities and prefunding loan originations in its
securitizations, as well as forward sales of mortgage loans or mortgage-backed
securities, interest rate caps and floors and buying and selling of futures
and options on futures. The Company's management determines the nature and
quantity of hedging transactions based on various factors, including market
conditions and the expected volume of mortgage loan originations and
purchases. While the Company believes its hedging strategies are cost-
effective and provide some protection against interest rate risks, no hedging
strategy can completely protect the Company from such risks. Further, the
Company does not believe that hedging against the interest rate risks
associated with adjustable-rate mortgages is cost effective, and the Company
does not utilize the hedging strategies described above with respect to its
adjustable-rate loans, which constitute the majority of the Company's loan
production.
COMPETITION
The Company faces intense competition in the business of originating,
purchasing and selling mortgage loans. The Company's competitors in the
industry include other consumer finance companies, mortgage banking companies,
commercial banks, credit unions, thrift institutions, credit card issuers and
insurance finance companies. Many of these competitors are substantially
larger and have considerably greater financial, technical and marketing
resources than the Company. In addition, many financial services organizations
that are much
54
<PAGE>
larger than the Company have formed national loan origination networks
offering loan products that are substantially similar to the Company's loan
programs. Competition among industry participants can take many forms,
including convenience in obtaining a loan, customer service, marketing and
distribution channels, amount and term of the loan, loan origination fees and
interest rates. In addition, the current level of gains realized by the
Company and its competitors on the sale of subprime loans could attract
additional competitors into this market. Additional competition may lower the
rates the Company can charge borrowers, thereby potentially lowering gain on
future loan sales and securitizations. To the extent any of these competitors
significantly expand their activities in the Company's market, the Company
could be materially adversely affected. Fluctuations in interest rates and
general economic conditions may also affect the Company's competition. During
periods of rising rates, competitors that have locked in low borrowing costs
may have a competitive advantage. During periods of declining rates,
competitors may solicit the Company's customers to refinance their loans.
The Company believes its competitive strengths include: (i) the experience
of its senior executive team and underwriting personnel; (ii) providing a high
level of service to brokers and their customers; (iii) offering competitive
loan programs for borrowers whose needs are not met by conventional mortgage
lenders; (iv) the Company's high-volume targeted direct mail marketing program
and database screening methodology; and (v) its performance-based compensation
structure which allows the Company to attract, retain and motivate qualified
personnel.
REGULATION
The consumer financing industry is a highly regulated industry. The
Company's business is subject to extensive and complex rules and regulations
of, and examinations by, various federal, state and local government
authorities. These rules and regulations impose obligations and restrictions
on the Company's loan origination, credit activities and secured transactions.
In addition, these rules limit the interest rates, finance charges and other
fees the Company may assess, mandate extensive disclosure to the Company's
customers, prohibit discrimination and impose multiple qualification and
licensing obligations on the Company. Failure to comply with these
requirements may result in, among other things, loss of approved status,
demands for indemnification or mortgage loan repurchases, certain rights of
rescission for mortgage loans, class action lawsuits, administrative
enforcement actions and civil and criminal liability. Management of the
Company believes that the Company is in compliance with these rules and
regulations in all material respects.
The Company's loan origination activities are subject to the laws and
regulations in each of the states in which those activities are conducted. For
example, state usury laws limit the interest rates the Company can charge on
its loans. As of May 31, 1997, the Company was licensed or exempt from
licensing requirements by the relevant state banking or consumer credit
agencies to originate first mortgages in 41 states and second mortgages in 36
states. The Company's lending activities are also subject to various federal
laws, including the Truth in Lending Act, Homeownership and Equity Protection
Act of 1994, the Equal Credit Opportunity Act, the Fair Credit Reporting Act,
the Real Estate Settlement Procedures Act and the Home Mortgage Disclosure
Act.
The Company is subject to certain disclosure requirements under the Truth in
Lending Act ("TILA") and Regulation Z promulgated under TILA. TILA is designed
to provide consumers with uniform, understandable information with respect to
the terms and conditions of loan and credit transactions. TILA also guarantees
consumers a three day right to cancel certain credit transactions, including
loans of the type originated by the Company. In addition, TILA gives
consumers, among other things, a right to rescind loan transactions in certain
circumstances if the lender fails to provide the requisite disclosure to the
consumer.
The Company is also subject to the Homeownership and Equity Protection Act
of 1994 (the "High Cost Mortgage Act"), which makes certain amendments to
TILA. The High Cost Mortgage Act generally applies to consumer credit
transactions secured by the consumer's principal residence, other than
residential mortgage transactions, reverse mortgage transactions or
transactions under an open end credit plan, in which the loan has either (i)
total points and fees upon origination in excess of the greater of eight
percent of the loan amount or
55
<PAGE>
$400, or (ii) an annual percentage rate of more than ten percentage points
higher than United States Treasury securities of comparable maturity ("Covered
Loans"). The High Cost Mortgage Act imposes additional disclosure requirements
on lenders originating Covered Loans. In addition, it prohibits lenders from,
among other things, originating Covered Loans that are underwritten solely on
the basis of the borrower's home equity without regard to the borrower's
ability to repay the loan and including prepayment fee clauses in Covered
Loans to borrowers with a debt-to-income ratio in excess of 50% or Covered
Loans used to refinance existing loans originated by the same lender. The High
Cost Mortgage Act also restricts, among other things, certain balloon payments
and negative amortization features. The Company did not originate or purchase
Covered Loans in 1996, but the Company commenced originating and purchasing
Covered Loans during the first quarter of 1997.
The Company is also required to comply with the Equal Credit Opportunity Act
of 1974, as amended ("ECOA") and Regulation B promulgated thereunder, the Fair
Credit Reporting Act, as amended, the Real Estate Settlement Procedures Act of
1975, as amended, and the Home Mortgage Disclosure Act of 1975, as amended.
ECOA prohibits creditors from discriminating against applicants on the basis
of race, color, sex, age, religion, national origin or marital status.
Regulation B restricts creditors from requesting certain types of information
from loan applicants. The Fair Credit Reporting Act, as amended, requires
lenders, among other things, to supply an applicant with certain information
if the lender denied the applicant credit. The Real Estate Settlement
Procedures Act mandates certain disclosure concerning settlement fees and
charges and mortgage servicing transfer practices. It also prohibits the
payment or receipt of kickbacks or referral fees in connection with the
performance of settlement services. In addition, beginning with loans
originated in 1997, the Company must file an annual report with the Department
of Housing and Urban Development pursuant to the Home Mortgage Disclosure Act,
which requires the collection and reporting of statistical data concerning
loan transactions.
In the course of its business, the Company may acquire properties securing
loans that are in default. There is a risk that hazardous or toxic waste could
be found on such properties. In such event, the Company could be held
responsible for the cost of cleaning up or removing such waste, and such cost
could exceed the value of the underlying properties.
Because the Company's business is highly regulated, the laws, rules and
regulations applicable to the Company are subject to regular modification and
change. There are currently proposed various laws, rules and regulations
which, if adopted, could impact the Company. There can be no assurance that
these proposed laws, rules and regulations, or other such laws, rules or
regulations, will not be adopted in the future which could make compliance
much more difficult or expensive, restrict the Company's ability to originate,
broker, purchase or sell loans, further limit or restrict the amount of
commissions, interest and other charges earned on loans originated, brokered,
purchased or sold by the Company, or otherwise adversely affect the business
or prospects of the Company.
EMPLOYEES
At April 30, 1997, the Company employed 491 full-time employees and 3 part-
time employees. None of the Company's employees is subject to a collective
bargaining agreement. The Company believes that its relations with its
employees are satisfactory.
PROPERTIES
The Company's executive and administrative offices were located in Newport
Beach, California until June 1997, and consisted 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 relocated its executive and administrative offices in June 1997
to Irvine, California. The expiration date for the lease on the new premises
is June 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 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.
56
<PAGE>
The Company also leases space for its sales offices. As of March 31, 1997,
these facilities had an annual aggregate base rental of approximately $990,000
and the sales offices ranged in size from 100 to 4,968 square feet with lease
terms typically ranging from one to five years. As of March 31, 1997, annual
base rents for the sales offices ranged from approximately $3,600 to $82,000.
In general, the terms of these leases vary as to duration and rent escalation
provisions and the leases expire between June 1997 and May 2002 and provide
for rent escalations dependent upon either increases in the lessors' operating
expenses or fluctuations in the consumer price index in the relevant
geographical area.
LEGAL PROCEEDINGS
The Company occasionally becomes involved in litigation arising in the
normal course of business. Management believes that any liability with respect
to such legal actions, individually or in the aggregate, will not have a
material adverse effect on the Company's financial position or results of
operations.
57
<PAGE>
MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The Board of Directors is divided into three classes: Class I, Class II and
Class III. After each director's initial term, each director serves for a term
ending the third annual meeting after which such director is elected and until
such director's successor is elected. The terms of office of directors in
Class I, Class II and Class III end after the annual meetings of stockholders
of the Company in 1998, 1999 and 2000, respectively. Messrs. Gotschall, Ryan
and Smith are Class I directors, Messrs. Chu, Morrice and Sachs are Class II
directors and Messrs. Bentley, Cole and Holder are Class III directors. The
following table sets forth the name, age and position with the Company of each
person who is an executive officer, director or key employee of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Directors and Executive
- -----------------------
Officers:
--------
Robert K. Cole........... 50 Chairman of the Board, Chief Executive Officer,
Director
Brad A. Morrice.......... 40 Vice Chairman, President, General Counsel,
Secretary, Director
Edward F. Gotschall...... 42 Vice Chairman, Chief Operating Officer--
Finance/Administration, Director
Steven G. Holder......... 40 Vice Chairman, Chief Operating Officer--Loan
Production/Operations, Director
John C. Bentley(1)(2).... 37 Director
Sherman I. Chu(2)........ 32 Director
Harlan W. Smith(3)....... 63 Director
Martin F. Ryan........... 59 Director
Michael M. Sachs(1)(2)... 56 Director
Future Director:
- ---------------
Fredric J. Forster(4).... 53 Future Director
Key Employees:
- -------------
Patrick J. Flanagan...... 32 Director, Executive Vice President and Chief
Operating Officer, New Century Mortgage (5)
Shahid S. Asghar......... 34 Director, Senior Vice President--Wholesale
Lending, New Century Mortgage (5)
Paul L. Rigdon........... 36 Director, Senior Vice President--Retail Lending,
New Century Mortgage (5)
</TABLE>
- --------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
(3) Upon the completion of the Offering, Mr. Smith shall resign from the
Board.
(4) Mr. Forster shall become a director of the Company and a member of the
Compensation Committee upon the closing of the Offering and has agreed to
be named as such in the Prospectus.
(5) New Century Mortgage Corporation ("New Century Mortgage") is a wholly-
owned subsidiary of the Company.
ROBERT K. COLE has been the Chairman of the Board and Chief Executive
Officer of the Company since December 1995 and a director of the Company since
November 1995. Mr. Cole also serves on the Board of Directors of New Century
Mortgage. From February 1994 to March 1995, he was the President and Chief
Operating Officer--Finance of Plaza Home Mortgage Corporation ("Plaza Home
Mortgage"), a publicly-traded savings and loan holding company specializing in
the origination and servicing of residential mortgage loans. In addition, Mr.
Cole served as a director of Option One Mortgage Corporation ("Option One"), a
subsidiary of
58
<PAGE>
Plaza Home Mortgage specializing in the origination, sale and servicing of
subprime mortgage loans. From June 1990 to January 1994, Mr. Cole was the
President of Triple Five, Inc., an international real estate development
company. Previously, Mr. Cole was the President of operating subsidiaries of
NBD Bancorp and Public Storage, Inc. Mr. Cole received a Masters of Business
Administration degree from Wayne State University.
BRAD A. MORRICE has been Vice Chairman of the Company since December 1996,
General Counsel of the Company since December 1995 and President, Secretary
and a director of the Company since November 1995. Mr. Morrice also serves as
Co-Chairman of the Board and Chief Executive Officer of New Century Mortgage.
From February 1994 to March 1995, he was the President and Chief Operating
Officer--Administration of Plaza Home Mortgage, after serving as its Executive
Vice President, Chief Administrative Officer since February 1993. In addition,
Mr. Morrice served as General Counsel and a director of Option One. From
August 1990 to January 1993, Mr. Morrice was a partner in the law firm of
King, Purtich & Morrice, where he specialized in the legal representation of
mortgage banking companies. Mr. Morrice previously practiced law at the firms
of Fried, King, Holmes & August and Manatt, Phelps & Phillips. He received his
law degree from the University of California, Berkeley (Boalt Hall) and a
Masters of Business Administration degree from Stanford University.
EDWARD F. GOTSCHALL has been Vice Chairman of the Company since December
1996, Chief Operating Officer--Finance/Administration of the Company since
December 1995 and a director of the Company since November 1995. Mr. Gotschall
also serves as Chief Financial Officer and a director of New Century Mortgage.
From April 1994 to July 1995, he was the Executive Vice President/Chief
Financial Officer of Plaza Home Mortgage and a director of Option One. In
December 1992, Mr. Gotschall was one of the co-founders of Option One and
served as its Executive Vice President/Chief Financial Officer until April
1994. From January 1991 to July 1992, he was the Executive Vice
President/Chief Financial Officer of The Mortgage Network, Inc., a retail
mortgage banking company.
STEVEN G. HOLDER has been Vice Chairman of the Company since December 1996,
Chief Operating Officer--Loan Production/Operations of the Company since
December 1995 and a director of the Company since November 1995. Mr. Holder
also serves as Co-Chairman of the Board and Chief Executive Officer of New
Century Mortgage. From February 1993 to August 1995, he was the Executive Vice
President of Long Beach Mortgage Company ("Long Beach Mortgage"). From July
1991 to February 1993, Mr. Holder was the Vice President for Business
Development of Transamerica Financial Services. From 1985 to 1990, he was a
Regional Vice President for Nova Financial Services, a startup consumer
finance subsidiary of First Interstate Bank. Mr. Holder has over 20 years
experience in the consumer finance and mortgage business.
PATRICK J. FLANAGAN has been Executive Vice President and Chief Operating
Officer of New Century Mortgage since January 1997 and a director of New
Century Mortgage Corporation since May 1997. Mr. Flanagan initially joined New
Century Mortgage in May 1996 as Regional Vice President of Midwest Wholesale
and Retail operations. From August 1994 to April 1996, Mr. Flanagan was a
Regional Manager with Long Beach Mortgage. From July 1992 to July 1994, he was
an Assistant Vice President for First Chicago Bank, from February 1989 to
February 1991, he was Assistant Vice President for Banc One in Chicago and
from February 1991 to July 1992, he was a Business Development Manager for
Transamerica Financial Services.
SHAHID S. ASGHAR has been Senior Vice President--Wholesale Lending of New
Century Mortgage since January 1997 and a director of New Century Mortgage
Corporation since May 1997. Mr. Asghar initially joined New Century Mortgage
as Vice President, Mortgage Banking Operations in December 1995. From June
1995 to November 1995, Mr. Asghar was the Southern California District Manager
for Ford Consumer Finance. From September 1992 to March 1995, he was an Area
Sales Manager for Long Beach Mortgage and from June 1988 to September 1992, he
was a Business Development Manager for Transamerica Financial Services.
PAUL L. RIGDON has been Senior Vice President--Retail Lending of New Century
Mortgage since February 1997 and a director of New Century Mortgage
Corporation since May 1997. Mr. Rigdon joined New Century Mortgage in
September 1996 as the Regional Manager in charge of expansion in the Northwest
Retail Region. From May 1995 to September 1996, he was a District Manager for
Advanta Finance. From March 1990 to May 1995, he was an Area Manager for Long
Beach Mortgage.
59
<PAGE>
JOHN C. BENTLEY has been a director of the Company since November 1995.
Since February 1995, Mr. Bentley has been a principal of Cornerstone Equity
Partners, L.L.C., a private equity investment company of which he is a co-
founder. From February 1989 to February 1995, he was employed by Banc One
Capital Corporation, most recently as a Senior Vice President, where he worked
in the merchant banking group. Mr. Bentley also served four years as Chief
Financial Officer of R.J. Moran, Inc., a diversified holding company.
SHERMAN I. CHU has been a director of the Company since November 1995. Since
April 1995, Mr. Chu has been a principal of Cornerstone Equity Partners,
L.L.C., of which he is a co-founder. From November 1991 to March 1995, he was
employed by Banc One Capital Corporation, most recently as an Assistant Vice
President, where he worked in the merchant banking group. Mr. Chu was also
employed for two years by Banc One Corporation, where he worked in the credit
and international lending departments.
HARLAN W. SMITH has been a director of the Company since November 1995 and
following the completion of the Offering, Mr. Smith will resign from the
Board. Since December 1994, Mr. Smith has been the owner and manager of Copper
State Capital, LLC, a private equity investment company, and the owner and
manager of Kiva Corporation, a consulting firm. From July 1986 to November
1993, he was the Chairman of the Board of Dyneer Corporation, a privately-held
provider of mobile power transmission equipment.
MICHAEL M. SACHS has been a director of the Company since November 1995.
Since 1990, Mr. Sachs has been the principal shareholder, Chairman of the
Board and Chief Executive Officer of Westrec Financial, Inc., which operates
marinas and related businesses. He also serves on the Board of Directors of
Innoserv Technologies, a publicly-traded company.
MARTIN F. RYAN has been a director of the Company since December 1996. Mr.
Ryan has practiced as an attorney since 1963 and has been the President and a
director of Martin F. Ryan, Ltd. since 1983. Mr. Ryan has served as a director
of The Foundation Companies, Inc. since its inception in 1992, including two
years as Chairman of the Board. In addition, Mr. Ryan served as a director of
the Baptist Foundation of Arizona for seven years. The Baptist Foundation is
the sole owner of The Foundation Companies, Inc. and the Foundation Companies,
Inc. is the managing member of Cornerstone Fund I, L.L.C. ("Cornerstone").
FREDRIC J. FORSTER will become a director of the Company upon the closing of
this Offering. Since January 1996, Mr. Forster has been a principal of
Financial Institutional Partners, LLC, a newly formed investment banking and
brokerage firm headquartered in Irvine, California. From March 1993 to April
1996, Mr. Forster was the President and Chief Operating Officer of H.F.
Ahmanson and Company and its subsidiary Home Savings of America, and from 1979
to 1993, he was the President of ITT Federal Bank, formerly Newport Balboa
Savings and Loan Association. In addition, from 1986 to 1995, Mr. Forster
served on the board of directors, and in 1995 was the Vice Chairman, of the
Federal Home Loan Bank of San Francisco.
Pursuant to the shareholders agreement in effect prior to the Offering among
the Company, Cornerstone and the other stockholders of the Company,
Cornerstone previously designated five directors (Messrs. Bentley, Chu, Sachs,
Smith and Ryan), and Messrs. Cole, Morrice, Gotschall and Holder collectively
designated themselves to the Board. All rights to designate directors will
terminate along with the termination of the shareholders agreement upon the
closing of the Offering. The Company anticipates that upon the closing of the
Offering Mr. Smith will resign and be replaced by Mr. Forster. The directors,
officers and key employees listed above each owns shares of Common Stock of
the Company in the amounts set forth in the section entitled "Beneficial
Ownership of Securities and Selling Stockholders."
BOARD COMMITTEES
The Company's Board of Directors has an Audit Committee and a Compensation
Committee. The Audit Committee is comprised of Messrs. Sachs, Chu and Bentley
and is responsible for making recommendations concerning the engagement of
independent certified public accountants, approving professional services
provided by the independent certified public accountants and reviewing the
adequacy of the Company's internal
60
<PAGE>
accounting controls. The Compensation Committee is comprised of Messrs.
Bentley and Sachs and Mr. Forster will become a member of such committee upon
the closing of the Offering. The Compensation Committee has the exclusive
responsibility for establishing the compensation and other benefits payable to
executive officers and has the responsibility for administering the Company's
incentive compensation and benefit plans, including the Stock Option Plan and
the Founding Managers' Plan.
DIRECTOR COMPENSATION
The Company pays its non-employee directors an annual retainer of $10,000,
and a fee of $2,500 for each board or committee meeting attended. The Company
will also reimburse its non-employee directors for reasonable expenses
incurred in attending meetings. In addition, the Company's Stock Option Plan
provides that, upon their initial election or appointment to the Board, each
non-employee director will be granted a non-qualified option to purchase
15,000 shares of Common Stock, subject to vesting in equal installments over
three years from the date of grant (a "Non-Employee Director Option"). If any
non-employee director's services as a member of the Board terminate, each of
such director's option which is not then exercisable will terminate. The
current non-employee directors other than Mr. Smith were each granted a Non-
Employee Director Option in May 1997 at an exercise price of $7.50 per share.
Upon Mr. Smith's resignation from the Board effective as of the closing of the
Offering, Mr. Smith will receive an option to purchase 7,500 shares of Common
Stock at an exercise price equal to the initial public offering price.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No member of the Compensation Committee is or has been an employee of the
Company.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company has adopted a provision in its Certificate of Incorporation that
limits the liability of its directors for monetary damages arising from a
breach of their fiduciary duties as directors. The Company's Bylaws provide
that the Company must indemnify its directors and officers to the fullest
extent permitted by the Delaware General Corporation Law. The Company also has
entered into indemnification agreements with its executive officers and
directors and has officer and director liability insurance with respect to
certain liabilities. See "Description of Capital Stock--Limitation of
Liability of Directors and Indemnification of Directors and Officers."
61
<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information with respect to
compensation earned by the Company's Chief Executive Officer and the named
executive officers other than the Chief Executive Officer during fiscal 1996.
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
------------
AWARDS
ANNUAL ------------
COMPENSATION SECURITIES
---------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS OPTIONS COMPENSATION(1)
--------------------------- -------- ------- ------------ ---------------
<S> <C> <C> <C> <C>
Robert K. Cole................ $150,000 $96,969(2) -- $ 825
Chairman of the Board and
Chief Executive Officer
Brad A. Morrice............... 150,000 96,969(2) -- 1,200
Vice Chairman, President and
General Counsel
Edward F. Gotschall........... 143,750 96,969(2) 40,000 6,933(3)
Vice Chairman and Chief
Operating Officer--
Finance/Administration
Steven G. Holder.............. 150,000 81,969(2) 80,000 563
Vice Chairman and Chief
Operating Officer-- Loan
Production/Operations
</TABLE>
- --------
(1) The contribution made by the Company on behalf of the executive officer to
a 401(k) profit sharing plan.
(2) Includes signing bonuses and amounts earned pursuant to the Founding
Managers' Incentive Compensation Plan in 1996 but paid in 1997.
(3) Includes $5,789 paid by the Company to lease an automobile for Mr.
Gotschall.
Option Grants in Fiscal 1996
The following table sets forth certain information with respect to
individual grants of stock options made during fiscal 1996 to the named
executive officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------- POTENTIAL REALIZABLE
NUMBER OF PERCENT OF VALUE AT ASSUMED
SECURITIES TOTAL ANNUAL RATES OF STOCK
UNDERLYING OPTIONS PRICE APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OPTION TERM(2)
GRANTED EMPLOYEES IN PRICE EXPIRATION -----------------------
NAME (1) FISCAL 1996 ($/SH) DATE 5% 10%
---- ---------- ------------ -------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Robert K. Cole.......... -- -- -- -- -- --
Brad A. Morrice......... -- -- -- -- -- --
Edward F. Gotschall..... 40,000(3) 8.9% $3.50(4) 12/4/06 $ 88,000 $ 223,200
Steven G. Holder........ 80,000(3) 17.7% 3.50(4) 12/4/06 176,000 446,400
</TABLE>
- --------
(1) All options were granted "at market" on the date of grant.
(2) This column shows the hypothetical gains or "option spreads" of the
options granted based on the per-share market price of the Common Stock at
the time of grant and assumed annual compound stock appreciation rates of
5% and 10% over the full 10-year term of the options. The 5% and 10%
assumed rates of appreciation are mandated by the rules of the Securities
and Exchange Commission and do not represent the Company's estimate or
projection of future Common Stock prices. The gains shown are net of the
option exercise price, but do not include deductions for taxes or other
expenses associated with the exercise of the option or the sale of the
underlying shares. The actual gains, if any, on the exercises of stock
options will depend on the future performance of the Common Stock, the
option holder's continued employment through the option period for options
granted pursuant to the Stock Option Plan, and the date on which the
options are exercised.
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<PAGE>
(3) The options are exercisable as to one third of the shares of Common Stock
on the first anniversary of the grant date, with an additional one third
of the underlying shares becoming exercisable on each successive
anniversary date, and full vesting on the third anniversary date. The
options were granted for a term of 10 years, subject to earlier
termination in certain events related to termination of employment. In
certain circumstances, including a recapitalization, stock split,
reorganization, merger, combination, consolidation and a sale of
substantially all of the assets of the Company, the Board of Directors
will adjust, in such manner and to such extent as it deems appropriate,
the number, amount and type of shares subject to the option and the
exercise price of the option.
(4) The exercise price and tax withholding obligations related to exercise may
be paid by delivery of already owned shares of Common Stock, subject to
certain conditions.
Fiscal Year-end Option Values
The following table sets forth certain information with respect to the value
of the options at the end of fiscal 1996 held by the named executive officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
DECEMBER 31, 1996 (#) DECEMBER 31, 1996 ($)(1)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert K. Cole.............. -- -- -- --
Brad A. Morrice............. -- -- -- --
Edward F. Gotschall......... -- 40,000 -- $20,000
Steven G. Holder............ -- 80,000 -- $40,000
</TABLE>
- --------
(1) The amounts set forth represent the difference between the estimated fair
market value of $4.00 per share as of December 31, 1996 and the exercise
price of the options, multiplied by the applicable number of shares
underlying the options.
Employment Agreements
The Company has entered into employment agreements with Messrs. Cole,
Morrice, Gotschall and Holder (the "Founding Managers"). Each agreement
continues in effect until December 31, 1999 but is extended automatically for
successive one-year periods unless terminated by either the Company or the
respective Founding Manager. Under the terms of the agreements, the Founding
Managers each received a signing bonus of $15,000 and an annual base salary at
the rate of $150,000 per year during 1996 and thereafter at a rate determined
by the Company's Board of Directors. The Founding Managers initially received
a salary of $180,000 for fiscal 1997. On May 30, 1997, the Board of Directors
revised the Founding Managers' salary to $256,000 for fiscal 1997, plus a $500
per month automobile allowance. In the event of termination of employment of a
Founding Manager without cause (as defined in the agreement) by the Company,
the Company: (i) will pay such Founding Manager his base salary through the
end of the month during which such termination occurs plus credit for any
vacation earned but not taken, his base salary in effect at termination for a
minimum of six months or, if longer, through the expiration of the term of
employment then in effect, and an amount equal to the most recent annual
profit-sharing and/or incentive bonus received by him or, if more, the amount
which would be due under the profit sharing and/or incentive bonus plans
applicable to him for the then current year calculated as of the effective
date of termination; (ii) will maintain such Founding Manager's medical
insurance and other programs in which he was entitled to participate until the
expiration of the term of employment then in effect or his commencement of
full time employment with a new employer; and (iii) will pay all costs up to
$20,000 related to such Founding Manager's participation in a senior executive
outplacement program. Each Founding Manager may be terminated for cause only
by a vote of a majority of the Board of Directors of the Company.
63
<PAGE>
Founding Managers' Incentive Compensation Plan
General. In December 1996, the Company adopted the Founding Managers'
Incentive Compensation Plan and the Company has amended the terms thereof
effective for 1997 and subsequent plan years (as amended, the "Incentive
Compensation Plan"). The Incentive Compensation Plan is intended to promote
the success of the Company by providing a means to retain and motivate the
Founding Managers by rewarding them with additional incentive compensation for
high levels of individual annual performance and for significant efforts to
enhance the financial performance of the Company. The Compensation Committee
(the "Committee") of the Board of Directors administers the Incentive
Compensation Plan. The Committee has full discretion to construe and interpret
the terms and provisions of the Incentive Compensation Plan and related
agreements. In addition, the Committee has the authority to make all
determinations under the Incentive Compensation Plan, and to prescribe, amend
and rescind rules relating to the administration of the Incentive Compensation
Plan. Capitalized terms not otherwise expressly defined herein shall have the
meaning specified in the Incentive Compensation Plan.
Shares Reserved for Awards. The total number of shares of the Company's
Common Stock set aside for awards under the Incentive Compensation Plan is
250,000 shares, subject to certain adjustments described below. The number and
kind of shares available under the Incentive Compensation Plan are subject to
adjustment in the event of certain extraordinary events, such as a
reorganization, merger, consolidation, recapitalization, reclassification,
stock-split or similar event. The number of shares covered by awards
outstanding are also subject to adjustment in these events.
Incentive Compensation Amounts. Each of the four Founding Managers is
entitled to one quarter of amounts payable under the Incentive Compensation
Plan. Subject to the limitations described below, the amount available for
incentive awards (the "Incentive Pool") for each fiscal year, commencing in
1997, is an amount equal to a percentage of the Company's earnings
("Earnings") before income taxes and without deducting amounts payable under
the Incentive Compensation Plan. The specific percentage of Earnings which is
used to determine the Incentive Pool is based on the ratio (the "Ratio") of
Earnings to Total Stockholders' Equity. If the Ratio is at least 25% but less
than 50%, the Incentive Pool is an amount equal to 5% of Earnings in excess of
25% of Total Stockholders' Equity. If the Ratio is at least 50%, the Incentive
Pool is an amount equal to the sum of (i) 5% of Earnings in excess of 25% of
Total Stockholders' Equity, plus (ii) 2% of Earnings in excess of 50% of Total
Stockholders' Equity. Total Stockholders' Equity for purposes of this
calculation is equal to the amount of stockholders' equity as of January 1 of
each fiscal year adjusted on a pro-rata basis for any equity offerings
completed during the fiscal year.
Limits on Incentive Compensation. The Incentive Compensation Plan limits the
aggregate amount of cash payable thereunder for each fiscal year. The maximum
cash award payable for fiscal 1997 is 100% of the Founding Manager's base
salary in such year and thereafter is 200% of such base salary. In the event
the Incentive Pool for any fiscal year exceeds such maximum amounts, the
balance of the awards will be paid in shares of restricted stock valued at the
fair market value of the Company's Common Stock at the time of the award. The
restricted stock will vest in equal annual installments over a three year
period. In the event that a Founding Manager's employment terminates with the
Company for any reason other than death or total disability, shares of
restricted stock which have not yet become vested shall be forfeited.
Notwithstanding the preceding, upon the occurrence of certain Change of
Control Events, unvested shares subject to a restricted stock award will
become fully vested. A Founding Manager who receives shares of restricted
stock will be entitled to cash dividends and voting rights for each share of
restricted stock issued under the Incentive Compensation Plan.
Restrictions. If the payment of a Founding Manager's benefits under the
Incentive Compensation Plan would cause the Company to violate any covenant
contained in any agreement entered into by the Company with a third party, the
payment of benefits under the Incentive Compensation Plan are deferred until
such time as the Company would remain in compliance with these covenants after
such benefits are paid. In addition, if the Company is in violation of any
third party financial covenant, the payment of benefits will be deferred until
the Company is in compliance with its financial covenants after such benefits
are paid.
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<PAGE>
Semi-Annual and Annual Payments. On July 31 and January 31 of each year, the
Founding Managers are entitled to a cash advance equal to 80% of the amount
payable as of June 30 and December 31 based on the Company's unaudited
financial statements as of such dates. To the extent the Incentive Pool for
any fiscal year exceeds the aggregate of the semi-annual cash awards, an
additional award in cash and/or restricted stock will be payable to the
Founding Managers in a lump sum within 10 days of the receipt of the Company's
audited financial statements for such fiscal year. To the extent the Incentive
Pool for any fiscal year is less than the aggregate of the semi-annual cash
advances, the Founding Managers shall refund in a lump sum the excess cash
advances within 10 days of the completion of the Company's audited financial
statements for such fiscal year.
Stock Option Plan
The Company adopted the New Century Financial Corporation 1995 Stock Option
Plan (the "Stock Option Plan") in December 1995. The Stock Option Plan is
intended to provide a means to attract, motivate and retain key employees,
consultants, advisors and knowledgeable directors of the Company and to
promote the success of the Company.
Under the Stock Option Plan, awards ("Awards") may consist of any
combination of stock options (incentive or nonqualified), restricted stock,
stock appreciation rights ("SARs") and performance share awards. The number of
shares of Common Stock reserved for issuance that may be issued under the
Stock Option Plan currently is 2,000,000. The maximum number of shares that
may be covered by options and SARs granted to any participant during a
calendar year is 500,000 shares. Each of the foregoing limits is subject to
adjustment under certain circumstances as described more fully in Section 6.2
of the Stock Option Plan. Awards under the Stock Option Plan may be made to
officers and key employees of the Company, to consultants of the Company and
to directors who are not employees or officers of the Company ("Non-Employee
Directors"). See "Management--Director Compensation." As of May 31, 1997, the
Company had granted options to purchase a total of 1,267,520 shares of Common
Stock under the Stock Option Plan (of which 1,267,520 options remained
outstanding and 36,450 shares were vested) which include options to purchase
an aggregate of 60,000 shares of Common Stock which have been granted to the
non-employee directors. The Company will grant options to purchase 441,500
shares of Common Stock upon the closing of the Offering, including an option
to purchase 62,500 shares subject to three year vesting in equal annual
installments, to each of Messrs. Cole, Morrice, Gotschall and Holder.
In addition to the above options, a restricted stock award covering 92,500
shares of Common Stock has been granted to each of Messrs. Cole, Morrice,
Gotschall and Holder, of which 92,500, 61,667 and 30,833 shares will be
subject to forfeiture until the first, second and third anniversaries of the
date of grant, respectively.
The Stock Option Plan provides that all Awards are non-transferable and will
not become subject in any manner to sale, transfer, anticipation, alienation,
assignment, pledge, encumbrance or charge. The Compensation Committee may,
however, permit Awards to be exercised by certain persons or entities related
to a participant for estate and/or tax planning purposes. Only the
participant, subject to the above exceptions, may exercise an Award during the
participant's lifetime.
Participants in the Stock Option Plan are recommended by management and
approved by the Compensation Committee. The Compensation Committee is
appointed by the Board of Directors and has the authority to construe and
interpret the Stock Option Plan and any agreements thereunder, prescribe,
amend and rescind rules and regulations relating to the administration of the
Stock Option Plan, accelerate or extend the vesting or exercisability or
extend the term of any or all outstanding Awards (within the maximum 10 year
limit on the term of Awards), and make all other determinations necessary or
desirable for the administration of the Stock Option Plan.
Nonqualified stock options and incentive stock options (those intended to
qualify under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code")) may be granted under the Stock Option Plan. Incentive stock
options may only be granted to employees of the Company. The Compensation
Committee determines the exercise price, vesting provisions, and terms of
Options. However, the exercise price of incentive stock options cannot be less
than the fair market value of the Common Stock on the date of grant (110% if
granted to an employee who owns 10% or more of the Common Stock).
65
<PAGE>
The Stock Option Plan contains a Non-Employee Director program which
provides for the grant of options to Non-Employee Directors. Under this
program, each Non-Employee Director who was elected or appointed to the Board
of Directors at the Company's 1997 annual meeting of stockholders was granted
a nonqualified stock option to purchase 15,000 shares of Common Stock. In
addition, upon any other individual's initial election to the Board of
Directors as a Non-Employee Director (or initial appointment to the Board of
Directors as a Non-Employee Director), such Non-Employee Director will be
granted a nonqualified stock option to purchase 15,000 shares of Common Stock.
The number of shares provided for each grant is subject to adjustment upon
certain events as provided in Section 6.2 of the Stock Option Plan. The
purchase price per share for options granted under this program will equal the
fair market value of the Common Stock on the date of grant. Each option
granted under this program becomes exercisable in installments according to
the following schedule: (i) one-third of the total number of shares subject to
the option become exercisable on the first anniversary of the grant date, (ii)
an additional one-third of the total number of shares subject to the option
become exercisable on the second anniversary of the grant date, and (iii) the
remaining number of shares subject to the option become exercisable on the
third anniversary of the grant date. These options are granted for 10 year
terms, but will terminate earlier if the director ceases to be a member of the
Board of Directors.
Restricted stock awards may be granted on the basis of such factors as the
Compensation Committee deems appropriate. Each restricted stock award
agreement must specify the number of shares of Common Stock to be issued, the
date of such issuance, the price, if any, to be paid for such shares by the
participant, whether and to what extent the cash consideration paid for such
shares shall be returned upon forfeiture and the restrictions imposed on such
shares, which will not terminate earlier than six months after the date the
restricted stock is awarded. Shares subject to restricted stock awards are
nontransferable and held by the Company until such shares have vested and are
subject to a risk of forfeiture unless certain conditions are satisfied.
SARs may be granted in connection with stock options or separately. SARs
granted in connection with stock options will provide for payments to the
holder based upon increases in the price of the Common Stock over the exercise
price of the related option on the exercise date. The Compensation Committee
may elect to pay SARs in cash, Common Stock or in a combination of cash and
Common Stock.
Performance share awards may be granted on the basis of such factors as the
Compensation Committee deems appropriate. Generally, these awards will be
based upon specific agreements and will specify the number of shares of Common
Stock subject to the award, the price, if any, to be paid for such shares by
the participant and the conditions upon which the issuance to the participant
will be based.
Without limiting the generality of the foregoing, the Stock Option Plan will
permit the Compensation Committee to grant certain other types of Awards
("Performance Based Awards") which are intended to qualify as "performance-
based compensation" under Section 162(m) of the Code. Options and SARs that
are granted at fair market value are intended to qualify as Performance-Based
Awards. In addition, other share-based awards may be granted under the Stock
Option Plan and are intended to qualify as Performance-Based Awards. The Stock
Option Plan also provides for the grant of Performance-Based Awards that are
not denominated nor payable in and do not have a value derived from the value
of or a price related to shares of Common Stock and are payable only in cash
("Cash--Based Awards").
The eligible class of persons for Performance-Based Awards is all executive
officers of the Company. The maximum number of shares of Common Stock which
may be delivered pursuant to all Awards that are granted as Performance-Based
Awards to any participant in any calendar year may not exceed 500,000 shares
(subject to adjustment) and the annual aggregate amount of compensation that
may be paid to any participant in respect of Cash-Based Awards may not exceed
$1,000,000.
The performance goals of Performance-Based Awards are any one or a
combination of Cash Flow, Earnings Per Share, Gain on Sale of Loans, Loan
Production Volume, Loan Quality, Return on Equity, and Total Stockholder
Return (each as defined in Article VII of the Stock Option Plan). These goals
will be applied over performance cycles as determined by the Compensation
Committee. Specific cycles and target levels of performance, as well as the
award levels, will be determined by the Compensation Committee not later than
the
66
<PAGE>
applicable deadline under Section 162(m) of the Code and in any event at a
time when achievement of such targets is substantially uncertain. Appropriate
adjustments to goals and targets may be made by the Compensation Committee
based upon objective criteria in the case of certain events that were not
anticipated at the time goals were established. The Company believes that
specific performance targets (when established) are likely to constitute
confidential business information, the disclosure of which may adversely
affect the Company or mislead the public.
The Compensation Committee must certify the achievement of the applicable
performance goals and the actual amount payable to each participant under
Performance-Based Awards prior to payment. The Compensation Committee may
retain discretion to reduce, but not increase, the amount payable under a
Performance-Based Award, notwithstanding the achievement of targeted
performance goals. Performance-Based Awards may be fully accelerated or the
Compensation Committee may provide for partial credit in the event of certain
events circumstances that the Compensation Committee may determine.
Options which have not yet become exercisable will lapse upon the date a
participant is no longer employed by the Company for any reason. Options which
have become exercisable must generally be exercised within 30 days after such
date if the termination of employment was for any reason other than
retirement, total disability, death or discharge for cause. In the event the
participant is discharged for cause, all options will lapse immediately upon
such termination of employment. If the termination of employment was due to
retirement, total disability or death, the options, which are exercisable on
the date of such termination, must be exercised within three months of the
date of such termination or such shorter period provided in the award
agreement. SARs granted concurrently with an option have the same termination
provisions as the option to which they relate. The termination provisions of
SARs granted independently of an option are governed by the applicable award
agreement. In the event of a termination of services to or employment with the
Company for any reason, shares of Common Stock subject to a participant's
restricted stock award will be forfeited in accordance with the related award
agreement to the extent such shares have not vested on the date of
termination. Likewise, in the event of a termination of services to or
employment with the Company for any reason, shares of Common Stock subject to
a participant's performance share award will be forfeited in accordance with
the related award agreement to the extent such shares have not been issued or
become issuable on the date of termination.
In the event the stockholders of the Company approve the dissolution or
liquidation of the Company, certain mergers or consolidations or the sale of
substantially all of the business assets of the Company, unless prior to such
event the Board of Directors determines that there will be either no
acceleration or limited acceleration of awards, each option and related SAR
will become immediately exercisable, restricted stock will immediately vest
and the number of shares or an amount of cash covered by each performance
share award will be issued or paid to the participant.
The authority to grant new Awards under the Stock Option Plan will terminate
on the tenth anniversary of its adoption by the Board of Directors, unless the
Stock Option Plan is terminated prior to that time by the Board of Directors.
Such termination typically will not affect rights of participants which
accrued prior to such termination. The Board of Directors and the Compensation
Committee may make certain amendments to the Stock Option Plan and outstanding
Awards. To the extent required by applicable law or deemed necessary by the
Board of Directors, the Stock Option Plan may not be amended, without
shareholder consent, to increase the maximum number of shares which may be
delivered pursuant to Awards granted thereunder, materially increase the
benefits accruing to participants thereunder or materially change the
requirements as to the eligibility to participate therein.
With respect to nonqualified stock options, the Company is generally
entitled to deduct an amount equal to the difference between the option
exercise price and the fair market value of the shares at the time of
exercise. With respect to incentive stock options, the Company is generally
not entitled to a similar deduction either upon grant of the option or at the
time the option is exercised. The current federal income tax consequences of
other awards authorized under the Stock Option Plan generally follow certain
basic patterns: SARs are taxed and deductible in substantially the same manner
as nonqualified stock options; nontransferable restricted stock subject
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<PAGE>
to a substantial risk of forfeiture results in income recognition equal to the
excess of the fair market value of the stock over the purchase price only at
the time the restrictions lapse (unless the recipient elects to accelerate
recognition as of the date of grant); performance share awards generally are
subject to tax at the time of payment; unconditional stock bonuses are
generally subject to tax measured by the value of the payment received; and
Cash-Based Awards generally are subject to tax at the time of payment; in each
of the foregoing cases, the Company will generally have a corresponding
deduction at the time the participant recognizes income. If an Award is
accelerated under the Stock Option Plan, the Company may not be permitted to
deduct the portion of the compensation attributable to the acceleration.
Furthermore, if the compensation attributable to Awards is not "performance-
based" within the meaning of Section 162(m) of the Code, the Company may not
be permitted to deduct such compensation in certain circumstances.
401(k) Profit Sharing Plan
The Company has a 401(k) profit sharing plan that covers substantially all
employees who have been employed by the Company for over three months and have
attained the age of 21. The 401(k) plan allows eligible employees to defer
amounts of their compensation up to the statutory limit each year. The Company
matches 25% of employee contributions up to a maximum contribution by the
Company of 1.5% of each employee's compensation. The Company also has a
discretionary matching program under the plan, through which the Company may
make contributions to employees out of the Company's current or accumulated
net profit. In 1996, the Company contributed $47,000 to its 401(k) profit
sharing plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In December 1996, the Company issued warrants to purchase the following
number of shares of Common Stock, exercisable at $3.50 per share, to the
following directors, executive officers and 5% security holders (collectively,
the "Warrantholders") in satisfaction of their preemptive rights as
stockholders: Cornerstone (220,656 shares), Westrec Rollover PS Plan (11,032
shares), Michael M. Sachs (16,550 shares), Harlan W. Smith (11,032 shares),
Harcol Limited Partnership (11,032 shares), Cornerstone Equity Partners,
L.L.C. (11,032 shares), Martin F. Ryan, Ltd. Defined Benefit Pension Plan
(8,274 shares), Robert K. Cole (55,556 shares), Brad A. Morrice (54,453
shares), Samantha H. Morrice Trust (1,103 shares), Edward F. Gotschall (50,040
shares), and Steven G. Holder (47,834 shares). The Warrantholders voluntarily
exercised these warrants on May 30, 1997. John Bentley and Sherman Chu,
directors of the Company, are principals of Cornerstone Equity Partners,
L.L.C., which manages certain aspects of and has a 20% "back-end" ownership
interest in Cornerstone Fund I, L.L.C. Michael Sachs, a director of the
Company, is the trustee of Westrec Rollover PS Plan. Harlan W. Smith, a
director of the Company, is a general partner in Harcol Limited Partnership.
Martin F. Ryan, a director of the Company, is the trustee of Martin F. Ryan,
Ltd. Defined Benefit Pension Plan. The sole beneficiary of the Samantha H.
Morrice Trust is the daughter of Brad A. Morrice, a director and executive
officer of the Company.
In connection with a letter of intent regarding the possible purchase of a
subsidiary of Westrec Financial, Inc. ("Westrec"), the Company paid an
aggregate of approximately $68,000 through March 31, 1997 to Westrec for the
payment of certain operating expenses of such subsidiary. In exchange for the
payment of such expenses, the Company received an option to purchase all of
the outstanding shares of the subsidiary. The letter of intent was terminated
in April 1997. Michael Sachs, a director of the Company, is the Chief
Executive Officer, Chairman and primary shareholder of Westrec.
In connection with the sale of 545,000 shares of Common Stock to Comerica,
the Company and Comerica have agreed to enter into certain arrangements
concerning servicing and other strategic relationships. Under the
arrangements, the Company will pay certain fees to Comerica and has issued
warrants to purchase 100,000 shares of Common Stock. The Company has also
reserved an additional 233,333 shares of Common Stock for issuance under
warrants to be granted to Comerica if certain performance goals are met, such
as (i) the commencement of servicing operations under the sub-servicing
arrangements between the Company and Comerica, (ii) the completion of one year
of servicing operations under such sub-servicing agreements, and (iii) the
funding of $20 million in loans by the Company as a result of leads developed
through Comerica's branch system and consumer loan portfolio. See "Prospectus
Summary--Recent Developments--Comerica Investment and Strategic Relationship."
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<PAGE>
BENEFICIAL OWNERSHIP OF SECURITIES AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 31, 1997, as adjusted to
reflect the sale of 2,900,000 shares by the Company in the Offering, by (i)
each director of the Company, (ii) each of the named executive officers, (iii)
each person known to the Company to be the beneficial owner of more than 5% of
the Common Stock, (iv) all directors and executive officers of the Company as
a group and (v) each Selling Stockholder.
<TABLE>
<CAPTION>
COMMON STOCK
COMMON STOCK TO BE BENEFICIALLY
BENEFICIALLY OWNED OWNED
PRIOR TO OFFERING AFTER THE OFFERING(2)
--------------------- ------------------------
NUMBER NUMBER OF NUMBER
OF SHARES BEING OF
BENEFICIAL OWNERS(1) SHARES PERCENT OFFERED (2) SHARES PERCENT
-------------------- ----------- --------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Cornerstone Fund I,
L.L.C.(3).............. 4,220,656 38.40% 600,000 3,620,656 26.06%
Comerica Incorporat-
ed(4).................. 545,000 4.96 -- 545,000 3.92
Brad A. Morrice(5)(6)... 1,223,217 11.13 -- 1,223,217 8.80
Robert K. Cole(5)....... 1,222,735 11.12 -- 1,222,735 8.80
Edward F. Gotschall(5).. 1,119,632 10.19 -- 1,119,632 8.06
Steven G. Holder(5)..... 1,078,391 9.81 -- 1,078,391 7.76
John C. Bentley(7)...... 211,032 1.92 -- 211,032 1.52
Sherman I. Chu(7)....... 211,032 1.92 -- 211,032 1.52
Harlan W. Smith(8)...... 422,064 3.84 -- 422,064 3.04
Martin F. Ryan(9)....... 158,274 1.44 -- 158,274 1.14
Michael M. Sachs(10).... 527,582 4.80 -- 527,582 3.80
Fredric J. Forster...... -- * -- -- *
All directors and execu-
tive officers as a
group (9 persons)...... 5,962,927 54.25% 5,329,831 38.37%
</TABLE>
- --------
* Less than one percent.
(1) Unless otherwise indicated, each of the stockholders named in this table
has sole voting and dispositive power with respect to the shares shown as
beneficially owned.
(2) Assumes no exercise of the Underwriters' over-allotment option. If the
Underwriters' over-allotment option is exercised in full, (i) Cornerstone
Fund I, L.L.C. will sell an additional 250,000 shares of Common Stock and
the number of shares and the percent of Common Stock to be beneficially
owned after the Offering by Cornerstone Fund I, L.L.C. will be 3,370,656
shares and 23.9%, respectively, (ii) Cornerstone Equity Partners, L.L.C.
("CEP") will sell 42,500 shares of Common Stock and the number of shares
and the percent of Common Stock to be beneficially owned after the
Offering by CEP will be 168,532 shares and 1.19%, respectively and (iii)
the number of shares and the percent of Common Stock to be beneficially
owned after the Offering by all directors and executive officers as a
group will be 5,037,331 and 35.7%, respectively.
(3) Such person may be reached at 5050 N. 40th Street, Suite 310, Phoenix,
Arizona 85018. The Foundation Companies, Inc. is the managing member of
Cornerstone Fund I, L.L.C. and CEP is a member of Cornerstone Fund I,
L.L.C. The Foundation Companies, Inc. has sole voting power and shares
dispositive power with CEP with respect to the shares owned by
Cornerstone Fund I, L.L.C. The Foundation Companies, Inc. is a wholly-
owned subsidiary of the Baptist Foundation of Arizona, which may also be
deemed to be the beneficial owner of the shares owned by Cornerstone Fund
I, L.L.C.
(4) Such person may be reached at 3551 Hamlin Road, Auburn Hills, Michigan
48326.
(5) Each of such persons may be reached through the Company at 4910 Birch
Street, Suite 100, Newport Beach, California 92660.
(6) Includes 21,103 shares of Common Stock owned by the Samantha H. Morrice
Trust, the sole beneficiary of which is Mr. Morrice's minor daughter.
(7) Includes 211,032 shares of Common Stock owned by CEP. As principals of
CEP, Messrs. Bentley and Chu share voting and dispositive power of the
shares owned by CEP and may be deemed to be the beneficial owners of the
shares owned by Cornerstone Fund I, L.L.C. See note (3) above.
(8) Includes 211,032 shares of Common Stock owned by Harcol Limited
Partnership, of which Mr. Smith is a general partner.
(9) All 158,274 shares of Common Stock are owned by The Martin F. Ryan, Ltd.,
Profit Sharing Plan and Trust, of which Mr. Ryan is the trustee. Martin
F. Ryan, a director of the Company, is a director of The Foundation
Companies, Inc. See note (3) above.
(10) Includes 211,032 shares of Common Stock owned by Westrec Rollover PS
Plan, of which Mr. Sachs is the trustee.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon closing of this Offering, the authorized capital stock of the Company
will consist of 45,000,000 shares of Common Stock and 7,500,000 shares of
Preferred Stock. Upon the closing of the Offering, the Company will have
13,892,373 shares of Common Stock outstanding and no shares of Preferred Stock
outstanding.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on all matters to
be voted upon by the stockholders, including the election of directors. The
Company's Certificate of Incorporation does not provide for cumulative voting
in the election of directors.
Holders of Common Stock are entitled to receive such dividends as may be
declared from time to time by the Board of Directors out of funds legally
available therefor. The Company does not anticipate paying any cash dividends
in the foreseeable future. See "Risk Factors--Absence of Dividends" and
"Dividend Policy." In the event of liquidation, dissolution or winding up of
the Company, holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities and after satisfaction of the
liquidation preference of any outstanding Preferred Stock.
Upon completion of the Offering, no holders of Common Stock will have
preemptive rights. In addition, holders of Common Stock have no conversion or
redemption rights and are not subject to further assessments by the Company.
Upon consummation of the Offering, all of the then outstanding shares of
Common Stock will be validly issued, fully paid and nonassessable.
PREFERRED STOCK
The Company's Board of Directors is authorized to issue from time to time,
without stockholder authorization, in one or more designated series, any or
all of the authorized but unissued shares of Preferred Stock with such
dividend, redemption, conversion and exchange provisions as may be provided
for the particular series. Any series of Preferred Stock may possess voting,
dividend, liquidation and redemption rights superior to those of the Common
Stock. The rights of holders of Common Stock will be subject to and may be
adversely affected by the rights of the holders of any Preferred Stock that
may be issued in the future. Issuance of a new series of Preferred Stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could make it more difficult for a third party
to acquire, or discourage a third party from acquiring, the outstanding voting
stock of the Company, and make removal of the present Board of Directors more
difficult. The Company has no present plans to issue any shares of Preferred
Stock. See "Risk Factors--Anti-Takeover Provisions."
REGISTRATION RIGHTS
After November 22, 1998, holders of approximately 10,392,373 shares of
Common Stock, constituting all of the holders of Common Stock prior to the
Offering, will be entitled to request that the Company effect a registration
under the Securities Act, covering the sale of some or all of the shares owned
by such holders, subject to certain conditions. Such holders may request that
the Company effect three such registrations. In addition, the Company must use
reasonable efforts to make registration statements under Forms S-2 and S-3
available to such holders, but is not obligated to do so. Finally, in the
event the Company proposes to register any of its shares of Common Stock under
the Securities Act, such holders of Common Stock are entitled to require that
the Company include all or a portion of their shares in such registration,
subject to certain conditions and limitations, including reductions in the
number of shares to be registered. The Company is required to bear all
registration expenses incurred in connection with the three demand
registrations on Form S-1, and in all Form S-2, S-3 and Company registrations.
CERTAIN PROVISIONS OF DELAWARE LAW
The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law (the "DGCL"). In general, Section 203
prevents an "interested stockholder" (defined generally as a person
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<PAGE>
owning 15% or more of a corporation's outstanding voting stock) from engaging
in a "business combination" (as defined therein) with a Delaware corporation
for three years following the date such person became an interested
stockholder unless (i) before such person became an interested stockholder,
the board of directors of the corporation approved the transaction in which
the interested stockholder became an interested stockholder or approved the
business combination, (ii) upon consummation of the transaction that resulted
in the interested stockholder becoming an interested stockholder, the
interested stockholder owns at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced (excluding
shares owned by persons who are both officers and directors of the corporation
and shares held by certain employee stock ownership plans) or (iii) following
the transaction in which such person became an interested stockholder, the
business combination is approved by the board of directors of the corporation
and authorized at a meeting of stockholders by the affirmative vote of the
holders of at least two-thirds of the outstanding voting stock of the
corporation not owned by the interested stockholder.
APPLICATION OF THE CALIFORNIA GENERAL CORPORATION LAW TO THE COMPANY
If the Company's equity securities are held by less than 800 stockholders
and a majority of its outstanding shares are held by persons with California
addresses and the Company has operational characteristics that indicate that
it has significant contacts to California, the Company may be subject to
Section 2115 of the California Corporations Code. In such event, the Company
would be subject to certain key provisions of the California General
Corporation Law, including, without limitation, those provisions relating to
the number of directors to be elected each year (all directors would be
required to be elected each year under California law applicable to companies
with less than 800 beneficial holders of their equity securities), the
stockholders' right to cumulate votes at elections of directors (cumulative
voting would be mandatory under California law applicable to companies with
less than 800 beneficial holders of their equity securities), the
stockholders' right to remove directors without cause (which under California
law is subject to the stockholders' right to cumulative voting), the Company's
ability to indemnify its officers, directors and employees (which generally is
more limited in certain situations in California than in Delaware), the
Company's ability to make distributions, dividends or repurchases (which
generally is more restrictive in California than in Delaware), inspection of
corporate records (which is generally more available in California than in
Delaware), approval of certain corporate transactions, and dissenters' rights.
After consultation with the Underwriters of this Offering, the Company
anticipates that it will have more than 800 stockholders following the
completion of this Offering.
LIMITATION OF LIABILITY AND INDEMNIFICATION AGREEMENTS
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by applicable law a director of the Company shall not be
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director. Under the DGCL, liability of a director may not
be limited (i) for any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) in respect
of certain unlawful dividend payments or stock redemptions or repurchases and
(iv) for any transaction from which the director derives an improper personal
benefit. The effect of the provisions of the Company's Certificate of
Incorporation is to eliminate the rights of the Company and its stockholders
(through stockholders' derivative suits on behalf of the Company) to recover
monetary damages against a director for breach of the fiduciary duty of care
as a director (including breaches resulting from negligent or grossly
negligent behavior), except as provided in the situations described in clauses
(i) through (iv) above. This provision does not limit or eliminate the rights
of the Company or any stockholder to seek nonmonetary relief such as an
injunction or rescission in the event of a breach of a director's duty of
care.
The Bylaws of the Company provide that the Company will indemnify its
directors and officers to the fullest extent permitted by the DGCL. In
addition, the Company has entered into agreements with each of the directors
and officers of the Company pursuant to which the Company has agreed to
indemnify, subject to certain limitations, such director or officer from
claims, liabilities, damages, expenses, losses, costs, penalties or amounts
paid in settlement incurred by such director or officer in or arising out of
his capacity as a director, officer,
71
<PAGE>
employee and/or agent of the Company or any other corporation of which such
person is a director or officer at the request of the Company to the maximum
extent provided by applicable law. In addition, such director or officer is
entitled to an advance of expenses to the maximum extent authorized or
permitted by law.
PROVISIONS OF CERTIFICATE OF INCORPORATION AND BYLAWS
Certain provisions of the Company's Certificate of Incorporation and Bylaws
summarized in the following paragraphs may have an anti-takeover effect and
may delay, defer or prevent a tender offer or takeover attempt that a
stockholder might consider in its best interest, including those attempts that
might result in a premium over the market price for the shares held by
stockholders.
Classified Board of Directors
Under the Company's Certificate of Incorporation, the Board of Directors of
the Company is divided into three classes, with staggered terms of three years
each. Each year the term of one class expires. The Company's Certificate of
Incorporation provides that any vacancies on the Board of Directors may be
filled by the affirmative vote of a majority of the directors then in office,
even if less than a quorum.
Stockholders Meeting Requirement
Under the Company's Certificate of Incorporation, any election or other
action by stockholders of the Company must be effected at an annual or special
meeting of stockholders and may not be effected by written consent without a
meeting.
Advance Notice Requirements
Under the Company's Bylaws, stockholders will be required to comply with
advance notice provisions with respect to any proposal submitted for
stockholder vote. To be timely, a stockholder's notice must be delivered to
the Secretary at the principal executive offices of the Company not less than
60 days nor more than 90 days prior to the meeting; provided, however, that in
the event that less than 70 days' notice of the date of the meeting is given,
notice by the stockholder to be timely must be received no later than the
tenth day following the day on which such notice of the date of the meeting
was first made by the Corporation. If notice has not been given pursuant to
these provisions, the chairman of the meeting may declare to the meeting that
the proposed business was not properly brought before the meeting and such
business may not be transacted at the meeting. These provisions may preclude
some stockholders from bringing matters before the stockholders at an annual
or special meeting.
Supermajority Voting Requirements
Under the Company's Bylaws, a vote of two-thirds of the directors is
required to change the number of directors of the Company.
LISTING
There is no public trading market for the Common Stock. Application has been
made to have the Common Stock approved for quotation on Nasdaq under the
trading symbol "NCEN."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is U.S. Stock Transfer
Corporation.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding
13,892,373 shares of Common Stock. Of the outstanding shares, 3,500,000 shares
will be freely tradeable without restriction or further registration under the
Securities Act unless purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act.
The remaining 10,392,373 shares of Common Stock outstanding are "restricted
securities" as that term is defined in Rule 144 promulgated under the
Securities Act and are eligible for sale subject to holding period, volume and
other limitations imposed by that rule. As described below, Rule 144 permits
resales of restricted securities subject to certain restrictions. In addition,
stock options for an additional 1,267,520 shares of Common Stock have been
granted to certain non-employee directors and employees of the Company under
the Stock Option Plan, and options to acquire 441,500 shares will be granted
upon the closing of the Offering. Options to acquire 127,500 shares of Common
Stock have also been granted or will be granted to two executive officers and
two non-employee directors of the Company outside the Stock Option Plan,
warrants to purchase 100,000 shares of Common Stock have been issued to
Comerica and warrants to purchase an additional 233,333 shares of Common Stock
will be issued to Comerica subject to the completion by Comerica of certain
performance events. All of the Comerica warrants will have an exercise price
equal to the initial public offering price of the Company's Common Stock,
subject to vesting in equal installments on December 31, 1997, 1998 and 1999.
Accelerated vesting will occur upon (i) certain changes in control of the
Company or (ii) the inclusion of the shares underlying the warrants in a
registration statement, subject to certain limitations, upon exercise of
Comerica's registration rights. An additional 290,980 shares of Common Stock
are reserved for future issuance under the Stock Option Plan. The Company and
certain stockholders have agreed, subject to certain conditions, that they
will not offer, sell or otherwise dispose of any of the shares of Common Stock
or securities convertible into Common Stock owned by them for 180 days from
the date of this Prospectus and the commencement of the Offering,
respectively, without the prior written consent of Montgomery Securities on
behalf of the Underwriters.
In general, under Rule 144 as in effect as of April 29, 1997, a person (or
persons whose shares are aggregated) who has beneficially owned restricted
securities for at least one year, will be entitled to sell in any three-month
period a number of shares that does not exceed the greater of: (i) 1% of the
number of shares of Common Stock then outstanding (approximately 138,924
shares immediately after the Offering) or (ii) the average weekly trading
volume of the Company's Common Stock on Nasdaq during the four calendar weeks
immediately preceding the date on which the notice of sale is filed with the
Securities and Exchange Commission. Sales pursuant to Rule 144 are subject to
certain requirements relating to manner of sale, notice and availability of
current public information about the Company. A person (or persons whose
shares are aggregated) who is not deemed to have been an affiliate of the
Company at any time during the 90 days immediately preceding the sale and who
has beneficially owned restricted securities for at least two years is
entitled to sell such shares pursuant to Rule 144(k) without regard to the
limitations and requirements described above.
The Company intends to file a registration statement under the Securities
Act to register shares of Common Stock reserved for issuance under its Stock
Option Plan, thus permitting the resales of such shares by non-affiliates in
the public market without restriction under the Securities Act. Such
registration statement is expected to be filed shortly after the date of this
Prospectus. As of the closing of the Offering, options to purchase an
aggregate of 1,709,020 shares of Common Stock will be outstanding under the
Stock Option Plan.
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<PAGE>
UNDERWRITING
The Underwriters named below represented by Montgomery Securities and Piper
Jaffray Inc. (the "Representatives"), have severally agreed, subject to the
terms and conditions set forth in the Underwriting Agreement, to purchase from
the Company and the Selling Stockholder the number of shares of Common Stock
indicated below opposite their respective names at the initial public offering
price less the underwriting discount set forth on the cover page of this
Prospectus. The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters are committed to purchase all of such shares if any are
purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER SHARES
----------- ---------
<S> <C>
Montgomery Securities...........................................
Piper Jaffray Inc...............................................
---------
Total......................................................... 3,500,000
=========
</TABLE>
The Representatives have advised the Company and the Selling Stockholder
that the Underwriters propose initially to offer the Common Stock to the
public on the terms set forth on the cover page of this Prospectus. The
Underwriters may allow to selected dealers a concession of not more than
$ per share, and the Underwriters may allow, and such dealers may reallow, a
concession of not more than $ per share to certain other dealers. After this
Offering, the offering price and other selling terms may be changed by the
Representatives. The shares of Common Stock are offered subject to receipt and
acceptance by the Underwriters, and to certain other conditions, including the
right to reject orders in whole or in part.
The Company and the Selling Stockholders have granted options to the
Underwriters, exercisable during the 30-day period after the date of this
Prospectus, to purchase up to a maximum of 525,000 additional shares of Common
Stock to cover over-allotments, if any, at the offering price less the
underwriting discount set forth on the cover page of this Prospectus. To the
extent the Underwriters exercise this option, each of the Underwriters will be
committed, subject to certain conditions, to purchase such additional shares
in approximately the same proportion as set forth in the above table. The
Underwriters may purchase such shares only to cover over-allotments made in
connection with Offering.
The Underwriters have reserved up to 175,000 shares of Common Stock offered
hereby for sale at the Offering price to directors, officers and employees of
the Company and to certain other persons.
The Underwriting Agreement provides that the Company and the Selling
Stockholder will indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act, or will contribute to payments
the Underwriters may be required to make in respect thereof. The Company has
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is therefore unenforceable.
All of the Company's officers and directors and certain of the Company's
stockholders have agreed that they will not, without the prior written consent
of Montgomery Securities (which consent may be withheld in its sole
discretion) and subject to certain limited exceptions, directly or indirectly,
sell, offer, contract or grant any option to sell, make any short sale,
pledge, transfer, establish an open "put equivalent position" within the
meaning of Rule 16a-1(h) under the Exchange Act, or otherwise dispose of any
shares of Common Stock, options or warrants to acquire Common Stock, or
securities exchangeable or exercisable for or convertible into Common Stock
currently owned either of record or beneficially by them or announce the
intention to do any of the foregoing, for a period commencing on the date of
this Prospectus and continuing to a date 180 days after such date. Montgomery
Securities may, in its sole discretion and at any time without notice, release
all or any portion of the securities subject to these lock-up agreements. In
addition, the Company has agreed that, for a period of 180 days after the date
of this Prospectus, it will not, without the consent of Montgomery Securities,
issue, offer,
74
<PAGE>
sell or grant options to purchase or otherwise dispose of any equity
securities or securities convertible into or
exchangeable for equity securities except for (i) the issuance of shares of
Common Stock offered hereby, (ii) the issuance of shares of Common Stock
pursuant to the exercise of outstanding options and (iii) the grant of options
to purchase shares of Common Stock pursuant to the Stock Option Plan and
shares of Common Stock issued pursuant to the exercise of such options. See
"Management--Stock Option Plan" and "Shares Eligible for Future Sale."
Prior to this Offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined by
negotiations among the Company, the Selling Stockholder and the
Representatives. Among the factors to be considered in such negotiations are
the history of, and prospects for, the Company and the industry in which it
competes, an assessment of the Company management, its past and present
operations and financial performance, the prospects for future earnings of the
Company, the present state of the Company's development, the general condition
of the securities markets at the time of the Offering, the market prices of
and demand for publicly traded common stocks of comparable companies in recent
periods and other factors deemed relevant.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in this Offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level
above that which might otherwise prevail in the open market. A "stabilizing
bid" is a bid for or the purchase of the Common Stock on behalf of the
Underwriters for the purpose of fixing or maintaining the price of the Common
Stock. A "syndicate covering transaction" is the bid for or the purchase of
the Common Stock on behalf of the Underwriters to reduce a short position
incurred by the Underwriters in connection with this Offering. A "penalty bid"
is an arrangement permitting the Representatives to reclaim the selling
concession otherwise accruing to an Underwriter or syndicate member in
connection with this Offering if the Common Stock originally sold by such
Underwriter or syndicate member is purchased by the Representative in a
syndicate covering transaction and has therefore not been effectively placed
by such Underwriter or syndicate member. The Representatives have advised the
Company that such transactions may be effected on Nasdaq or otherwise and, if
commenced, may be discontinued at any time.
Montgomery Securities has performed certain investment banking and advisory
services for the Company in the past.
The Representatives have informed the Company that the Underwriters do not
expect to make sales to accounts over which they exercise discretionary
authority in excess of 5% of the number of shares of Common Stock offered
hereby.
LEGAL MATTERS
Certain matters relating to this Offering are being passed upon for the
Company by O'Melveny & Myers LLP, Newport Beach, California. A partner of such
firm owns 211,032 shares of Common Stock of the Company. Brobeck, Phleger &
Harrison LLP, Newport Beach, California will act as counsel for the
Underwriters.
EXPERTS
The financial statements of the Company as of December 31, 1996 and December
31, 1995, for the year ended December 31, 1996 and for the period from
November 17, 1995 (inception) to December 31, 1995 have been included herein
in reliance upon the report of KPMG Peat Marwick LLP, independent auditors
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
75
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"), in Washington, D.C., a Registration Statement on Form S-1 under
the Securities Act with respect to the Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto. Certain items are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits filed as a
part thereof. Statements contained in this Prospectus as to the contents of
any contract or any other document referred to are not necessarily complete
and, in each instance, if such contract or document is filed as an exhibit,
reference is made to the copy of such contract or document filed as an exhibit
to the Registration Statement, each such statement being qualified in all
respects by such reference to such exhibit. Upon completion of the Offering,
the Company will be subject to the informational requirements of the Exchange
Act and, in accordance therewith, will file reports and other information with
the Commission. The Registration Statement, including exhibits thereto, as
well as the reports and other information filed by the Company with the
Commission, may be inspected without charge at the Public Reference Room of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's regional offices at Seven World Trade Center, 13th Floor, New
York, New York 10048, and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661. Copies of such materials can also be obtained
at prescribed rates from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549. Electronic filings made through
the Electronic Data Gathering Analysis and Retrieval System are publicly
available through the Commission's Web Site (http://www.sec.gov).
76
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
Independent Auditors' Report.......................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995........ F-3
Consolidated Statements of Operations for the year ended December
31, 1996, and for the period from November 17, 1995 (inception) to
December 31, 1995.................................................. F-4
Consolidated Statements of Changes in Stockholders' Equity for the
year ended December 31, 1996, and for the period from November 17,
1995 (inception) to December 31, 1995.............................. F-5
Consolidated Statements of Cash Flows for the year ended December
31, 1996, and for the period from November 17, 1995 (inception) to
December 31, 1995.................................................. F-6
Notes to Consolidated Financial Statements for the year ended
December 31, 1996, and for the period from November 17, 1995
(inception) to December 31, 1995................................... F-7
Condensed Consolidated Balance Sheets as of March 31, 1997
(unaudited) and December 31, 1996.................................. F-20
Condensed Consolidated Statements of Operations (unaudited) for the
three months ended March 31, 1997 and 1996 ........................ F-21
Condensed Consolidated Statements of Cash Flows (unaudited) for the
three months ended March 31, 1997 and 1996 ........................ F-22
Notes to Condensed Consolidated Financial Statements (unaudited) for
the three months ended March 31, 1997 and 1996..................... F-23
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
New Century Financial Corporation:
We have audited the accompanying consolidated balance sheets of New Century
Financial Corporation and subsidiary as of December 31, 1996 and 1995 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the year ended December 31, 1996 and the period from
November 17, 1995 (inception) to December 31, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of New
Century Financial Corporation and subsidiary as of December 31, 1996 and 1995
and the results of their operations and their cash flows for the year ended
December 31, 1996 and the period from November 17, 1995 (inception) to
December 31, 1995 in conformity with generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Orange County, California
March 7, 1997, except
for note 4, which is
as of March 28, 1997.
F-2
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1996 1995
------- ------
ASSETS
<S> <C> <C>
Cash and cash equivalents...................................... $ 3,041 $3,029
Loans receivable held for sale, net (notes 2 and 4)............ 57,990 --
Accrued interest receivable.................................... 786 --
Office property and equipment (notes 3 and 5).................. 1,620 34
Prepaid expenses and other assets.............................. 1,201 88
------- ------
$64,638 $3,151
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Warehouse lines of credit (note 4)............................. $55,659 $ --
Notes payable (note 5)......................................... 1,326 --
Income taxes payable (note 7).................................. 839 --
Accounts payable and accrued liabilities....................... 2,283 83
Deferred income taxes (note 7)................................. 128 --
------- ------
60,235 83
------- ------
Stockholders' equity (notes 9 and 10):
Preferred stock, $.01 par value. Authorized 7,320,000 shares:
Series A Convertible Preferred Stock--issued and
outstanding 5,500,000 shares.............................. 54 54
Series B Convertible Preferred Stock--issued and
outstanding 320,000 shares................................ 4 4
Common Stock, $.01 par value. Authorized 12,963,778 shares;
issued and outstanding 528,618 shares....................... 6 6
Additional paid-in capital................................... 3,086 3,086
Retained earnings (deficit), restricted...................... 1,253 (82)
------- ------
Total stockholders' equity............................... 4,403 3,068
Commitments and contingencies (notes 6 and 8)..................
Subsequent events (notes 2, 4, 5 and 6)........................
------- ------
$64,638 $3,151
======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA PERIOD FROM
----------------- NOVEMBER 17, 1995
YEAR ENDED YEAR ENDED (INCEPTION) TO
DECEMBER 31, 1996 DECEMBER 31, DECEMBER 31,
(NOTE 14) 1996 1995
----------------- ------------ -----------------
(UNAUDITED)
<S> <C> <C> <C>
Revenues:
Gain on sale of loans (note
2).......................... $ 11,630 $11,630 $--
Interest income.............. 2,846 2,846 14
Servicing fees............... 29 29 --
---------- ------- ----
Total revenues............ 14,505 14,505 14
---------- ------- ----
Expenses:
Personnel.................... 6,328 6,083 54
General and administrative
(note 11)................... 2,456 2,456 11
Interest..................... 1,941 1,941 --
Advertising and promotion.... 1,169 1,169 --
Servicing.................... 269 269 --
Professional services........ 282 282 30
---------- ------- ----
Total expenses............ 12,445 12,200 95
---------- ------- ----
Earnings (loss) before
income taxes............. 2,060 2,305 (81)
Income taxes (note 7)......... 867 970 1
---------- ------- ----
Net earnings (loss)....... $ 1,193 $ 1,335 $(82)
========== ======= ====
Pro Forma earnings per share.. $ 0.10
==========
Pro Forma weighted average
number of shares outstanding. 11,630,439
==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD FROM
NOVEMBER 17, 1995 (INCEPTION) TO DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A SERIES B RETAINED
PREFERRED PREFERRED COMMON ADDITIONAL EARNINGS
STOCK STOCK STOCK PAID-IN (DEFICIT)
AMOUNT AMOUNT AMOUNT CAPITAL RESTRICTED TOTAL
--------- --------- ------ ---------- ---------- ------
<S> <C> <C> <C> <C> <C> <C>
Balance, November 17,
1995 (inception)....... $-- $-- $-- $ -- $ -- $ --
Proceeds from issuance
of Series A Preferred
Stock (note 9)......... 54 -- -- 2,696 -- 2,750
Proceeds from issuance
of Series B Preferred
Stock (note 9)......... -- 4 -- 156 -- 160
Proceeds from issuance
of Common Stock
(note 9)............... -- -- 6 234 -- 240
Net loss................ -- -- -- -- (82) (82)
---- ---- ---- ------ ------ ------
Balance, December 31,
1995................... 54 4 6 3,086 (82) 3,068
Net earnings............ -- -- -- -- 1,335 1,335
---- ---- ---- ------ ------ ------
Balance, December 31,
1996................... $ 54 $ 4 $ 6 $3,086 $1,253 $4,403
==== ==== ==== ====== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1996 AND THE PERIOD FROM
NOVEMBER 17, 1995 (INCEPTION) TO DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1996 1995
--------- ------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)........................................ $ 1,335 $ (82)
Adjustments to reconcile net earnings (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization............................. 260 --
Deferred income taxes..................................... 128 --
Provision for losses...................................... 706 --
Loans originated or acquired for sale..................... (357,727) --
Loan sales, net........................................... 298,713 --
Principal payments on loans receivable held for sale...... 418 --
Increase in accrued interest receivable................... (786) --
Increase in prepaid expenses and other assets............. (1,125) (88)
Increase in warehouse lines of credit..................... 55,659 --
Increase in income taxes payable.......................... 839 --
Increase in accounts payable and accrued liabilities...... 2,100 83
--------- ------
Net cash provided by (used in) operating activities..... 520 (87)
--------- ------
Cash flows from investing activities--purchase of office
property and equipment..................................... (1,834) (34)
--------- ------
Cash flows from financing activities:
Net proceeds from notes payable............................ 1,326 --
Proceeds from issuance of stock............................ -- 3,150
--------- ------
Net cash provided by financing activities............... 1,326 3,150
--------- ------
Net increase in cash and cash equivalents............... 12 3,029
Cash and cash equivalents at beginning of period............ 3,029 --
--------- ------
Cash and cash equivalents at end of period.................. $ 3,041 $3,029
========= ======
Supplemental cash flow disclosure:
Interest paid.............................................. $ 1,738 $ --
Income taxes............................................... 3 1
========= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization--New Century Financial Corporation (the "Company"), a Delaware
corporation, was incorporated on November 17, 1995. The Company's subsidiary
commenced operations in February 1996 and is a specialty finance company
engaged in the business of originating, purchasing, selling and servicing
mortgage loans secured primarily by first mortgages on single family
residences.
Principles of Consolidation--The accompanying consolidated financial
statements include the accounts of the Company's wholly owned subsidiary, New
Century Mortgage Corporation. All material intercompany balances and
transactions are eliminated in consolidation. The consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles.
Cash and Cash Equivalents--For purposes of the statements of cash flows, the
Company considers all highly liquid debt instruments with original maturities
of three months or less to be cash equivalents. Cash equivalents consist of
cash on hand and due from banks.
Loans Receivable Held for Sale--Mortgage loans held for sale are stated at
the lower of amortized cost or market as determined by outstanding commitments
from investors or current investor-yield requirements calculated on an
aggregate basis.
Interest on loans receivable held for sale is credited to income as earned.
Interest is accrued only if deemed collectible.
Gains on Sale of Loans--Gains or losses resulting from sales of mortgage
loans are recognized at the date of settlement and are based on the difference
between the selling price and the carrying value of the related loans sold.
Such gains and losses may be increased or decreased by the amount of any
servicing released premiums received. Nonrefundable fees and direct costs
associated with the origination of mortgage loans are deferred and recognized
when the loans are sold.
Allowance for Repurchase Losses--The allowance for repurchase losses on
loans sold relates to costs incurred due to the repurchase of loans or
indemnification of losses based on alleged violations of representations and
warranties customary to the mortgage banking industry. The allowance
represents the Company's estimate of losses expected to occur and is
considered to be adequate. Provisions for losses are charged to expense and
credited to the allowance and are determined to be adequate by management
based upon the Company's evaluation of the potential exposure related to the
loan sale agreements.
Office Property and Equipment--Office property and equipment are stated at
cost. The straight-line method of depreciation is followed for financial
reporting purposes. Depreciation and amortization are provided in amounts
sufficient to relate the cost of assets to operations over their estimated
service lives or the lives of the respective leases. The estimated service
lives for furniture and office equipment, computer hardware/software and
leasehold improvements are five years, three years and five years,
respectively.
Organization Costs--Organization costs incurred in connection with the
formation of the Company amounted to approximately $63,000 and are being
amortized over a five-year period using the straight-line method. At December
31, 1996 and 1995, accumulated amortization was $12,000 and $0, respectively.
Financial Statement Presentation--The Company prepares its financial
statements using an unclassified balance sheet presentation as is customary in
the mortgage banking industry. A classified balance sheet
F-7
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
presentation would have aggregated current assets, current liabilities and net
working capital as of December 31, 1996 as follows (dollars in thousands):
<TABLE>
<S> <C>
Current assets................................. $63,018
Current liabilities............................ 59,240
-------
Net working capital........................... $ 3,778
=======
</TABLE>
Errors and Omissions Policy--In connection with the Company's lending
activities, the Company has Fidelity Bond and Errors and Omissions insurance
coverage of $500,000 each at December 31, 1996.
Income Taxes--The Company intends to file consolidated Federal and combined
state tax returns. The Company accounts for income taxes using the asset and
liability method. Under the asset and liability method, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Residual Interests in Securitizations--Residual interests in securitizations
of real estate mortgage investment conduits (REMICs) are recorded as a result
of the sale of loans through securitization. At the closing of each
securitization, the Company removes from its balance sheet the mortgage loans
held for sale and adds to its balance sheet (i) the cash received, (ii) the
estimated fair value of the residuals from the securitizations which consists
of (a) an overcollateralization amount (OC) and (b) a net interest receivable
(NIR). The excess of the cash received and assets retained by the Company over
the carrying value of the loans sold, less transaction costs, equals the gain
on sale of loans recorded by the Company.
The Company allocates its basis in the mortgage loans between the portion of
the mortgage loans sold through mortgage backed securities (the senior
certificates) and the portion retained (the residual interests) based on the
relative fair values of those portions on the date of the sale.
The Company may recognize gains or losses attributable to the change in the
fair value of the residual interests, which are recorded at estimated fair
value and accounted for as "held-for-trading" securities. The Company is not
aware of an active market for the purchase or sale of residual interests;
accordingly, the Company estimates fair value of the residual interests by
calculating the present value of the estimated expected future cash flows
using a discount rate commensurate with the risks involved.
NIRs are determined by using the amount of the excess of the weighted-
average coupon on the loans sold over the sum of: (1) the coupon on the senior
certificates, (2) a base servicing fee paid to the servicer of the loans, (3)
expected losses to be incurred on the portfolio of loans sold over the lives
of the loans and (4) other expenses and revenues, which includes anticipated
prepayment penalties. The significant assumptions used by the Company to
estimate NIR cash flows are anticipated prepayments and estimated credit
losses. The Company estimates prepayments by evaluating historical prepayment
performance of comparable loans and the impact of trends in the industry. The
Company estimates credit losses using available historical loss data for
comparable loans and the specific characteristics of the loans included in the
Company's securitizations.
The OC represents the portion of the loans which are held by the trust as
overcollateralization for the senior certificates sold and along with a
certificate guarantor insurance policy serves as credit enhancement to the
senior certificate holders. The OC initially consists of the excess of the
principal balance of the mortgage loans sold to
F-8
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the trust, less the principal balance of the certificates sold to investors.
The OC is required to be maintained at a specified target level of the
principal balance of the certificates, which can be increased significantly in
the event delinquencies and or losses exceed certain specified levels. Cash
flows received by the trust in excess of the obligations of the trust are
deposited into the overcollateralization account until the target OC is
reached. Once the target OC is reached, distributions of excess cash are
remitted to the Company.
Use of Estimates--Management of the Company has made certain estimates and
assumptions relating to the reporting of assets and liabilities and the
disclosure of contingent assets and liabilities to prepare these financial
statements in accordance with generally accepted accounting principles. Actual
results could differ from these estimates.
Advertising--The Company accounts for its advertising costs as nondirect
response advertising. Accordingly, advertising costs are expensed as incurred.
Reclassification--Certain amounts for 1995 have been reclassified to conform
to the 1996 presentation.
Recent Accounting Developments--In June 1996, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
125 (FASB No. 125), "Accounting for Transfer and Servicing of Financial Assets
and Extinguishment of Liabilities." FASB No. 125 addresses the accounting for
all types of securitization transactions, securities lending and repurchase
agreements, collateralized borrowing arrangements and other transactions
involving the transfer of financial assets. FASB No. 125 distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. FASB No. 125 is effective for transactions that occur after
December 31, 1996 and it is to be applied prospectively. FASB No. 125 will
require the Company to allocate its basis in the mortgage loans between the
portion of the mortgage loans sold through mortgage backed securities and the
portion retained (the residual interests) based on the relative fair values of
those portions on the date of the sale. The pronouncement requires the Company
to account for the residual interests as "held-for-trading" securities which
are to be recorded at fair value in accordance with SFAS No. 115. The Company
adopted FASB No. 125 on January 1, 1997 and there was no material impact on
the Company's financial position or results of operations.
2. LOANS RECEIVABLE HELD FOR SALE
A summary of loans receivable held for sale, at the lower of cost or market
at December 31, 1996 follows (dollars in thousands):
<TABLE>
<S> <C>
Mortgage loans receivable........................................ $57,701
Net deferred origination costs................................... 289
-------
$57,990
=======
</TABLE>
The Company had no loans receivable held for sale at December 31, 1995.
At December 31, 1996, the Company had loans receivable held for sale of
approximately $1.1 million, on which the accrual of interest had been
discontinued. If these loans receivable had been current throughout their
terms, interest would have increased by approximately $26,000.
F-9
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Gain on Sale of Loans--Gain on sale of loans for the year ended December 31,
1996 was comprised of the following components (dollars in thousands):
<TABLE>
<S> <C>
Gain from whole loan sale transactions.......................... $15,052
Provision for losses............................................ (706)
Nonrefundable fees.............................................. 3,548
Premiums, net................................................... (1,973)
Origination costs............................................... (4,291)
-------
$11,630
=======
</TABLE>
Originations and Purchases--During the year ended December 31, 1996,
approximately 62.4% and 15.7% of the Company's total loan originations and
purchases were in the states of California and Illinois, respectively.
Significant Customers--The Company has entered into a number of transactions
with two customers which accounted for more than 10% of the Company's loan
sales. During the year ended December 31, 1996, the Company sold a total of
approximately 51.4% and 32.2% of the loans sold to these two customers and
recognized gross gains on sales of approximately 50.9% and 39.3% of the total
gross gains.
3. OFFICE PROPERTY AND EQUIPMENT
Office property and equipment consist of the following at December 31
(dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
------ ----
<S> <C> <C>
Leasehold improvements....................................... $ 93 $ 2
Furniture and office equipment............................... 547 4
Computer hardware and software............................... 1,228 28
------ ---
1,868 34
Less accumulated depreciation and amortization............... (248) --
------ ---
$1,620 $34
====== ===
</TABLE>
4. WAREHOUSE LINES OF CREDIT
Warehouse lines of credit consist of the following at December 31 (dollars
in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -----
<S> <C> <C>
A $55 million line of credit expiring in June 1997 secured
by loans receivable held for sale, bearing interest based
on one month LIBOR (5.54% at December 31, 1996)........... $41,702 $ --
A $175 million master repurchase agreement bearing interest
based on one month LIBOR (5.54% at December 31, 1996). The
agreement may be terminated by the lender giving 28 days
written notice............................................ 13,957 --
------- -----
$55,659 $ --
======= =====
</TABLE>
The warehouse line of credit agreements contain certain restrictive
financial and other covenants which require the Company to, among other
requirements, restrict dividends, and maintain certain levels of net worth,
liquidity of at least $1.5 million, debt to net worth ratios and maintenance
of compliance with regulatory and investor requirements. At December 31, 1996,
the Company was in compliance with these financial and other covenants.
F-10
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On March 14, 1997, the Company amended the $55 million line of credit
agreement to include a working capital line of credit with the bank whereby
the Company will be able to borrow up to $2.5 million. The working capital
line of credit expires in June 1997, is unsecured and bears interest based on
the bank's prime rate.
On March 28, 1997, the $55 million line of credit was amended whereby the
Company will be able to borrow up to $85 million. The terms and conditions of
the amended line of credit are the same as the original terms and conditions
mentioned above.
5. NOTES PAYABLE
Notes payable consists of a financing line of credit of $1.5 million,
collateralized by office property and equipment, bears interest at rates
varying from 8.82% to 9.05% and expires in May 1997. The Company had borrowed
approximately $1.3 million under this line as of December 31, 1996. The
borrowings are payable in blended monthly payments of principal and interest
and mature commencing from May 1999 to December 1999.
The maturities of notes payable at December 31, 1996 are as follows (dollars
in thousands):
<TABLE>
<S> <C>
Due in 1 year or less............................................. $ 459
Due after 1 through 5 years....................................... 867
------
$1,326
======
</TABLE>
In February 1997, the financing line of credit was amended whereby the
Company will be able to borrow up to $2.5 million. The terms and conditions of
the amended line of credit are the same as the original terms and conditions
mentioned above.
6. COMMITMENTS AND CONTINGENCIES
Servicing--The Company's portfolio of mortgage loans serviced for others is
comprised of approximately $102 million at December 31, 1996, all of which
were serviced on a temporary basis under interim servicing arrangements which
the Company contracted with a subservicer to perform.
The Company has a subservicing contract with a subservicer to service its
loans receivable held for sale portfolio which together with the interim
servicing portfolio noted above, totaled approximately $160 million at
December 31, 1996.
Related Party--The Company entered into employment agreements on December 1,
1995 with four executive officers (the "Founding Managers") of the Company
expiring through December 1998. The Company is committed to pay minimum
aggregate compensation of $720,000 per annum. In addition, the executive
officers are entitled to certain employment-related benefits.
In December 1996, the Company adopted the Founding Manager's Incentive
Compensation Plan (the "Plan") for the benefit of the Founding Managers. The
Plan provides for payment of incentive compensation equal to 12.5% of the
Company's earnings before income taxes, provided that these earnings represent
greater than 17.5% return on stockholders' equity as defined. In the event the
aggregate incentive compensation amounts payable to Founding Managers for a
fiscal year exceeds the aggregate base salaries of the Founding Managers, 50%
of the excess amount will be distributed at the discretion of the Compensation
Committee in cash installments or granted as a nonqualified stock option, and
the remaining 50% will be distributed at the discretion of each Founding
Manager in cash installments or granted as a nonqualified stock option. As of
December 31, 1996 and 1995, the Company accrued $318,000 and $0, respectively,
of incentive compensation under the Plan.
F-11
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Operating Leases--The Company and its subsidiary lease certain facilities
under noncancelable operating leases, which expire at various dates through
2002. Total rental expenditures under these leases were approximately $389,000
and $0 for the year ended December 31, 1996 and the period from November 17,
1995 (inception) to December 31, 1995, respectively. Minimum rental
commitments for these leases are as follows (dollars in thousands):
<TABLE>
<S> <C>
Year ending December 31:
1997............................................................. $ 852
1998............................................................. 722
1999............................................................. 475
2000............................................................. 251
2001............................................................. 156
Thereafter....................................................... 8
------
$2,464
======
</TABLE>
The Company is in the process of negotiating a new lease for its
administrative offices. The initial monthly rental payment is estimated to be
$75,000 and is anticipated to expire in 2002.
Loan Commitments--Commitments to fund loans are agreements to lend to a
customer as long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses. Also, external market forces impact the probability of
commitments being exercised; therefore, total commitments outstanding do not
necessarily represent future cash requirements. The Company quotes interest
rates to borrowers which are subject to change by the Company. Although the
Company generally honors such interest rate quotes, the quotes do not
constitute interest rate locks, minimizing any potential interest rate risk
exposure. The Company had commitments to fund loans of approximately $37.7
million at December 31, 1996.
The Company had no commitments to sell loans at December 31, 1996.
As of December 31, 1996, the Company was committed to provide an investment
banking firm with a right to purchase whole loans and/or to lead underwrite
loans sold through securitization by the Company in an aggregate amount of
$500 million. In February 1997, the Company securitized through this
investment banking firm approximately $99.1 million in loans. In conjunction
with this securitization, the Company borrowed $7.5 million from this same
firm which is renewable monthly, bears interest based on one month LIBOR and
is collateralized by the Company's retained residual interest in the
securitization.
Contingencies--The Company has entered into loan sale agreements with
investors in the normal course of business which include standard
representations and warranties customary to the mortgage banking industry.
Violations of these representations and warranties may require the Company to
repurchase loans previously sold or to reimburse investors for losses
incurred. In the opinion of management, the potential exposure related to the
Company's loan sale agreements will not have a material adverse effect on the
financial position and operating results of the Company.
The Company sold loans in September and December 1996 under an agreement to
repurchase those loans which were delinquent at a specific date in December
1996 and January 1997. In accordance with this loan sale agreement, the
Company repurchased loans with an outstanding principal balance of
approximately $1.7 million for the year ended December 31, 1996. Subsequent to
year-end, the Company repurchased additional loans with an outstanding
principal balance of approximately $2.3 million.
F-12
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1996 and 1995, included in other liabilities are $100,000
and $0, respectively, in allowances for repurchase losses related to possible
off-balance sheet recourse and repurchase agreement provisions. The activity
in the allowance related to possible off-balance sheet recourse and repurchase
agreement provisions for the year ended December 31, 1996 is summarized as
follows (dollars in thousands):
<TABLE>
<S> <C>
Balance, beginning of year.......................................... $ --
Provision for losses................................................ 706
Charge-offs, net.................................................... (606)
----
Balance, end of year................................................ $100
====
</TABLE>
Litigation--The Company is a party to legal actions arising in the normal
course of business. In the opinion of management, based in part on discussions
with outside legal counsel, resolution of such matters will not have a
material adverse effect on the financial position and operating results of the
Company.
7. INCOME TAXES
Components of the Company's provision for income taxes for the year ended
December 31, 1996 and for the period from November 17, 1995 (inception) to
December 31, 1995 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Current:
Federal........................................................ $650 $ 1
State.......................................................... 192 --
---- ----
842 1
---- ----
Deferred:
Federal........................................................ 66 --
State.......................................................... 62 --
---- ----
128 --
---- ----
$970 $ 1
==== ====
</TABLE>
Actual income taxes differ from the amount determined by applying the
statutory Federal rate of 34% for the year ended December 31, 1996 and for the
period from November 17, 1995 (inception) to December 31, 1995 to earnings
(loss) before taxes as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Computed "expected" income taxes............................. $784 $(27)
State tax, net............................................... 174 --
Valuation reserve............................................ (28) 28
Other........................................................ 40 --
---- ----
$970 $ 1
==== ====
</TABLE>
F-13
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses.................................... $229 $--
Accruals for tax purposes not deductible..................... 40 --
State taxes.................................................. 86 --
Net operating losses......................................... -- 28
---- ----
355 28
Valuation allowance....................................... -- (28)
---- ----
355 --
---- ----
Deferred tax liabilities:
Deferred loan fees........................................... (448) --
Office property and equipment................................ (35) --
---- ----
(483) --
---- ----
Net deferred income tax liability......................... $128 $--
==== ====
</TABLE>
The valuation allowance for deferred tax assets was $0 and $28,000 at
December 31, 1996 and 1995, respectively. The net change in the total
valuation allowance for the year ended December 31, 1996 was $28,000.
Deferred tax assets are initially recognized for differences between the
financial statement carrying amount and the tax bases of assets and
liabilities which will result in future deductible amounts and operating loss
and tax credit carryforwards. A valuation allowance is then established to
reduce that deferred tax asset to the level at which it is more likely than
not that the tax benefits will be realized. Realization of tax benefits of
deductible temporary differences and operating loss or tax credit
carryforwards depends on having sufficient taxable income of an appropriate
character within the carryback and carryforward periods. Sources of taxable
income that may allow for the realization of tax benefits include: (1) taxable
income in the current year or prior years that is available through carryback,
(2) future taxable income that will result from the reversal of existing
taxable temporary differences, (3) future taxable income generated by future
operations and (4) tax planning strategies that, if necessary, would be
implemented to accelerate taxable income into years in which net operating
losses might otherwise expire.
8. EMPLOYEE BENEFIT PLAN
On July 1, 1996, the Company established the New Century Financial
Corporation 401(k) Profit Sharing Plan (the Plan) for the benefit of eligible
employees and their beneficiaries. The Plan is a defined contribution 401(k)
plan which allows eligible employees to save for retirement through pretax
contributions. Under the Plan, employees of the Company may contribute up to
the statutory limit. The Company will match 25% of the first 6% of
compensation contributed by the employee. An additional Company contribution
may be made at the discretion of the Company. Contributions to the Plan by the
Company for the year ended December 31, 1996 were $47,000.
9. STOCKHOLDERS' EQUITY
Convertible Preferred Stock--On November 22, 1995, the Company issued
5,000,000 shares of Series A Preferred Stock. In December 1995, the Company
issued an additional 500,000 shares of Series A Preferred Stock. The Company
received $2.75 million from the issuances. The holders of the Series A
Preferred Stock are
F-14
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
entitled to convert each share of Series A Preferred Stock into one share of
Common Stock. Upon liquidation, the Series A Preferred Stock is entitled to
receive, in preference to any payment on Series B Preferred Stock and Common
Stock, an amount equal to $0.50 per share and a 12% annual return.
On November 22, 1995, the Company issued 320,000 shares of Series B
Preferred Stock. The Company received $160,000 from this issue. The holders of
the Series B Preferred Stock are entitled to convert each share of Series B
Preferred Stock into one share of Common Stock. Upon liquidation, after the
payments to Series A Preferred Stock as described above, the Series B
Preferred Stock is entitled to receive, in preference to any payment on Common
Stock, an amount equal to $0.50 per share and a 6% annual return.
Common Stock--On November 22, 1995, the Company issued 528,618 shares of
Common Stock. The Company received $240,000 from this issue.
Stock Split--On September 19, 1996, the Company authorized a 2-for-1 stock
split of all classes of stock. The Company also authorized an additional
1,500,000 shares each of Common Stock and Preferred Stock, the terms and
preferences of which may be determined by the Board of Directors without
further shareholder approval. All references in the consolidated financial
statements to number of shares, per share amounts and market prices of the
Company's Preferred and Common Stock have been retroactively restated to
reflect the increased number of preferred and common shares outstanding.
Warrants--Each share of Common Stock issued on November 22, 1995 had a
warrant attached which entitles the holder to purchase 2.78 shares of Common
Stock of the Company at $1.00, $2.00 and $3.00 per share. The warrants are
exercisable at any time prior to January 31, 2003.
In December 1996, the Company issued warrants to purchase an aggregate of
512,384 shares of Common Stock, exercisable at $3.50 per share, to the
Company's existing stockholders. Such warrants were granted to stockholders on
a pro rata basis in satisfaction of the stockholders' respective preemptive
rights.
10. STOCK OPTIONS
In 1995, the Company adopted and received stockholders' approval of the
qualified 1995 Stock Option Plan (the "Plan") pursuant to which the Company's
Board of Directors may grant stock options to officers and key employees. The
Plan authorizes grants of options to purchase up to 705,402 shares of
authorized but unissued Common Stock. Stock options granted under the Plan
have terms of ten years and vest over a range from December 1996 to December
2001. In addition to the Plan, in December 1996, the Company authorized
120,000 nonqualified stock options to certain executive officers of the
Company that vest in December 1999 and expire five years from the grant date.
All stock options are granted with an exercise price equal to the stock's fair
market value at the date of grant.
At December 31, 1996, there were 160,802 shares available for grant under
the Plan. Of the options outstanding at December 31, 1996 and 1995, 14,600 and
zero, respectively, were exercisable with a weighted-average exercise price of
$3.17. The per share weighted-average fair value of stock options granted
during the year ended December 31, 1996 and the period from November 17, 1995
(inception) to December 31, 1995 was $1.05 and $.20 at the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Expected life (years)......................................... 9.1 10
Risk-free interest rate....................................... 6.0% 6.0%
Volatility.................................................... 45.0% 45.0%
Expected dividend yield....................................... -- --
==== ====
</TABLE>
F-15
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company applies APB Opinion No. 25 in accounting for its plans and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," the Company's net earnings (loss) would have been reduced
to the pro forma amounts indicated below (dollars in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 17,
1995
(INCEPTION)
YEAR ENDED TO
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Net earnings (loss):
As reported................................... $1,335 $(82)
Pro forma..................................... 1,329 (82)
====== ====
</TABLE>
Stock options activity during the year ended December 31, 1996 and the
period from November 17, 1995 (inception) to December 31, 1995 is as follows:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Granted.......................................... 73,000 $ .50
Exercised........................................ -- --
Canceled......................................... -- --
------- -----
Balance at December 31, 1995................... 73,000 .50
Granted.......................................... 595,600 1.92
Exercised........................................ -- --
Canceled......................................... (4,000) 0.50
------- -----
Balance at December 31, 1996................... 664,600 $1.77
======= =====
</TABLE>
At December 31, 1996, the range of exercise prices, the number outstanding,
weighted-average remaining term and weighted-average exercise price of options
outstanding and the number exercisable and weighted-average price of options
currently exercisable are as follows:
<TABLE>
<CAPTION>
WEIGHTED- WEIGHTED- WEIGHTED-
RANGE OF NUMBER AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING REMAINING TERM EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- -------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.50 -- 0.50 282,000 9.67 $0.50 14,600 $0.50
1.75 -- 1.75 174,000 9.75 1.75 -- --
3.50 -- 3.50 208,600 10.00 3.50 -- --
======== ======= ===== ===== ====== =====
</TABLE>
F-16
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. GENERAL AND ADMINISTRATIVE EXPENSES
A summary of general and administrative expenses follows (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995
------ ----
<S> <C> <C>
Occupancy.................................................... $ 389 $--
Telephone.................................................... 336 --
Travel and entertainment..................................... 277 6
Depreciation and amortization................................ 260 --
Office supplies.............................................. 238 2
Postage and courier.......................................... 204 --
Equipment rental............................................. 184 --
Other administrative expenses................................ 568 3
------ ----
$2,456 $ 11
====== ====
</TABLE>
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments is made using estimated fair value amounts that have been
determined using available market information and appropriate valuation
methodologies. However, considerable judgment is necessarily required to
interpret market data to develop the estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts that
could be realized in a current market exchange. The use of different market
assumptions or estimation methodologies may have a material impact on the
estimated fair value amounts.
The estimated fair values of the Company's financial instruments as of
December 31, 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
CARRYING FAIR
VALUE VALUE
-------- -------
<S> <C> <C>
Financial assets:
Cash and cash equivalents............................. $ 3,041 $ 3,041
Loans receivable held for sale, net................... 57,990 61,210
Financial liabilities:
Warehouse lines of credit............................. 55,659 55,659
Notes payable......................................... 1,326 1,326
======= =======
</TABLE>
The following methods and assumptions were used in estimating the Company's
fair value disclosures for financial instruments.
Cash and cash equivalents: The fair value of cash and cash equivalents
approximates the carrying value reported in the balance sheet.
Loans receivable held for sale: The fair value of loans receivable held for
sale is determined in the aggregate based on outstanding whole loan
commitments from investors or current investor yield requirements.
Warehouse lines of credit: The carrying value reported in the balance sheet
approximates fair value as the warehouse lines of credit are due upon demand
and bear interest at a rate that approximates current market interest rates
for similar type lines of credit.
Notes payable: The fair value of notes payable is determined by discounting
expected cash payments at the current market interest rate over the term of
the notes payable.
F-17
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
13. CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
The following is condensed information as to the financial condition, results
of operations and cash flows of New Century Financial Corporation (dollars in
thousands):
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1995
ASSETS ------- ------
<S> <C> <C>
Cash and cash equivalents....................................... $ 4 $1,151
Investment in subsidiary........................................ 4,273 1,913
Other assets.................................................... 136 53
------- ------
$ 4,413 3,117
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities............................................... $ 10 $ 49
Stockholders' equity............................................ 4,403 3,068
------- ------
$ 4,413 $3,117
======= ======
</TABLE>
CONDENSED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 17,
1995
(INCEPTION)
YEAR ENDED TO
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Interest income....................................... $ 17 $ 5
Equity in earnings (loss) of subsidiary............... 1,419 (87)
------ ----
1,436 (82)
------ ----
Personnel............................................. 104 --
General and administrative............................ 46 --
Professional services................................. 10 --
------ ----
160 --
------ ----
Earnings (loss) before income tax benefit........... 1,276 (82)
Income tax benefit.................................... (59) --
------ ----
Net earnings (loss)................................. $1,335 $(82)
====== ====
</TABLE>
F-18
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 17,
1995
(INCEPTION)
YEAR ENDED TO
DECEMBER 31, DECEMBER 31,
1996 1995
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)................................ $ 1,335 $ (82)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 11 --
Increase in other assets......................... (94) (53)
Increase (decrease) in other liabilities......... (39) 49
Equity in earnings (loss) of subsidiary.......... (1,419) 87
Net cash provided by (used in) operating
activities.................................... (206) 1
------- -------
Cash flows from investing and financing activities:
Investment in subsidiary........................... (941) (2,000)
Proceeds from issuance of stock.................... -- 3,150
------- -------
(941) 1,150
------- -------
Net increase (decrease) in cash................ (1,147) 1,151
Cash and cash equivalents, beginning of period....... 1,151 --
------- -------
Cash and cash equivalents, end of period............. $ 4 $ 1,151
======= =======
</TABLE>
14. UNAUDITED PRO FORMA STATEMENT OF EARNINGS AND EARNINGS PER SHARE
Pro Forma net earnings for the year ended December 31, 1996 represents the
results of operations adjusted to reflect the effect of the revised employment
agreements and the revised calculation of incentive compensation amounts for
the Founding Managers which took effect on May 30, 1997.
Pro Forma earnings per share has been computed by dividing pro forma net
earnings by the pro forma weighted average number of shares outstanding. In
accordance with a regulation of the Securities and Exchange Commission, the
pro forma weighted average number of shares includes all options and warrants
issued below the estimated initial public offering price within one year prior
to the filing of the Registration Statement for the initial public offering
and is calculated using the treasury stock method. Historical earnings per
share is not presented because it is not indicative of the ongoing entity.
F-19
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
MARCH 31,
1997 MARCH 31, DECEMBER 31,
ASSETS (NOTE 5) 1997 1996
------ --------- --------- ------------
<S> <C> <C> <C>
Cash and cash equivalents.................... $ 3,747 $ 3,747 $ 3,041
Loans receivable held for sale, net (notes 2
and 4)...................................... 113,162 113,162 57,990
Accrued interest receivable.................. 364 364 786
Residual interests in securitization (note
3).......................................... 13,243 13,243 --
Office property and equipment................ 1,990 1,990 1,620
Prepaid expenses and other assets............ 2,240 1,076 1,201
--------- -------- --------
$ 134,746 $133,582 $ 64,638
========= ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Warehouse lines of credit (note 4)........... $ 106,731 $110,534 $ 55,659
Residual financing (note 4).................. 7,248 7,248 --
Notes payable................................ 1,869 3,119 1,326
Income taxes payable......................... 67 131 839
Accounts payable and accrued liabilities..... 4,193 4,041 2,283
Deferred income taxes........................ 1,759 1,759 128
--------- -------- --------
$ 121,867 126,832 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 (Pro Forma outstanding
10,992,374 shares)........................ 110 6 6
Additional paid-in capital................. 12,032 3,086 3,086
Retained earnings, restricted.............. 3,512 3,600 1,253
--------- -------- --------
15,654 6,750 4,403
Deferred compensation costs.............. (2,775) -- --
--------- -------- --------
12,879 6,750 4,403
--------- -------- --------
Contingencies (note 7)
Subsequent events (notes 6 and 7)
$ 134,746 $133,582 $ 64,638
========= ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-20
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, MARCH 31,
1997 -------------
(NOTE 5) 1997 1996
------------ ------- -----
<S> <C> <C> <C>
Revenues
Gain on sale of loans (note 2)................... $ 10,012 $10,012 $ --
Interest income.................................. 2,271 2,271 39
Servicing fees................................... 302 302 --
---------- ------- -----
Total revenues................................. 12,585 12,585 39
---------- ------- -----
Expenses:
Personnel........................................ 3,697 3,545 584
General and administrative....................... 1,954 1,954 144
Interest......................................... 1,808 1,808 14
Advertising and promotion........................ 842 842 106
Servicing........................................ 234 234 --
Professional services............................ 156 156 51
---------- ------- -----
Total expenses................................. 8,691 8,539 899
---------- ------- -----
Earnings (loss) before income taxes (benefit).. 3,894 4,046 (860)
Income taxes (benefit)............................. 1,635 1,699 (362)
---------- ------- -----
Net earnings (loss)............................ $ 2,259 $ 2,347 $(498)
========== ======= =====
Pro forma earnings per share....................... $ 0.19
==========
Pro forma weighted average number of shares
outstanding....................................... 11,643,207
==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-21
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
---------------------
1997 1996
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)................................ $ 2,347 $ (498)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization.................... 286 27
Deferred income taxes............................ 1,631 (362)
Gain on sale of loans............................ (10,398) --
Net interest receivables collected............... (311) --
Over-collateralization amount released........... 311 --
Provision for losses............................. 495 --
Loans originated or acquired for sale............ (251,652) (4,252)
Loan sales, net.................................. 194,848 --
Principal payments of loans receivable held for
sale............................................ 1,257 --
Initial over-collateralization amount............ (2,973) --
(Increase) decrease in accrued interest
receivable...................................... 422 (2)
(Increase) decrease in prepaid expenses and other
assets.......................................... 122 (376)
Increase in warehouse lines of credit............ 54,875 4,080
Decrease in income taxes payable................. (708) --
Increase in accounts payable and accrued
liabilities..................................... 1,638 4
---------- --------
Net cash (used in) operating activities........ (7,810) (1,379)
---------- --------
Cash flows from investing activities--purchase of
office property and equipment....................... (525) (351)
---------- --------
Cash flows from financing activities:
Net proceeds from notes payable.................... 1,793 --
Net proceeds from residual financing............... 7,248 --
---------- --------
Net cash provided by financing activities...... 9,041 --
---------- --------
Net increase (decrease) in cash and cash
equivalents................................... 706 (1,730)
Cash and cash equivalents at beginning of period..... 3,041 3,029
---------- --------
Cash and cash equivalents at end of period........... $ 3,747 $ 1,299
========== ========
Supplemental cash flow disclosure:
Interest paid...................................... $ 1,730 $ 2
Income taxes....................................... 776 2
========== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-22
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MARCH 31, 1997 AND 1996
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three month
period ended March 31, 1997 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1997. For further information,
refer to the consolidated financial statements and footnotes thereto for the
year ended December 31, 1996 included elsewhere herein.
Recent Accounting Developments--In June 1996, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards No.
125 (FASB No. 125), "Accounting for Transfer and Servicing of Financial Assets
and Extinguishment of Liabilities." FASB No. 125 addresses the accounting for
all types of securitization transactions, securities lending and repurchase
agreements, collateralized borrowing arrangements and other transactions
involving the transfer of financial assets. FASB No. 125 distinguishes
transfers of financial assets that are sales from transfers that are secured
borrowings. FASB No. 125 requires the Company to allocate its basis in the
mortgage loans between the portion of the mortgage loans sold through mortgage
backed securities and the portion retained (the residual interests) based on
the relative fair values of those portions on the date of the sale. The
pronouncement requires the Company to account for the residual interests as
"held-for-trading" securities which are to be recorded at fair value in
accordance with SFAS No. 115. The Company adopted FASB No. 125 on January 1,
1997.
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, (FASB No. 128), "Earnings
Per Share." FASB No. 128 supersedes APB Opinion No. 15, (APB 15), "Earnings
Per Share" and specifies the computation, presentation, and disclosure
requirements for earnings per share (EPS) for entities with publicly held
common stock or potential common stock. FASB No. 128 was issued to simplify
the computation of EPS and to make the U.S. standard more compatible with the
EPS standards of other countries and that of the International Accounting
Standards Committee (IASC). It replaces the presentation of primary EPS with a
presentation of basic EPS and fully diluted EPS with diluted EPS.
Basic EPS, unlike primary EPS, excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Diluted EPS is computed similarly to fully diluted EPS under APB No. 15.
FASB No. 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted. After adoption, all prior-period EPS data presented shall be
restated to conform with FASB No. 128. The Company has determined that this
statement will increase the earnings per share computation under Basic EPS as
compared to primary EPS.
F-23
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
FASB No. 129, Disclosure of Information about Capital Structure, is
effective for financial statements for periods ending after December 15, 1997.
It is not expected that the issuance of FASB No. 129 will require significant
revision of prior disclosures since the Statement lists required disclosures
that had been included in a number of previously existing separate statements
and opinions.
Residual interests in securitizations--of real estate mortgage investment
conduits (REMICs) are recorded as a result of the sale of loans through
securitization. At the closing of each securitization, the Company removes
from its balance sheet the mortgage loans held for sale and adds to its
balance sheet (i) the cash received, (ii) the estimated fair value of the
residuals from the securitizations which consists of (a) an
overcollateralization amount (OC) and (b) a net interest receivable (NIR). The
excess of the cash received and assets retained by the Company over the
carrying value of the loans sold, less transaction costs, equals the gain on
sale of loans recorded by the Company.
The Company allocates its basis in the mortgage loans between the portion of
the mortgage loans sold through mortgage backed securities (the senior
certificates) and the portion retained (the residual interests) based on the
relative fair values of those portions on the date of the sale.
The Company may recognize gains or losses attributable to the change in the
fair value of the residual interests, which are recorded at estimated fair
value and accounted for as "held-for-trading" securities. The Company is not
aware of an active market for the purchase or sale of residual interests;
accordingly, the Company estimates fair value of the residual interests by
calculating the present value of the estimated expected future cash flows
using a discount rate commensurate with the risks involved.
NIRs are determined by using the amount of the excess of the weighted-
average coupon on the loans sold over the sum of: (1) the coupon on the senior
certificates, (2) a base servicing fee paid to the servicer of the loans, (3)
expected losses to be incurred on the portfolio of loans sold over the lives
of the loans and (4) other expenses and revenues, which includes anticipated
prepayment penalties. The significant assumptions used by the Company to
estimate NIR cash flows are anticipated prepayments and estimated credit
losses. The Company estimates prepayments by evaluating historical prepayment
performance of comparable loans and the impact of trends in the industry. The
Company estimates credit losses using available historical loss data for
comparable loans and the specific characteristics of the loans included in the
Company's securitizations.
The OC represents the portion of the loans which are held by the trust as
overcollateralization for the senior certificates sold and along with a
certificate guarantor insurance policy serves as credit enhancement to the
senior certificate holders. The OC initially consists of the excess of the
principal balance of the mortgage loans sold to the trust, less the principal
balance of the certificates sold to investors. The OC is required to be
maintained at a specified target level of the principal balance of the
certificates, which can be increased significantly in the event delinquencies
and or losses exceed certain specified levels. Cash flows received by the
trust in excess of the obligations of the trust are deposited into the
overcollateralization account until the target OC is reached. Once the target
OC is reached, distributions of excess cash are remitted to the Company.
F-24
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. LOANS RECEIVABLE HELD FOR SALE
A summary of loans receivable held for sale, at the lower of cost or market
at March 31, 1997 and December 31, 1996 follows (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
Mortgage loans receivable.......................... $112,723 $57,701
Net deferred origination costs..................... 439 289
-------- -------
$113,162 $57,990
======== =======
</TABLE>
Gain on Sale of Loans--Gain on sale of loans for the three months ended
March 31, 1997 and 1996 was comprised of the following components (dollars in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- ----
<S> <C> <C>
Gain from whole loan
sale transactions and
securitization.......... $11,903 $--
Unrealized gain on held-
for-trading securities. 1,267 --
Provision for losses.... (495) --
Nonrefundable fees...... 3,311 --
Premiums, net........... (1,803) --
Origination costs....... (4,171) --
------- ----
$10,012 $--
======= ====
</TABLE>
3. RESIDUAL INTERESTS IN SECURITIZATION
Residual interests in securitization consists of the following components at
March 31, 1997 (dollars in thousands):
<TABLE>
<S> <C>
Over-collateralization amount.................................... $ 2,973
Net interest receivable (NIR).................................... 10,270
-------
$13,243
=======
</TABLE>
The following table summarizes activity in NIR interests at March 31, 1997
(dollars in thousands):
<TABLE>
<S> <C>
Balance, beginning of period..................................... $ --
NIR recognized................................................... 10,398
Amortization..................................................... (128)
-------
Balance, end of period........................................... $10,270
=======
</TABLE>
F-25
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. WAREHOUSE LINES OF CREDIT
Warehouse lines of credit consist of the following at March 31, 1997 and
December 31, 1996 (dollars in thousands):
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
A $85 million line of credit expiring in May 1998
secured by loans receivable held for sale,
bearing interest based on one month LIBOR (5.71%
at March 31, 1997)............................... $ 65,803 $41,702
A $175 million master repurchase agreement bearing
interest based on one month LIBOR (5.71% at March
31, 1997). The agreement may be terminated by the
lender giving 28 days written notice............. 44,731 13,957
-------- -------
110,534 55,659
A residual financing line renewable monthly,
secured by residual interests in securitization
bearing interest based on one month LIBOR (5.71%
at March 31, 1997)............................... 7,248 --
-------- -------
$117,782 $55,659
======== =======
</TABLE>
The warehouse line of credit agreements contain certain restrictive
financial and other covenants which require the Company to, among other
requirements, restrict dividends, maintain certain levels of net worth,
liquidity of at least $1.5 million, debt to net worth ratios and maintenance
of compliance with regulatory and investor requirements. At March 31, 1997,
the Company was in compliance with these financial and other covenants.
Advances under the residual financing line are made at the sole discretion
of the lender and are based upon a percentage of the amount of loans
securitized.
5. UNAUDITED PRO FORMA FINANCIAL INFORMATION
The pro forma financial information shows what the significant effects on
the historical financial information would have been had the Company revised
the employment agreements and the calculation of incentive compensation
amounts. The following pro forma adjustments have been made for the three
months ended March 31, 1997.
Pro forma net earnings for the three months ended March 31, 1997 represents
the results of operations adjusted to reflect the effect of the revised
employment agreements and the revised calculation of incentive compensation
amounts for the Founding Managers which took effect on May 30, 1997. The
adjustment for the retroactive application of the revised salary for fiscal
1997 will be earned by the Founding Managers as of May 30, 1997.
Pro forma earnings per share for the three months ended March 31, 1997 has
been computed by dividing pro forma net earnings by the pro forma weighted
average number of shares outstanding. In accordance with a regulation of the
Securities and Exchange Commission, the pro forma weighted average number of
shares includes all options and warrants issued below the estimated initial
public offering price within one year prior to the filing of the Registration
Statement for the initial public offering and is calculated using the treasury
stock method. Historical earnings per share is not presented because it is not
indicative of the ongoing entity.
F-26
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pro forma balance sheet information as of March 31, 1997 has been presented
to reflect the adjustments for the revision of employment agreements,
calculation of incentive compensation amounts, the grants of restricted stock
awards, stocks issued to Comerica Inc. for cash consideration, net of costs,
of $3,987,500, stock warrants issued to Comerica Inc., the exercise of
outstanding warrants and the conversion of Series A Preferred Stock and Series
B Preferred Stock, which took effect on May 30, 1997. The pro forma balance
sheet does not reflect the sale of common shares in the initial public
offering.
6. STOCK OPTIONS
In 1995, the Company adopted and received stockholders' approval of the
qualified 1995 Stock Option Plan (the "Plan") pursuant to which the Company's
Board of Directors may grant stock options to officers and key employees. The
Plan authorizes grants of options to purchase up to 705,402 shares of
authorized but unissued Common Stock. Stock options granted under the Plan
have terms of ten years and vest over a range from December 1996 to December
2001. In addition to the Plan, in December 1996, the Company authorized
120,000 nonqualified stock options to certain executive officers of the
Company that vest in December 1999 and expire five years from the grant date.
All stock options are granted with an exercise price equal to the stock's fair
market value at the date of grant.
At March 31, 1997, there were 172,802 shares available for grant under the
Plan. Of the options outstanding at March 31, 1997, 21,450 were exercisable
with a weighted-average price of $0.50.
Stock options activity during the three months ended March 31, 1997 is as
follows:
<TABLE>
<CAPTION>
WEIGHTED-
NUMBER OF AVERAGE
SHARES EXERCISE PRICE
--------- --------------
<S> <C> <C>
Balance at December 31, 1996..................... 664,000 $1.77
Granted........................................ -- --
Exercised...................................... -- --
Canceled....................................... (12,000) 0.92
------- -----
Balance at March 31, 1997.................... 652,600 $1.74
======= =====
</TABLE>
In May 1997, the Company's Board of Directors increased the stock options
that may be granted under the Plan to 2 million shares.
As of May 31, 1997, the Company had a balance of 1,267,520 shares granted
that were outstanding at a weighted-average price of $5.17 per share.
On May 31, 1997, the stock warrants issued in November 1995 and December
1996, were exercised by the respective warrantholders. Certain warrantholders
exercised their warrants by paying the exercise price of the warrants with
shares of common stock of the Company. Such shares of common stock were
credited toward the exercise price at the fair market value of the Common
Stock.
7. CONTINGENCIES
The Company has entered into loan sale agreements with investors in the
normal course of business which include standard representations and
warranties customary to the mortgage banking industry. Violations of these
representations and warranties may require the Company to repurchase loans
previously sold or to reimburse investors for losses incurred. In the opinion
of management, the potential exposure related to the Company's loan sale
agreements will not have a material adverse effect on the financial position
and operating results of the Company.
F-27
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company sold loans in September and December 1996 under an agreement to
repurchase those loans which were delinquent at a specific date in December
1996 and January 1997. In accordance with this loan sale agreement, the
Company repurchased loans with an outstanding principal balance of
approximately $3.5 million in the quarter ended March 31, 1997 and $1.7
million for the year ended December 31, 1996.
At March 31, 1997 and December 31, 1996, included in other liabilities are
$220,000 and $100,000, respectively, in allowances for repurchase losses
related to possible off-balance sheet recourse and repurchase agreement
provisions.
The activity in the allowance related to possible off-balance sheet recourse
and repurchase agreement provisions is summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
1997 1996
--------- ------------
<S> <C> <C>
Balance, beginning of period.......................... $100 $ --
Provisions for losses................................. 495 706
Charge-offs, net...................................... (375) (606)
---- ----
Balance, end of period................................ $220 $100
==== ====
</TABLE>
The Company has issued to Comerica warrants to purchase 100,000 shares of
Common Stock and has agreed to issue warrants to purchase, subject to the
completion of certain performance events by Comerica, an additional of 233,333
shares of Common Stock. The warrants are exercisable over five years at an
exercise price equal to the initial public offering price of the Company's
Common Stock, subject to vesting in equal installments on December 31, 1997,
1998 and 1999.
F-28
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations other than those contained in this
Prospectus in connection with the offer made in this Prospectus and, if given
or made, such information or representations must not be relied upon as having
been authorized by the Company, any of the Underwriters or the Selling
Stockholders. This Prospectus does not constitute an offer to sell or a
solicitation of any offer to buy any shares of Common Stock other than the
shares of Common Stock to which it relates or an offer to, or a solicitation
of, any person in any jurisdiction where such an offer or solicitation would be
unlawful. Neither the delivery of this Prospectus nor any sale made hereunder
shall, under any circumstances, create any implication that the information
contained herein is correct as of any time subsequent to the date hereof.
-------------------
TABLE OF CONTENTS
-------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 3
Risk Factors............................................................... 10
Use of Proceeds............................................................ 22
Dividend Policy............................................................ 22
Dilution................................................................... 22
Capitalization............................................................. 24
Selected Consolidated Financial and Other Data............................. 25
Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ 28
Business................................................................... 39
Management................................................................. 58
Certain Relationships and Related Transactions............................. 68
Beneficial Ownership of Securities and Selling Stockholders................ 69
Description of Capital Stock............................................... 70
Shares Eligible for Future Sale............................................ 73
Underwriting............................................................... 74
Legal Matters.............................................................. 75
Experts.................................................................... 75
Available Information...................................................... 76
Index to Consolidated Financial Statements................................. F-1
</TABLE>
Until , 1997 (25 days after the date of this Prospectus), all dealers ef-
fecting transactions in the registered securities, whether or not participating
in this distribution, may be required to deliver a Prospectus. This is in addi-
tion to the obligation of the dealers to deliver a Prospectus when acting as
underwriters and with respect to their unsold allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,500,000 SHARES
[LOGO of New Century FINANCIAL CORPORATION]
COMMON STOCK
----------------
PROSPECTUS
----------------
MONTGOMERY SECURITIES
PIPER JAFFRAY INC.
, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses, other than the underwriting
discount, payable by the Company in connection with the issuance and
distribution of the Common Stock being registered. All amounts are estimates
except the Securities and Exchange Commission registration fee, the NASD
filing fee and the Nasdaq listing fee.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee........... $ 12,806.00
NASD filing fee............................................... 4,686.00
Nasdaq listing fee............................................ 42,116.00
Accounting fees and expenses.................................. 225,000.00
Legal fees and expenses....................................... 325,000.00
Blue Sky qualification fees and expenses...................... 10,000.00
Printing and engraving expenses............................... 100,000.00
Transfer agent and registrar fees............................. 2,000.00
Road show expenses............................................ 50,000.00
Miscellaneous................................................. 28,392.00
-----------
Total....................................................... $800,000.00
===========
</TABLE>
The Company intends to pay all expenses of registration, issuance and
distribution, excluding the underwriters' discount and commissions, with
respect to the shares being sold by the Selling Stockholders.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation provides that to the fullest
extent permitted by applicable law a director of the Company shall not be
liable to the Company or its stockholders for monetary damages for breach of
fiduciary duty as a director. Under the DGCL, liability of a director may not
be limited (i) for any breach of the director's duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or that
involve intentional misconduct or a knowing violation of law, (iii) in respect
of certain unlawful dividend payments or stock redemptions or repurchases and
(iv) for any transaction from which the director derives an improper personal
benefit. The effect of the provisions of the Company's Certificate of
Incorporation is to eliminate the rights of the Company and its stockholders
(through stockholders' derivative suits on behalf of the Company) to recover
monetary damages against a director for breach of the fiduciary duty of care
as a director (including breaches resulting from negligent or grossly
negligent behavior), except as provided in the situations described in clauses
(i) through (iv) above. This provision does not limit or eliminate the rights
of the Company or any stockholder to seek nonmonetary relief such as an
injunction or rescission in the event of a breach of a director's duty of
care.
The Bylaws of the Company provide that the Company will indemnify its
directors and officers to the fullest extent permitted by the DGCL. In
addition, the Company has entered into agreements with each of the directors
and officers of the Company pursuant to which the Company has agreed to
indemnify, subject to certain limitations, such director or officer from
claims, liabilities, damages, expenses, losses, costs, penalties or amounts
paid in settlement incurred by such director or officer in or arising out of
his capacity as a director, officer, employee and/or agent of the Company or
any other corporation of which such person is a director or officer at the
request of the Company to the maximum extent provided by applicable law. In
addition, such director or officer is entitled to an advance of expenses to
the maximum extent authorized or permitted by law.
II-1
<PAGE>
The Form of Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Company and
its directors and officers for certain liabilities arising under the
Securities Act or otherwise.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following is an historical summary of transactions by the Company since
its incorporation involving sales of the Company's securities that were not
registered under the Securities Act. The numbers are not adjusted to reflect
the 2-for-1 stock split effected by the Company.
In November 1995, the Company issued 2,000,000 shares of Series A Preferred
Stock to Cornerstone Fund, I, L.L.C. for $2,000,000, 100,000 shares of Series
A Preferred Stock to MMSPC Defined Benefit Plan for $100,000, 100,000 shares
of Series A Preferred Stock to Harlan W. Smith for $100,000, 100,000 shares of
Series A Preferred Stock to Harcol Limited Partnership for $100,000, 100,000
shares of Series A Preferred Stock to David Krinsky for $100,000 and 100,000
shares of Series A Preferred Stock to Cornerstone Equity Partners, L.L.C. for
$100,000. The sale and issuance of securities described in this paragraph were
exempt from the registration requirements of the Securities Act by virtue of
Section 4(2) of the Securities Act and Regulation D thereunder.
In November 1995, the Company issued 70,000 shares of Series B Preferred
Stock to Robert K. Cole for $70,000, 70,000 shares of Series B Preferred Stock
to Brad A. Morrice for $70,000 and 20,000 shares of Series B Preferred Stock
to Edward F. Gotschall for $20,000. The sale and issuance of securities
described in this paragraph were exempt from the registration requirements of
the Securities Act by virtue of Section 4(2) of the Securities Act and
Regulation D thereunder.
In November 1995, the Company issued 88,103 units each consisting of one
share of Common Stock together with a warrant ("Warrant") to purchase 7.68505
shares of Common Stock ("Units") to Robert K. Cole for $80,000, 88,103 Units
to Brad A. Morrice for $80,000 and 88,103 Units to Edward F. Gotschall for
$80,000. In December 1995, the Company increased the total number of shares of
Common Stock issuable under each of the Warrants by 57,884 shares, from
677,076 to 734,960 shares. The sale and issuance of securities described in
this paragraph were exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) of the Securities Act and Regulation
D thereunder.
In December 1995, the Company issued 150,000 shares of Series A Preferred
Stock to Michael M. Sachs for $150,000, 75,000 shares of Series A Preferred
Stock to Martin F. Ryan, Ltd. Defined Benefit Pension Plan for $75,000 and
25,000 shares of Series A Preferred Stock to Oak Craft Inc. Employees Profit
Sharing Plan for $25,000. The sale and issuance of securities described in
this paragraph were exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) of the Securities Act and Regulation
D thereunder.
In December 1996, the Company issued an option to purchase 40,000 shares of
Common Stock, exercisable at $3.50 per share, to Edward F. Gotschall and an
option to purchase 80,000 shares of Common Stock, exercisable at $3.50 per
share, to Steve Holder. The sale and issuance of securities described in this
paragraph were exempt from the registration requirements of the Securities Act
by virtue of Section 4(2) of the Securities Act and Regulation D thereunder.
In December 1996, the Company issued warrants to purchase the following
number of shares of Common Stock, exercisable at $3.50 per share, to the
following stockholders in satisfaction of their preemptive rights: Cornerstone
Fund I, L.L.C. (220,656 shares), Westrec Rollover PS Plan (11,032 shares),
Michael M. Sachs (16,550 shares), Harlan W. Smith (11,032 shares), Harcol
Limited Partnership (11,032 shares), David Krinsky (11,032 shares),
Cornerstone Equity Partners, L.L.C. (11,032 shares), Oak Craft Inc. Employees
Profit Sharing Plan (2,758 shares), Martin F. Ryan, Ltd. Defined Benefit
Pension Plan (8,274 shares), Robert K. Cole (55,556 shares), Brad A. Morrice
(54,453 shares), Samantha H. Morrice Trust (1,103), Edward F. Gotschall
(50,040 shares), and Steve Holder (47,834 shares). The sale and issuance of
securities described in this paragraph were exempt from the registration
requirements of the Securities Act by virtue of Section 4(2) of the Securities
Act and Regulation D thereunder.
II-2
<PAGE>
In May 1997, the Company issued to the following stockholders the following
number of shares of Common Stock upon the exercise by such stockholders of
certain Warrants to Purchase Common Stock of the Company at exercise prices
ranging from $1.00 to $3.50 per share: Cornerstone Fund I, L.L.C. (220,656
shares), Westrec Rollover PS Plan (11,032 shares), Michael M. Sachs (16,550
shares), Harlan W. Smith (11,032 shares), Harcol Limited Partnership (11,032
shares), David Krinsky (11,032 shares), Cornerstone Equity Partners, L.L.C.
(11,032 shares), Oak Craft Inc. Employees Profit Sharing Plan (2,758 shares),
Martin F. Ryan, Ltd. Defined Benefit Pension Plan (8,274 shares), Robert K.
Cole (858,080 shares), Brad A. Morrice (858,563 shares), Samantha H. Morrice
Trust (1,103 shares), Edward F. Gotschall (854,978 shares), and Steve Holder
(853,737 shares). The sale and issuance of securities described in this
paragraph were exempt from the registration requirements of the Securities Act
by virtue of Section 4(2) of the Securities Act and Regulation D thereunder.
In May 1997, the Company issued to the following stockholders the following
number of shares of Common Stock upon the conversion by such stockholders of
shares of Series A and B Preferred Stock of the Company: Cornerstone Fund I,
L.L.C. (4,000,000 shares), Westrec Rollover PS Plan (200,000 shares), Michael
M. Sachs (300,000 shares), Harlan W. Smith (200,000 shares), Harcol Limited
Partnership (200,000 shares), David Krinsky (200,000 shares), Cornerstone
Equity Partners, L.L.C. (200,000 shares), Oak Craft Inc. Employees Profit
Sharing Plan (50,000 shares), Martin F. Ryan, Ltd. Defined Benefit Pension
Plan (150,000 shares), Robert K. Cole (140,000 shares), Brad A. Morrice
(120,000 shares), Samantha H. Morrice Trust (20,000 shares) and Edward F.
Gotschall (40,000 shares). The sale and issuance of securities described in
this paragraph were exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) of the Securities Act and Regulation
D thereunder.
In May 1997, the Company issued to Comerica 545,000 shares of Common Stock
for $4,087,500. The sale and issuance of securities described in this
paragraph were exempt from the registration requirements of the Securities Act
by virtue of Section 4(2) of the Securities Act and Regulation D thereunder.
From time to time since its incorporation, the Company issued stock options
to purchase Common Stock pursuant to the Company's 1995 Stock Option Plan to
officers and employees of the Company. During the period referred to above, no
options granted pursuant to the 1995 Stock Option Plan were exercised. With
respect to these grants of options, exemption from registration under the
Securities Act was unnecessary in that the transaction did not involve a
"sale" of securities as such term in used in Section 2(3) of the Securities
Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement
* 3.1 Certificate of Incorporation of the Company
* 3.2 First Amended and Restated Certificate of Incorporation of the Company
* 3.3 Bylaws of the Company
* 3.4 First Amended and Restated Bylaws of the Company
4.1 Specimen stock certificate
5.1 Opinion of O'Melveny & Myers LLP
10.1 Form of Indemnity Agreement between the Company and each of its
executive officers and directors
*10.2 1995 Stock Option Plan
*10.3 Founding Managers' Incentive Compensation Plan
*10.4 Agreement by and between New Century Mortgage Corporation and Advanta
Mortgage Corporation U.S.A. dated April 4, 1996, as amended on January
1, 1997
*10.5 Sub-Servicing Agreement by and between New Century Mortgage
Corporation and Advanta Mortgage Corp. USA dated February 1, 1997
*10.6 Amended and Restated Credit Agreement by and between New Century
Mortgage Corporation and First Bank National Association dated October
25, 1996, as amended on December 31, 1996, March 14, 1997, March 28,
1997 and April 16, 1997
*10.7 Form of Warrant to Purchase Common Stock
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
*10.8 Pooling and Servicing Agreement by and among Salomon Brothers Mortgage
Securities VII, Inc. ("Salomon"), New Century Mortgage Corporation and
First Trust National Association, dated February 1, 1997, incorporated
by reference from the Form 8-K, dated February 27, 1997, filed by
Salomon with the Securities and Exchange Commission
*10.9 Agreement by and between Salomon Brothers Realty Corp. and New Century
Mortgage dated November 4, 1996
*10.10 Form of Founding Managers' Employment Agreement
*10.11 Office Building Lease by and between Koll Center Irvine Number Two and
New Century Financial Corporation dated April 11, 1997
*10.12 Registration Rights Agreement, dated May 30, 1997, by and among the
Company and certain stockholders of the Company
*10.13 Form of Equalization Option granted to two executive officers of the
Company
*10.14 Amended and Restated 1995 Stock Option Plan
10.15 Stock Purchase Agreement, dated May 30, 1997, by and between the
Company and Comerica
*10.16 New Century Financial Corporation Warrant to Purchase Common Stock
issued to Comerica on
May 30, 1997
11.1 Statement re: Computation of Pro forma Earnings Per Share
*21.1 List of Subsidiaries
23.1 Consent of KPMG Peat Marwick LLP
*23.2 Consent of O'Melveny & Myers LLP (included in Exhibit 5.1)
*24.1 Power of Attorney (contained on page II-5)
*27.1 Financial Data Schedule
</TABLE>
- --------
* Previously filed.
(b) Financial Statement Schedules.
All schedules are omitted because they are not required, are not applicable,
or the information is included in the Consolidated Financial Statements or
notes thereto.
ITEM 17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the closing specified in the Underwriting Agreement
certificates in the denominations and registered in the names as required by
the Underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted to directors, officers
and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether the indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of a
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of the registration
statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Act, each post-
effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of those securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Minneapolis, State of Minnesota, on the 17th day of June, 1997.
NEW CENTURY FINANCIAL CORPORATION
By: /s/ Brad A. Morrice
----------------------------------
Brad A. Morrice
President
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
*
- ------------------------ Chairman of the Board, Chief June 17, 1997
Robert K. Cole Executive Officer and Director
/s/ Brad A. Morrice Vice Chairman of the Board, June 17, 1997
- ------------------------ President, General Counsel, Secretary
Brad A. Morrice and Director
* Vice Chairman of the Board, Chief June 17, 1997
- ------------------------ Operating Officer--
Edward F. Gotschall Finance/Administration and Director
(Principal Financial and
Accounting Officer)
* Vice Chairman of the Board, Chief June 17, 1997
- ------------------------ Operating Officer--Loan
Steven G. Holder Production/Operations and Director
*
- ------------------------ Director June 17, 1997
John C. Bentley
*
- ------------------------ Director June 17, 1997
Sherman I. Chu
*
- ------------------------ Director June 17, 1997
Harlan W. Smith
*
- ------------------------ Director June 17, 1997
Martin F. Ryan
*
- ------------------------ Director June 17, 1997
Michael M. Sachs
*By: /s/ Brad A. Morrice June 17, 1997
--------------------
Brad A. Morrice
Attorney-in-fact
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION NUMBERED PAGE
------- ----------- -------------
<C> <S> <C>
1.1 Form of Underwriting Agreement
* 3.1 Certificate of Incorporation of the Company
* 3.2 First Amended and Restated Certificate of
Incorporation of the Company
* 3.3 Bylaws of the Company
* 3.4 First Amended and Restated Bylaws of the Company
4.1 Specimen stock certificate
5.1 Opinion of O'Melveny & Myers LLP
10.1 Form of Indemnity Agreement between the Company and
each of its executive officers and directors
*10.2 1995 Stock Option Plan
*10.3 Founding Managers' Incentive Compensation Plan
*10.4 Agreement by and between New Century Mortgage
Corporation and Advanta Mortgage Corporation U.S.A.
dated April 4, 1996, as amended on January 1, 1997
*10.5 Sub-Servicing Agreement by and between New Century
Mortgage Corporation and Advanta Mortgage Corp. USA
dated February 1, 1997
*10.6 Amended and Restated Credit Agreement by and between
New Century Mortgage Corporation and First Bank
National Association dated October 25, 1996, as
amended on December 31, 1996, March 14, 1997, March
28, 1997 and April 16, 1997
*10.7 Form of Warrant to Purchase Common Stock
*10.8 Pooling and Servicing Agreement by and among Salomon
Brothers Mortgage Securities VII, Inc. ("Salomon"),
New Century Mortgage Corporation and First Trust
National Association, dated February 1, 1997,
incorporated by reference from the Form 8-K, dated
February 27, 1997, filed by Salomon with the
Securities and Exchange Commission
*10.9 Agreement by and between Salomon Brothers Realty Corp.
and New Century Mortgage dated November 4, 1996
*10.10 Form of Founding Managers' Employment Agreement
*10.11 Office Building Lease by and between Koll Center
Irvine Number Two and New Century Financial
Corporation dated April 11, 1997
*10.12 Registration Rights Agreement, dated May 30, 1997, by
and among the Company and certain stockholders of the
Company
*10.13 Form of Equalization Option granted to two executive
officers of the Company
*10.14 Amended and Restated 1995 Stock Option Plan
10.15 Stock Purchase Agreement, dated May 30, 1997, by and
between the Company and Comerica
*10.16 New Century Financial Corporation Comerica Warrant to
Purchase Common Stock issued to Comerica on May 30,
1997
11.1 Statement re: Computation of Pro forma Earnings Per
Share
*21.1 List of Subsidiaries
23.1 Consent of KPMG Peat Marwick LLP
*23.2 Consent of O'Melveny & Myers LLP (included in Exhibit
5.1)
*24.1 Power of Attorney (contained on page II-5)
*27.1 Financial Data Schedule
</TABLE>
- -------
* Previously filed.
<PAGE>
EXHIBIT 1.1
MONTGOMERY SECURITIES
FORM OF UNDERWRITING AGREEMENT
3,500,000 Shares
NEW CENTURY FINANCIAL CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
DATED JUNE __, 1997
<PAGE>
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Section 1. Representations and Warranties................................................... 2
A. Representations and Warranties of the Company.................................... 2
(a) Compliance with Registration Requirements................................. 2
(b) Offering Materials Furnished to Underwriters.............................. 2
(c) Distribution of Offering Material By the Company.......................... 2
(d) The Underwriting Agreement................................................ 3
(e) Authorization of the Common Shares........................................ 3
(f) No Applicable Registration or Other Similar Rights........................ 3
(g) No Material Adverse Change................................................ 3
(h) Independent Accountants................................................... 3
(i) Preparation of the Financial Statements................................... 3
(j) Incorporation and Good Standing of the Company and its Subsidiaries....... 4
(k) Capitalization and Other Capital Stock Matters............................ 4
(l) Stock Exchange Listing.................................................... 4
(m) Non-Contravention of Existing Instruments; No Further Authorizations
or Approvals Required..................................................... 4
(n) No Material Actions or Proceedings........................................ 5
(o) Intellectual Property Rights.............................................. 5
(p) All Necessary Permits, Etc................................................ 5
(q) Title to Properties....................................................... 6
(r) Tax Law Compliance........................................................ 6
(s) Company Not an "Investment Company."...................................... 6
(t) Insurance................................................................. 6
(u) No Price Stabilization or Manipulation.................................... 6
(v) Related Party Transactions................................................ 7
(w) No Unlawful Contributions or Other Payments............................... 7
(x) Company's Accounting System............................................... 7
(y) Compliance with Environmental Laws........................................ 7
(z) ERISA Compliance.......................................................... 8
(aa) Financial Projections..................................................... 8
(bb) Events of Default......................................................... 8
(cc) Past Securitizations...................................................... 9
(dd) Exchange Act Filings...................................................... 9
(ee) Whole Loan Sales.......................................................... 9
(ff) Regulation................................................................ 9
B. Representations and Warranties of the OA Stockholders............................ 9
(a) The Underwriting Agreement................................................ 9
(b) The Custody Agreement and Power of Attorney............................... 9
(c) Title to Common Shares to be Sold; All Authorizations Obtained............ 10
(d) Delivery of the Common Shares to be Sold.................................. 10
(e) Non-Contravention; No Further Authorizations or Approvals
Required.................................................................. 10
(f) No Registration or Other Similar Rights................................... 10
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
(g) No Further Consents, Etc.................................................. 11
(h) Disclosure Made by Such OA Stockholder in the Prospectus.................. 11
(i) No Price Stabilization or Manipulation.................................... 11
(j) Confirmation of Company Representations and Warranties.................... 11
Section 2. Purchase, Sale and Delivery of the Common Shares................................. 11
Section 3. Additional Covenants............................................................. 14
A. Covenants of the Company......................................................... 14
(a) Representative's Review of Proposed Amendments and Supplements............ 14
(b) Securities Act Compliance................................................. 14
(c) Amendments and Supplements to the Prospectus and Other Securities
Act Matters............................................................... 14
(d) Copies of any Amendments and Supplements to the Prospectus................ 14
(e) Blue Sky Compliance....................................................... 15
(f) Use of Proceeds........................................................... 15
(g) Transfer Agent............................................................ 15
(h) Earnings Statement........................................................ 15
(i) Periodic Reporting Obligations............................................ 15
(j) Agreement Not To Offer or Sell Additional Securities...................... 15
(k) Future Reports to the Representatives..................................... 16
B. Covenants of the OA Stockholders................................................. 16
(a) Agreement Not to Offer or Sell Additional Securities...................... 16
(b) Delivery of Forms W-8 and W-9............................................. 16
Section 4. Payment of Expenses.............................................................. 16
Section 5. Conditions of the Obligations of the Underwriters................................ 17
(a) Accountants' Comfort Letter............................................... 17
(b) Compliance with Registration Requirements; No Stop Order; No
Objection from NASD....................................................... 18
(c) No Material Adverse Change or Ratings Agency Change....................... 18
(d) Opinion of Counsel for the Company........................................ 18
(e) Opinion of Counsel for the Underwriters................................... 18
(f) Officers' Certificate..................................................... 19
(g) Bring-down Comfort Letter................................................. 19
(i) Selling Stockholder's and OA Stockholders' Certificates................... 19
(j) Selling Stockholder's and OA Stockholders' Documents...................... 19
(k) Lock-Up Agreement from Certain Stockholders of the Company Other
than the Selling Stockholder and the OA Stockholders...................... 20
(l) Additional Documents...................................................... 20
Section 6. Reimbursement of Underwriters' Expenses.......................................... 20
Section 7. Effectiveness of this Agreement.................................................. 20
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Section 8. Indemnification 21
(a) Indemnification of the Underwriters....................................... 21
(b) Indemnification of the Company, its Directors and Officers................ 22
(c) Notifications and Other Indemnification Procedures........................ 22
(d) Settlements............................................................... 23
Section 9. Contribution...................................................................... 23
Section 10. Default of One or More of the Several Underwriters............................... 25
Section 11. Termination of this Agreement.................................................... 25
Section 12. Representations and Indemnities to Survive Delivery.............................. 26
Section 13. Notices.......................................................................... 26
Section 14. Successors ...................................................................... 27
Section 15. Partial Unenforceability......................................................... 27
Section 16.................................................................................... 27
(a) Governing Law Provisions.................................................. 27
(b) Consent to Jurisdiction................................................... 27
(c) Waiver of Immunity........................................................ 27
Section 17. Failure of One or More of the OA Stockholders to Sell and Deliver
Common Shares.................................................................... 28
Section 18. General Provisions............................................................... 28
</TABLE>
iii
<PAGE>
UNDERWRITING AGREEMENT
June __, 1997
MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
PIPER JAFFRAY INC.
222 South Ninth Street
Minneapolis, Minnesota 55402
As Representatives of the several Underwriters
Ladies and Gentlemen:
INTRODUCTORY. New Century Financial Corporation, a Delaware corporation
(the "Company), proposes to issue and sell to the several underwriters named in
Schedule A (the "Underwriters") an aggregate of 2,900,000 shares of its Common
- ----------
Stock, par value $.01 per share (the "Common Stock"); and Cornerstone Fund I,
L.L.C. (the "Selling Stockholder") proposes to sell to the Underwriters an
aggregate of 600,000 shares of Common Stock. The 2,900,000 shares of Common
Stock to be sold by the Company and the 600,000 shares of Common Stock to be
sold by the Selling Stockholder are collectively called the "Firm Common
Shares". In addition, the Company, the Selling Stockholder and Cornerstone
Equity Partners, L.L.C. (collectively, the "OA Stockholders") have severally
granted to the Underwriters an option to purchase up to an additional 525,000
shares (the "Optional Common Shares") of Common Stock, as provided in Section 2,
each OA Stockholder selling up to the amount set forth opposite such OA
Stockholder's name in Schedule B. The Firm Common Shares and, if and to the
----------
extent such option is exercised, the Optional Common Shares are collectively
called the "Common Shares". Montgomery Securities and Piper Jaffray Inc. have
agreed to act as representatives of the several Underwriters (in such capacity,
the "Representatives") in connection with the offering and sale of the Common
Shares.
The Company has prepared and filed with the Securities and Exchange
Commission (the "Commission") a registration statement on Form S-1 (File No.
333-25483), which contains a form of prospectus to be used in connection with
the public offering and sale of the Common Shares. Such registration statement,
as amended, including the financial statements, exhibits and schedules thereto,
in the form in which it was declared effective by the Commission under the
Securities Act of 1933 and the rules and regulations promulgated thereunder
(collectively, the "Securities Act"), including any information deemed to be a
part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434
under the Securities Act, is called the "Registration Statement". Any
registration statement filed by the Company pursuant to Rule 462(b) under the
Securities Act is called the "Rule 462(b) Registration Statement," and from and
after the date and time of filing of the Rule 462(b) Registration Statement the
term "Registration Statement" shall include the Rule 462(b) Registration
Statement. Such prospectus, in the form first used by the Underwriters to
confirm sales of the Common Shares, is called the "Prospectus"; provided,
however, if the Company has, with the consent of Montgomery Securities, elected
to rely upon Rule 434 under the Securities Act, the term "Prospectus" shall mean
the Company's prospectus subject to completion (each, a "preliminary
prospectus") dated June 10, 1997 (such preliminary prospectus is called the
"Rule 434 preliminary prospectus"), together with the applicable term
<PAGE>
sheet (the "Term Sheet") prepared and filed by the Company with the Commission
under Rules 434 and 424(b) under the Securities Act and all references in this
Agreement to the date of the Prospectus shall mean the date of the Term Sheet.
All references in this Agreement to the Registration Statement, the Rule 462(b)
Registration Statement, a preliminary prospectus, the Prospectus or the Term
Sheet, or any amendments or supplements to any of the foregoing, shall include
any copy thereof filed with the Commission pursuant to its Electronic Data
Gathering, Analysis and Retrieval System ("EDGAR").
The Company the Selling Stockholder and each of the OA Stockholders hereby
confirm their respective agreements with the Underwriters as follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES.
A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents, warrants and covenants to each Underwriter as follows:
(a) Compliance with Registration Requirements. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company has
complied to the Commission's satisfaction with all requests of the
Commission for additional or supplemental information. No stop order
suspending the effectiveness of the Registration Statement or any Rule
462(b) Registration Statement is in effect and no proceedings for such
purpose have been instituted or are pending or, to the best knowledge of
the Company, are contemplated or threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed
complied in all material respects with the Securities Act and, if filed by
electronic transmission pursuant to EDGAR (except as may be permitted by
Regulation S-T under the Securities Act), was identical to the copy thereof
delivered to the Underwriters for use in connection with the offer and sale
of the Common Shares. Each of the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendment thereto, at the
time it became effective and at all subsequent times, complied and will
comply in all material respects with the Securities Act and did not and
will not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading. The Prospectus, as amended or
supplemented, as of its date and at all subsequent times through the end of
the Prospectus Delivery Period, did not and will not contain any untrue
statement of a material fact or omit to state a material fact necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading. The representations and
warranties set forth in the two immediately preceding sentences do not
apply to statements in or omissions from the Registration Statement, any
Rule 462(b) Registration Statement, or any post-effective amendment
thereto, or the Prospectus, or any amendments or supplements thereto, made
in reliance upon and in conformity with information relating to any
Underwriter or with respect to the Underwriting section of the Prospectus
furnished to the Company in writing by the Representatives expressly for
use therein. There are no contracts or other documents required to be
described in the Prospectus or to be filed as exhibits to the Registration
Statement which have not been described or filed as required.
(b) Offering Materials Furnished to Underwriters. The Company
has delivered to the Representative(s) one complete manually signed copy of
the Registration Statement and of each consent and certificate of experts
filed as a part thereof, and conformed copies of the Registration Statement
(without exhibits) and preliminary prospectuses and the
2
<PAGE>
Prospectus, as amended or supplemented, in such quantities and at such
places as the Representatives have reasonably requested for each of the
Underwriters.
(c) Distribution of Offering Material By the Company. The
Company has not distributed and will not distribute, prior to the later of
the Second Closing Date (as defined below) and the completion of the
Underwriters' distribution of the Common Shares, any offering material in
connection with the offering and sale of the Common Shares other than a
preliminary prospectus, the Prospectus, the Registration Statement and any
other materials permitted by the Securities Act.
(d) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement
of, the Company, enforceable in accordance with its terms, except as rights
to indemnification hereunder may be limited by applicable law and except as
the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
the rights and remedies of creditors or by general equitable principles.
(e) Authorization of the Common Shares. The Common Shares to be
purchased by the Underwriters from the Company have been duly authorized
for issuance and sale pursuant to this Agreement and, when issued and
delivered by the Company pursuant to this Agreement, will be validly
issued, fully paid and nonassessable.
(f) No Applicable Registration or Other Similar Rights. There
are no persons with registration or other similar rights to have any equity
or debt securities registered for sale under the Registration Statement or
included in the offering contemplated by this Agreement, other than the OA
Stockholders (including the Selling Stockholder) with respect to the Common
Shares included in the Registration Statement, except for such rights as
have been duly waived.
(g) No Material Adverse Change. Except as otherwise disclosed in
the Prospectus, subsequent to the respective dates as of which information
is given in the Prospectus: (i) there has been no material adverse change,
or any development that could reasonably be expected to result in a
material adverse change, in the condition, financial or otherwise, or in
the earnings, business, operations or prospects, whether or not arising
from transactions in the ordinary course of business, of the Company and
its subsidiaries, considered as one entity (any such change is called a
"Material Adverse Change"); (ii) the Company and its subsidiaries,
considered as one entity, have not incurred any material liability or
obligation, indirect, direct or contingent, not in the ordinary course of
business nor entered into any material transaction or agreement not in the
ordinary course of business; and (iii) there has been no dividend or
distribution of any kind declared, paid or made by the Company or, except
for dividends paid to the Company or other subsidiaries, any of its
subsidiaries on any class of capital stock or repurchase or redemption by
the Company or any of its subsidiaries of any class of capital stock.
(h) Independent Accountants. KPMG Peat Marwick LLP, who have
expressed their opinion with respect to the financial statements (which
term as used in this Agreement includes the related notes thereto) and
supporting schedules filed with the Commission as a part of the
Registration Statement and included in the Prospectus, are independent
public or certified public accountants as required by the Securities Act.
3
<PAGE>
(i) Preparation of the Financial Statements. The financial
statements and related notes thereto filed with the Commission as a part of
the Registration Statement and included in the Prospectus present fairly in
all material respects the consolidated financial position of the Company
and its subsidiaries as of and at the dates indicated and the results of
their operations and cash flows for the periods specified. The supporting
schedules included in the Registration Statement present fairly the
information required to be stated therein. Such financial statements and
supporting schedules have been prepared in conformity with generally
accepted accounting principles as applied in the United States applied on a
consistent basis throughout the periods involved, except as may be
expressly stated in the related notes thereto. No other financial
statements or supporting schedules are required to be included in the
Registration Statement. The financial data set forth in the Prospectus
under the captions "Prospectus Summary--Summary Consolidated Selected
Financial and Other Data," "Selected Consolidated Financial and Other Data"
and "Capitalization" fairly present the information set forth therein on a
basis consistent with that of the audited financial statements contained in
the Registration Statement.
(j) Incorporation and Good Standing of the Company and its
Subsidiaries. Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation and has corporate
power and authority to own, lease and operate its properties and to conduct
its business as described in the Prospectus and, in the case of the
Company, to enter into and perform its obligations under this Agreement.
Each of the Company and each subsidiary is duly qualified as a foreign
corporation to transact business and is in good standing in the State of
California and each other jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property or the
conduct of business, except for such jurisdictions (other than the State of
California) where the failure to so qualify or to be in good standing would
not, individually or in the aggregate, result in a Material Adverse Change.
All of the issued and outstanding capital stock of each subsidiary has been
duly authorized and validly issued, is fully paid and nonassessable and is
owned by the Company, directly or through subsidiaries, free and clear of
any security interest, mortgage, pledge, lien, encumbrance or claim. The
Company does not own or control, directly or indirectly, any corporation,
association or other entity other than the subsidiaries listed in Exhibit
21.1 to the Registration Statement.
(k) Capitalization and Other Capital Stock Matters. The
authorized, issued and outstanding capital stock of the Company is as set
forth in the Prospectus under the caption "Capitalization" (other than for
subsequent issuances, if any, pursuant to employee benefit plans described
in the Prospectus or upon exercise of outstanding options or warrants
described in the Prospectus). The Common Stock (including the Common
Shares) conforms in all material respects to the description thereof
contained in the Prospectus. All of the issued and outstanding shares of
Common Stock (including the shares of Common Stock owned by the OA
Stockholders (including the Selling Stockholder)) have been duly authorized
and validly issued, are fully paid and nonassessable and have been issued
in all material respects compliance with federal and state securities laws.
None of the outstanding shares of Common Stock were issued in violation of
any preemptive rights, rights of first refusal or other similar rights to
subscribe for or purchase securities of the Company. There are no
authorized or outstanding options, warrants, preemptive rights, rights of
first refusal or other rights to purchase, or equity or debt securities
convertible into or exchangeable or exercisable for, any capital stock of
the Company or any of its subsidiaries other than those accurately
described in the Prospectus. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the options
or
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other rights granted thereunder, set forth in the Prospectus accurately and
fairly presents in all material respects the information required to be
shown with respect to such plans, arrangements, options and rights.
(l) Stock Exchange Listing. The Common Shares have been approved
for listing on the Nasdaq National Market, subject only to official notice
of issuance.
(m) Non-Contravention of Existing Instruments; No Further
Authorizations or Approvals Required. Neither the Company nor any of its
subsidiaries is in violation of its charter or by-laws or is in default
(or, with the giving of notice or lapse of time, would be in default)
("Default") under any indenture, mortgage, loan or credit agreement, note,
contract, franchise, lease or other instrument to which the Company or any
of its subsidiaries is a party or by which it or any of them may be bound
(including, without limitation, the Company's revolving credit facilities
with [First Bank National Association and Guaranty Federal Bank and Salomon
Brothers], as lenders, or to which any of the property or assets of the
Company or any of its subsidiaries is subject (each, an "Existing
Instrument"), except for such Defaults as would not, individually or in the
aggregate, result in a Material Adverse Change. The Company's execution,
delivery and performance of this Agreement and consummation of the
transactions contemplated hereby and by the Prospectus (i) have been duly
authorized by all necessary corporate action and will not result in any
violation of the provisions of the charter or by-laws of the Company or any
subsidiary, (ii) will not conflict with or constitute a breach of, or
Default or a Debt Repayment Triggering Event (as defined below) under, or
result in the creation or imposition of any lien, charge or encumbrance
upon any property or assets of the Company or any of its subsidiaries
pursuant to, or require the consent of any other part to, any Existing
Instrument, except for such conflicts, breaches, Defaults, Debt Repayment
Triggering Event, liens, charges or encumbrances as would not, individually
or in the aggregate, result in a Material Adverse Change and (iii) will not
result in any violation of any law, administrative regulation or
administrative or court decree applicable to the Company or any subsidiary.
No consent, approval, authorization or other order of, or registration or
filing with, any court or other governmental or regulatory authority or
agency, is required for the Company's execution, delivery and performance
of this Agreement and consummation of the transactions contemplated hereby,
except such as have been obtained or made by the Company and are in full
force and effect under the Securities Act, the Securities Exchange Act of
1934, applicable state securities or blue sky laws and from the National
Association of Securities Dealers, Inc. (the "NASD"). As used herein, a
"Debt Repayment Triggering Event" means any event or condition which gives,
or with the giving of notice or lapse of time would give, the holder of any
note, debenture or other evidence of indebtedness (or any person acting on
such holder's behalf) the right to require the repurchase, redemption or
repayment of all or a portion of such indebtedness by the Company or any of
its subsidiaries.
(n) No Material Actions or Proceedings. There are no legal or
governmental actions, suits or proceedings pending or, to the best of the
Company's knowledge, threatened (i) against or, to the Company's knowledge
affecting the Company or any of its subsidiaries, (ii) which has as the
subject thereof any officer or director (in their capacities as such) of,
or property owned or leased by, the Company or any of its subsidiaries or
(iii) relating to environmental or discrimination matters, where in any
such case (A) there is a reasonable possibility that such action, suit or
proceeding might be determined adversely to the Company or such subsidiary
and (B) any such action, suit or proceeding, if so determined adversely,
would result in a Material Adverse Change or adversely affect the
consummation of the transactions contemplated by this Agreement. No
material labor dispute with the employees of the Company
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or any of its subsidiaries exists or, to the best of the Company's
knowledge, is threatened or imminent.
(o) Intellectual Property Rights. The Company and its
subsidiaries own or possess sufficient trademarks, trade names, patent
rights, copyrights, licenses, approvals, trade secrets and other similar
rights (collectively, "Intellectual Property Rights") reasonably necessary
to conduct their businesses as now conducted; and the expected expiration
of any of such Intellectual Property Rights would not result in a Material
Adverse Change. Neither the Company nor any of its subsidiaries has
received any notice of infringement or conflict with asserted Intellectual
Property Rights of others, which infringement or conflict, if the subject
of an unfavorable decision, would result in a Material Adverse Change.
(p) All Necessary Permits, Etc. The Company and each subsidiary
possess such valid and current certificates, authorizations or permits
issued by the appropriate state, federal or foreign regulatory agencies or
bodies necessary to conduct their respective businesses, the absence of
which would result in a Material Adverse Change and neither the Company nor
any subsidiary has received any notice of proceedings relating to the
revocation or modification of, or non-compliance with, any such
certificate, authorization or permit which, singly or in the aggregate, if
the subject of an unfavorable decision, ruling or finding, could result in
a Material Adverse Change.
(q) Title to Properties. The Company and each of its
subsidiaries has good and marketable title to all the properties and assets
reflected as owned in the financial statements referred to in Section 1(A)
(i) above (or elsewhere in the Prospectus), in each case free and clear of
any security interests, mortgages, liens, encumbrances, equities, claims
and other defects, except such as do not materially and adversely affect
the value of such property and do not materially interfere with the use
made or proposed to be made of such property by the Company or such
subsidiary. The material real property, improvements, equipment and
personal property held under lease by the Company or any subsidiary are
held under valid and enforceable leases, with such exceptions as are not
material and do not materially interfere with the use made or proposed to
be made of such material real property, improvements, equipment or personal
property by the Company or such subsidiary.
(r) Tax Law Compliance. The Company and its consolidated
subsidiaries have filed all necessary federal, state and foreign income and
franchise tax returns and have paid all taxes required to be paid by any of
them, the failure to pay or file would result in a Material Adverse Change
and, if due and payable, any related or similar assessment, fine or penalty
levied against any of them. The Company has made adequate charges,
accruals and reserves in the applicable financial statements referred to in
Section 1 (A) (i) above in respect of all material federal, state and
foreign income and franchise taxes for all periods as to which the tax
liability of the Company or any of its consolidated subsidiaries has not
been finally determined.
(s) Company Not an "Investment Company." The Company has been
advised of the rules and requirements under the Investment Company Act of
1940, as amended (the "Investment Company Act"). The Company is not, and
after receipt of payment for the Common Shares will not be, an "investment
company" within the meaning of Investment Company Act and intends to
conduct its business in a manner so that it will not become subject to the
Investment Company Act.
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<PAGE>
(t) Insurance. Each of the Company and its subsidiaries are
insured by recognized, financially sound and reputable institutions with
policies in such amounts and with such deductibles and covering such risks
as are generally deemed adequate and customary for their businesses
including, but not limited to, policies covering real and personal property
owned or leased by the Company and its subsidiaries against theft, damage,
destruction, acts of vandalism and earthquakes. The Company does not to
believe that it or any subsidiary will not be able (i) to renew its
existing insurance coverage as and when such policies expire or (ii) to
obtain comparable coverage from similar institutions as may be necessary or
appropriate to conduct its business as now conducted and at a cost that
would not result in a Material Adverse Change. Neither of the Company nor
any subsidiary has been denied any insurance coverage which it has sought
or for which it has applied.
(u) No Price Stabilization or Manipulation. The Company has not
taken and will not take, directly or indirectly, any action designed to or
that might be reasonably expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or
resale of the Common Shares.
(v) Related Party Transactions. There are no business
relationships or related-party transactions involving the Company or any
subsidiary or any other person required under the Securities Act to be
described in the Prospectus which have not been described as required.
(w) No Unlawful Contributions or Other Payments. Neither the
Company nor any of its subsidiaries nor, to the best of the Company's
knowledge, any employee or agent of the Company acting on behalf of the
Company or any subsidiary, has made any contribution or other payment to
any official of, or candidate for, any federal, state or foreign office in
violation of any law or of the character required to be disclosed in the
Prospectus.
(x) Company's Accounting System. The Company maintains a system
of accounting controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(y) Compliance with Environmental Laws. Except as would not,
individually or in the aggregate, result in a Material Adverse Change: (i)
neither the Company nor any of its subsidiaries is in violation of any
federal, state, local or foreign law or regulation relating to pollution or
protection of human health or the environment (including, without
limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or wildlife, including without limitation, laws and
regulations relating to emissions, discharges, releases or threatened
releases of chemicals, pollutants, contaminants, wastes, toxic substances,
hazardous substances, petroleum and petroleum products (collectively,
"Materials of Environmental Concern"), or otherwise relating to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Materials of Environment Concern (collectively,
"Environmental Laws"), which violation includes, but is not limited to,
noncompliance with any permits or other governmental authorizations
required for the operation of the business of the Company or its
subsidiaries under
7
<PAGE>
applicable Environmental Laws, or noncompliance with the terms and
conditions thereof, nor has the Company or any of its subsidiaries received
any written communication, whether from a governmental authority, citizens
group, employee or otherwise, that alleges that the Company or any of its
subsidiaries is in violation of any Environmental Law; (ii) there is no
claim, action or cause of action filed with a court or governmental
authority, no investigation with respect to which the Company has received
written notice, and no written notice by any person or entity alleging
potential liability for investigatory costs, cleanup costs, governmental
responses costs, natural resources damages, property damages, personal
injuries, attorneys' fees or penalties arising out of, based on or
resulting from the presence, or release into the environment, of any
Material of Environmental Concern at any location owned, leased or operated
by the Company or any of its subsidiaries, now or in the past
(collectively, "Environmental Claims"), pending or, to the best of the
Company's knowledge, threatened against the Company or any of its
subsidiaries or any person or entity whose liability for any Environmental
Claim the Company or any of its subsidiaries has retained or assumed either
contractually or by operation of law; and (iii) to the best of the
Company's knowledge, there are no past or present actions, activities,
circumstances, conditions, events or incidents, including, without
limitation, the release, emission, discharge, presence or disposal of any
Material of Environmental Concern, that reasonably could result in a
violation of any Environmental Law or form the basis of a potential
Environmental Claim against the Company or any of its subsidiaries or
against any person or entity whose liability for any Environmental Claim
the Company or any of its subsidiaries has retained or assumed either
contractually or by operation of law.
(z) ERISA Compliance. The Company and its subsidiaries and any
"employee benefit plan" (as defined under the Employee Retirement Income
Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, "ERISA")) established or
maintained by the Company, its subsidiaries or their "ERISA Affiliates" (as
defined below) are in compliance in all material respects with ERISA.
"ERISA Affiliate" means, with respect to the Company or a subsidiary, any
member of any group of organizations described in Sections 414(b),(c),(m)
or (o) of the Internal Revenue Code of 1986, as amended, and the
regulations and published interpretations thereunder (the "Code") of which
the Company or such subsidiary is a member. No "reportable event" (as
defined under ERISA) has occurred or is reasonably expected to occur with
respect to any "employee benefit plan" established or maintained by the
Company, its subsidiaries or any of their ERISA Affiliates. No "employee
benefit plan" established or maintained by the Company, its subsidiaries or
any of their ERISA Affiliates, if such "employee benefit plan" were
terminated, would have any "amount of unfunded benefit liabilities" (as
defined under ERISA). Neither the Company, its subsidiaries nor any of
their ERISA Affiliates has incurred or reasonably expects to incur any
liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971,
4975 or 4980B of the Code. Each "employee benefit plan" established or
maintained by the Company, its subsidiaries or any of their ERISA
Affiliates that is intended to be qualified under Section 401(a) of the
Code is so qualified and nothing has occurred, whether by action or failure
to act, which would cause the loss of such qualification.
(aa) Events of Default. No Master Servicer Event of Default or
increase in the Overcollateralization amount (as defined in the Pooling and
Servicing Agreement, dated as of February 1, 1997 by and among Salomon
Brothers Mortgage Securities VII, Inc., New Century Mortgage Corporation
and First Trust National Association), no Event of Default (as defined in
the Insuarnace and Indemnity Agreement, dated as of February 27, 1997, by
and among Financial Security Assurance Inc., New Century Mortgage
Corporation and Salomon
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Brothers Mortgage Securities VII, Inc.), no Event of Default (as defined in
the Amended and Restated Credit Agreement, dated October 25, 1996, by and
among New Century Mortgage Corporation, First Bank National Association and
the banks party therto, as the same has been amended as of the date of this
Agreement), no Termination Event (as defined in the leter agreement, dated
November 4, 1996, between Solomon Brothers Realty Corp and New Century
Mortgage Corporation) has occurred and, to the best of the Company's
knowledge, there is no event which, with the giving of notice or the
passage of time or both, would give rise to such a Default, Event of
Default or Events of Servicing Termination.
(bb) Past Securitizations. The description of past
securitization transactions effected by the Company, as contained in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), is true and complete in
all material respects and to the Company's best knowledge, no event or
series of events has occurred that would result in any of the securities
issued in connection with any of such transactions being downgraded or
placed on a watch list with negative implications by any rating agency or
similar organization, or that would impair the Company's or its
subsidiaries' ability to consummate future securitization transactions upon
economic terms consistent with past securitization transactions or
otherwise cause the Company and its subsidiaries to suffer any Material
Adverse Change with respect to any past or future securitization
transaction (other than any such event or series of events described in the
Prospectus, or, if the Prospectus is not yet in existence, the most recent
Preliminary Prospectus).
(cc) Exchange Act Filings. The Company has filed all reports
required under the Exchange Act with respect to the registration statements
filed in connection with the asset securitizations sponsored by the
Company.
(dd) Whole Loan Sales. The description of whole loan sales
effected by the Company, as contained in the Registration Statement and the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), is true and complete in all material respects and
no event or series of events has occurred that would result in any of the
securities issued in securitizations using such loans being downgraded or
placed on a watch list with negative implications by any rating agency or
similar organization, or that would impair the Company's or New Century
Mortgage Corporation's (the "Subsidiary") ability to consummate future
whole loan sales or to securitize such loans itself upon economic terms
consistent with past whole loan sales and securitizations of such loans or
otherwise cause the Company and the Subsidiary to suffer any Material
Adverse Change with respect to any past or future whole loan sale or
securitization (other than any such event or series of events described in
the Prospectus, (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus).
(ee) Regulation. The description of government rules and
regulations as contained in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus) under the captions "Risk Factors" and "Regulation" are true and
correct in all material respects.
Any certificate signed by an officer of the Company and delivered to
the Representatives or to counsel for the Underwriters shall be deemed to be a
representation and warranty by the Company to each Underwriter as to the matters
set forth therein.
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B. REPRESENTATIONS AND WARRANTIES OF THE OA STOCKHOLDERS. Each OA
Stockholder including the Selling Stockholder represents, warrants and covenants
to each Underwriter as follows:
(a) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by or on behalf of such OA Stockholder
and is a valid and binding agreement of such OA Stockholder, enforceable in
accordance with its terms, except as rights to indemnification hereunder
may be limited by applicable law and except as the enforcement hereof may
be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting the rights and remedies of creditors
or by general equitable principles.
(b) The Custody Agreement and Power of Attorney. Each of the (i)
Custody Agreement signed by such OA Stockholder and [___], as custodian
(the "Custodian"), relating to the deposit of the Common Shares to be sold
by such OA Stockholder (the "Custody Agreement") and (ii) Power of Attorney
appointing certain individuals named therein as such OA Stockholder's
attorneys-in-fact (each, an "Attorney-in-Fact") to the extent set forth
therein relating to the transactions contemplated hereby and by the
Prospectus (the "Power of Attorney"), of such OA Stockholder has been duly
authorized, executed and delivered by such OA Stockholder and is a valid
and binding agreement of such OA Stockholder, enforceable in accordance
with its terms, except as rights to indemnification thereunder may be
limited by applicable law and except as the enforcement thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting the rights and remedies of creditors
or by general equitable principles.
(c) Title to Common Shares to be Sold; All Authorizations
Obtained. Such OA Stockholder has, and on the First Closing Date and the
Second Closing Date (as defined below) will have, good and valid title to
all of the Common Shares which may be sold by such OA Stockholder pursuant
to this Agreement on such date and the legal right and power, and all
authorizations and approvals required by law and under its charter or by-
laws, partnership agreement, trust agreement or other organizational
documents to enter into this Agreement and its Custody Agreement and Power
of Attorney, to sell, transfer and deliver all of the Common Shares which
may be sold by such OA Stockholder pursuant to this Agreement and to comply
with its other obligations hereunder and thereunder.
(d) Delivery of the Common Shares to be Sold. Delivery of the
Common Shares which are sold to the Underwriters by such OA Stockholder
pursuant to this Agreement against payment therefor as provided herein will
pass good and valid title to such Common Shares, free and clear of any
security interest, mortgage, pledge, lien, encumbrance or other claim
(assuming that the Underwriters are not acquiring such Common Shares in
good faith and without knowledge of any adverse claims with respect
thereto).
(e) Non-Contravention; No Further Authorizations or Approvals
Required. The execution and delivery by such OA Stockholder of, and the
performance by such OA Stockholder of its obligations under, this
Agreement, the Custody Agreement and the Power of Attorney will not
contravene or conflict with, result in a breach of, or constitute a Default
under, or require the consent of any other party to, the charter or by-
laws, partnership agreement, trust agreement or other organizational
documents of such OA Stockholder or any other agreement or instrument to
which such OA Stockholder is a party or by which it is bound or under which
it is entitled to any right or benefit, any provision of applicable law or
any judgment, order, decree or regulation applicable to such OA Stockholder
of any court, regulatory body, administrative
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<PAGE>
agency, governmental body or arbitrator having jurisdiction over such OA
Stockholder. No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority or
agency, is required for the consummation by such OA Stockholder of the
transactions contemplated in this Agreement, except such as have been
obtained or made and are in full force and effect under the Securities Act,
applicable state securities or blue sky laws and from the NASD.
(f) No Registration or Other Similar Rights. Such OA Stockholder
does not have any registration or other similar rights to have any equity
or debt securities registered for sale by the Company under the
Registration Statement or included in the offering contemplated by this
Agreement, except for such rights as are described in the Prospectus under
"Shares Eligible for Future Sale".
(g) No Further Consents, Etc. Except for the (i) exercise by
such OA Stockholder of certain registration rights pursuant to the
Registration Rights Agreement dated as of [___] (which registration rights
have been duly exercised pursuant thereto), (ii) consent of such OA
Stockholder to the respective number of Common Shares to be sold by all of
the OA Stockholders pursuant to this Agreement and (iii) waiver by certain
other holders of Common Stock of certain registration rights pursuant to
such Registration Rights Agreement, no consent, approval or waiver is
required under any instrument or agreement to which such OA Stockholder is
a party or by which it is bound or under which it is entitled to any right
or benefit, in connection with the offering, sale or purchase by the
Underwriters of any of the Common Shares which may be sold by such OA
Stockholder under this Agreement or the consummation by such OA Stockholder
of any of the other transactions contemplated hereby.
(h) Disclosure Made by Such OA Stockholder in the Prospectus.
All information furnished by or on behalf of such OA Stockholder in writing
expressly for use in the Registration Statement and Prospectus is, and on
the First Closing Date and the Second Closing Date will be, true, correct,
and complete in all material respects, and does not, and on the First
Closing Date and the Second Closing Date will not, contain any untrue
statement of a material fact or omit to state any material fact necessary
to make such information not misleading. Such OA Stockholder confirms as
accurate the number of shares of Common Stock set forth opposite such OA
Stockholder's name (and in the associated footnotes) in the Prospectus
under the caption "Principal and Selling Stockholders" (both prior to and
after giving effect to the sale of the Common Shares).
(i) No Price Stabilization or Manipulation. Such OA Stockholder
has not taken and will not take, directly or indirectly, any action
designed to or that might be reasonably expected to cause or result in
stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Common Shares.
(j) Confirmation of Company Representations and Warranties. Such
OA Stockholder does not believe that the representations and warranties of
the Company contained in Section 1(A) hereof are not true and correct in
all material respects, is familiar with the Registration Statement and the
Prospectus and has no knowledge of any material fact, condition or
information not disclosed in the Registration Statement or the Prospectus
which has had a Material Adverse Effect.
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Any certificate signed by or on behalf of any OA Stockholder and
delivered to the Representatives or to counsel for the Underwriters shall be
deemed to be a representation and warranty by such OA Stockholder to each
Underwriter as to the matters covered thereby.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES.
The Firm Common Shares. Upon the terms herein set forth, (i) the
Company agrees to issue and sell to the several Underwriters an aggregate of
2,500,000 Firm Common Shares and (ii) the Selling Stockholder agrees to sell to
the several Underwriters an aggregate of 500,000 Firm Common Shares. On the
basis of the representations, warranties and agreements herein contained, and
upon the terms but subject to the conditions herein set forth, the Underwriters
agree, severally and not jointly, to purchase from the Company and the Selling
Stockholder the respective number of Firm Common Shares set forth opposite their
names on Schedule A. The purchase price per Firm Common Share to be paid by the
----------
several Underwriters to the Company and the Selling Stockholder (and to the OA
Stockholders for each Optional Common Stock) shall be $[___] per share.
The First Closing Date. Delivery of certificates for the Firm Common
Shares to be purchased by the Underwriters and payment therefor shall be made at
the offices of O'Melveny & Myers LLP, 610 Newport Center Drive, Suite 1700,
Newport Beach, California (or such other place as may be agreed to by the
Company and the Representatives) at 6:00 a.m. San Francisco time, on June ____,
1997, or such other time and date not later than 10:30 a.m. San Francisco time,
on June ____, 1997 as the Representatives shall designate by notice to the
Company (the time and date of such closing are called the "First Closing Date").
The Company and the Selling Stockholder hereby acknowledge that circumstances
under which the Representatives may provide notice to postpone the First Closing
Date as originally scheduled include, but are in no way limited to, any
determination by the Company or the Representatives to recirculate to the public
copies of an amended or supplemented Prospectus or a delay as contemplated by
the provisions of Section 10.
The Optional Common Shares; the Second Closing Date. In addition, on
the basis of the representations, warranties and agreements herein contained,
and upon the terms but subject to the conditions herein set forth, the OA
Stockholders hereby grant an option to the several Underwriters to purchase,
severally and not jointly, up to an aggregate of 450,000 Optional Common Shares
from the OA Stockholders at the purchase price per share to be paid by the
Underwriters for the Firm Common Shares. The option granted hereunder is for
use by the Underwriters solely in covering any over-allotments in connection
with the sale and distribution of the Firm Common Shares. The option granted
hereunder may be exercised at any time (but not more than once) upon notice by
the Representatives to the OA Stockholders (with a copy to the Company), which
notice may be given at any time within 30 days from the date of this Agreement.
Such notice shall set forth (i) the aggregate number of Optional Common Shares
as to which the Underwriters are exercising the option, (ii) the names and
denominations in which the certificates for the Optional Common Shares are to be
registered and (iii) the time, date and place at which such certificates will be
delivered (which time and date may be simultaneous with, but not earlier than,
the First Closing Date; and in such case the term "First Closing Date" shall
refer to the time and date of delivery of certificates for the Firm Common
Shares and the Optional Common Shares). Such time and date of delivery, if
subsequent to the First Closing Date, is called the "Second Closing Date" and
shall be determined by the Representatives and shall not be earlier than three
nor later than five full business days after delivery of such notice of
exercise. If any Optional Common Shares are to be purchased, (a) each
Underwriter agrees, severally and not jointly, to purchase the number of
Optional Common Shares (subject to such adjustments to eliminate fractional
shares as the Representatives may determine) that bears the same proportion to
the total number of Optional Common Shares to be
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purchased as the number of Firm Common Shares set forth on Schedule A opposite
----------
the name of such Underwriter bears to the total number of Firm Common Shares and
(b) each OA Stockholder agrees, severally and not jointly, to sell the number of
Optional Common Shares set forth in Schedule B opposite the name of such OA
----------
Stockholder. The Representatives may cancel the option at any time prior to its
expiration by giving written notice of such cancellation to the OA Stockholders
(with a copy to the Company).
Public Offering of the Common Shares. The Representatives hereby
advise the Company and the OA Stockholders that the Underwriters intend to offer
for sale to the public, as described in the Prospectus, their respective
portions of the Common Shares as soon after this Agreement has been executed and
the Registration Statement has been declared effective as the Representatives,
in their sole judgment, have determined is advisable and practicable.
Payment for the Common Shares. Payment for the Common Shares to be
sold by the Company shall be made at the First Closing Date (and, if applicable,
at the Second Closing Date) by wire transfer of immediately available funds to
the order of the Company. Payment for the Common Shares to be sold by the
Selling Stockholder and the OA Stockholders shall be made at the First Closing
Date (and, if applicable, at the Second Closing Date) by wire transfer of
immediately available funds to the order of the Custodian.
It is understood that the Representatives have been authorized, for
their own account and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Common Shares and any Optional Common Shares the Underwriters have agreed
to purchase. Either Montgomery Securities or Piper Jaffray, in their individual
capacities and not as the Representatives of the Underwriters, may (but shall
not be obligated to) make payment for any Common Shares to be purchased by any
Underwriter whose funds shall not have been received by the Representatives by
the First Closing Date or the Second Closing Date, as the case may be, for the
account of such Underwriter, but any such payment shall not relieve such
Underwriter from any of its obligations under this Agreement.
The Selling Stockholder and each OA Stockholder hereby agree that (i)
each will pay all stock transfer taxes, stamp duties and other similar taxes, if
any, payable upon the sale or delivery of the Common Shares to be sold by such
Selling Stockholder or such OA Stockholder to the several Underwriters, or
otherwise in connection with the performance of such Selling Stockholder's or
such OA Stockholder's obligations hereunder and (ii) the Custodian is authorized
to deduct for such payment any such amounts from the proceeds to such Selling
Stockholder or such OA Stockholder hereunder and to hold such amounts for the
account of such Stockholder or such OA Stockholder with the Custodian under the
Custody Agreement.
Delivery of the Common Shares. The Company and the Selling
Stockholder shall deliver, or cause to be delivered, to the Representatives for
the accounts of the several Underwriters certificates for the Firm Common Shares
to be sold by them at the First Closing Date, against the irrevocable release of
a wire transfer of immediately available funds for the amount of the purchase
price therefor. The Company and the OA Stockholders shall also deliver, or
cause to be delivered, to the Representatives for the accounts of the several
Underwriters, certificates for the Optional Common Shares the Underwriters have
agreed to purchase from them at the First Closing Date or the Second Closing
Date, as the case may be, against the irrevocable release of a wire transfer of
immediately available funds for the amount of the purchase price therefor. The
certificates for the Common Shares shall be in definitive form and registered in
such names and denominations as the Representatives shall have requested at
least two full
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business days prior to the First Closing Date (or the Second Closing Date, as
the case may be) and shall be made available for inspection on the business day
preceding the First Closing Date (or the Second Closing Date, as the case may
be) at a location in New York City as the Representatives may designate. Time
shall be of the essence, and delivery at the time and place specified in this
Agreement is a further condition to the obligations of the Underwriters.
Delivery of Prospectus to the Underwriters. Not later than 12:00 p.m.
on the second business day following the date the Common Shares are released by
the Underwriters for sale to the public, the Company shall deliver or cause to
be delivered copies of the Prospectus in such quantities and at such places as
the Representatives shall request.
SECTION 3. ADDITIONAL COVENANTS.
A. COVENANTS OF THE COMPANY. The Company hereby represents,
warrants and covenants to each Underwriter as follows:
(a) Representatives' Review of Proposed Amendments and
Supplements. During such period beginning on the date hereof and ending on
the later of the First Closing Date or such date, as in the opinion of
counsel for the Underwriters, the Prospectus is no longer required by law
to be delivered in connection with sales by an Underwriter or dealer (which
period for purposes of this Agreement shall not exceed the date nine months
following the First Closing Date) (the "Prospectus Delivery Period"), prior
to amending or supplementing the Registration Statement (including any
registration statement filed under Rule 462(b) under the Securities Act) or
the Prospectus , the Company shall furnish to the Representatives for
review a copy of each such proposed amendment or supplement, and the
Company shall not file any such proposed amendment or supplement to which
the Representatives reasonably objects.
(b) Securities Act Compliance. After the date of this Agreement,
the Company shall promptly advise the Representatives in writing (i) of the
receipt of any comments of, or requests for additional or supplemental
information from, the Commission, (ii) of the time and date of any filing
of any post-effective amendment to the Registration Statement or any
amendment or supplement to any preliminary prospectus or the Prospectus,
(iii) of the time and date that any post-effective amendment to the
Registration Statement becomes effective and (iv) of the issuance by the
Commission of any stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereto or of any
order preventing or suspending the use of any preliminary prospectus or the
Prospectus, or of any proceedings to remove, suspend or terminate from
listing or quotation the Common Stock from any securities exchange upon
which it is listed for trading or included or designated for quotation, or
of the threatening or initiation of any proceedings for any of such
purposes. If the Commission shall enter any such stop order at any time,
the Company will use its best efforts to obtain the lifting of such order
at the earliest possible moment. Additionally, the Company agrees that it
shall comply with the provisions of Rules 424(b), 430A and 434, as
applicable, under the Securities Act and will use its reasonable efforts to
confirm that any filings made by the Company under such Rule 424(b) were
received in a timely manner by the Commission.
(c) Amendments and Supplements to the Prospectus and Other
Securities Act Matters. If, during the Prospectus Delivery Period, any
event shall occur or condition exist as a result of which it is necessary
to amend or supplement the Prospectus in order to make the statements
therein, in the light of the circumstances when the Prospectus is delivered
to a
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purchaser, not misleading, or if in the opinion of the Representatives or
counsel for the Underwriters it is otherwise necessary to amend or
supplement the Prospectus to comply with law, the Company agrees to
promptly prepare (subject to Section 3(A)(a) hereof), file with the
Commission and furnish at its own expense to the Underwriters and to
dealers, amendments or supplements to the Prospectus so that the statements
in the Prospectus as so amended or supplemented will not, in the light of
the circumstances when the Prospectus is delivered to a purchaser, be
misleading or so that the Prospectus, as amended or supplemented, will
comply with law.
(d) Copies of any Amendments and Supplements to the Prospectus.
The Company agrees to furnish the Representatives, without charge, during
the Prospectus Delivery Period, as many copies of the Prospectus and any
amendments and supplements thereto as the Representatives may request.
(e) Blue Sky Compliance. The Company shall cooperate with the
Representatives and counsel for the Underwriters to qualify or register the
Common Shares for sale under (or obtain exemptions from the application of)
the state securities or blue sky laws or Canadian provincial Securities
laws of those jurisdictions designated by the Representatives, shall comply
with such laws and shall continue such qualifications, registrations and
exemptions in effect so long as reasonably required for the distribution of
the Common Shares. The Company shall not be required to qualify as a
foreign corporation or to take any action that would subject it to general
service of process in any such jurisdiction where it is not presently
qualified or where it would be subject to taxation as a foreign
corporation. The Company will advise the Representatives promptly of the
suspension of the qualification or registration of (or any such exemption
relating to) the Common Shares for offering, sale or trading in any
jurisdiction or any initiation or threat of any proceeding for any such
purpose, and in the event of the issuance of any order suspending such
qualification, registration or exemption, the Company shall use its best
efforts to obtain the withdrawal thereof at the earliest practicable
moment.
(f) Use of Proceeds. The Company shall apply the net proceeds
from the sale of the Common Shares sold by it in the manner described under
the caption "Use of Proceeds" in the Prospectus.
(g) Transfer Agent. The Company shall engage and maintain, at
its expense, a registrar and transfer agent for the Common Stock.
(h) Earnings Statement. As soon as practicable, the Company will
make generally available to its security holders and to the Representatives
an earnings statement (which need not be audited) covering the twelve-month
period ending __________ that satisfies the provisions of Section 11(a) of
the Securities Act.
(i) Periodic Reporting Obligations. During the Prospectus
Delivery Period the Company shall file, on a timely basis, with the
Commission and the Nasdaq National Market all reports and documents
required to be filed under the Exchange Act. Additionally, the Company
shall file with the Commission all reports on Form SR as may be required
under Rule 463 under the Securities Act.
(j) Agreement Not To Offer or Sell Additional Securities. During
the period of 180 days following the date of the Prospectus, the Company
will not, without the prior written
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consent of Montgomery Securities (which consent may be withheld at the sole
discretion of Montgomery Securities), directly or indirectly, sell, offer,
contract or grant any option to purchase, pledge, transfer or establish an
open "put equivalent position" within the meaning of Rule 16a-1(h) under
the Exchange Act, or otherwise dispose of or transfer, or announce the
offering of, or file any registration statement under the Securities Act in
respect of, any shares of Common Stock, options or warrants to acquire
shares of the Common Stock or securities exchangeable or exercisable for or
convertible into shares of Common Stock (other than as contemplated by this
Agreement with respect to the Common Shares); provided, however, that the
Company may issue shares of its Common Stock or a warrant (the "Comerica
Warrant") to Comerica Incorporated exercisable for up to 100,000 shares of
Common Stock or Common Stock upon exercise of the Comerica Warrant or
options to purchase its Common Stock, or Common Stock upon exercise of
options, pursuant to any stock option, stock bonus or other stock plan or
arrangement described in the Prospectus, but only if the holders of such
shares, options, or shares issued upon exercise of such options, agree in
writing not to sell, offer, dispose of or otherwise transfer any such
shares or options during such 180 day period without the prior written
consent of Montgomery Securities (which consent may be withheld at the sole
discretion of the Montgomery Securities).
(k) Future Reports to the Representatives. During the period of
five years hereafter the Company will furnish to the Representatives at 600
Montgomery Street, San Francisco, CA 94111 Attention:[ ]: (i) as soon as
practicable after the end of each fiscal year, copies of the Annual Report
of the Company containing the balance sheet of the Company as of the close
of such fiscal year and statements of income, stockholders' equity and cash
flows for the year then ended and the opinion thereon of the Company's
independent public or certified public accountants; (ii) as soon as
practicable after the filing thereof, copies of each proxy statement,
Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current Report
on Form 8-K or other report filed by the Company with the Commission, the
NASD or any securities exchange; and (iii) as soon as available, copies of
any report or communication of the Company mailed generally to holders of
its capital stock.
(l) Amendment to Credit Facility. The Company will use
commercially reasonable efforts to within 45 days following the First
Closing consummate an amendment to its warehouse line of credit maintained
with First Bank National Association increasing the principal amount that
may be borrowed under such line to at least $150 million.
B. COVENANTS OF THE OA STOCKHOLDERS. Each OA Stockholder (including
the Selling Stockholder) further covenants and agrees with each Underwriter:
(a) Agreement Not to Offer or Sell Additional Securities. Such
OA Stockholder will not, without the prior written consent of Montgomery
Securities (which consent may be withheld in its sole discretion), directly
or indirectly, sell, offer, contract or grant any option to purchase
(including without limitation 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 shares of Common Stock, or securities
exchangeable or exercisable for or convertible into shares of Common Stock
currently or hereafter owned either of record or beneficially (as defined
in Rule 13d-3 under Securities Exchange Act of 1934, as amended) by the
undersigned, or publicly announce the undersigned's intention to do any of
the foregoing, for a period commencing on the
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date hereof and continuing through the close of trading on the date 180
days after the date of the Prospectus.
(b) Delivery of Forms W-8 and W-9. To deliver to the
Representatives prior to the First Closing Date a properly completed and
executed United States Treasury Department Form W-8 (if the Selling
Stockholder is a non-United States person) or Form W-9 (if the OA
Stockholder is a United States Person).
Montgomery Securities, on behalf of the several Underwriters, may, in
its sole discretion, waive in writing the performance by the Company or any OA
Stockholder of any one or more of the foregoing covenants or extend the time for
their performance.
SECTION 4. PAYMENT OF EXPENSES. The Company agrees to pay all costs, fees
and expenses incurred in connection with the performance of their obligations
hereunder and in connection with the transactions contemplated hereby, including
without limitation (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs and fees and expenses
of the Custodian), (ii) all fees and expenses of the registrar and transfer
agent of the Common Stock, (iii) all necessary issue, transfer and other stamp
taxes in connection with the issuance and sale of the Common Shares to the
Underwriters, (iv) all fees and expenses of the Company's counsel and one
counsel for the Selling Stockholder and the OA Stockholders other than the
Company, independent public or certified pubic accountants and other advisors,
(v) all costs and expenses incurred in connection with the preparation,
printing, filing, shipping and distribution of the Registration Statement
(including financial statements, exhibits, schedules, consents and certificates
of experts), each preliminary prospectus and the Prospectus, and all amendments
and supplements thereto, and this Agreement, (vi) all filing fees, reasonable
attorneys' fees and expenses incurred by the Company or the Underwriters in
connection with qualifying or registering (or obtaining exemptions from the
qualification or registration of) all or any part of the Common Shares for offer
and sale under the state securities or blue sky laws or the provincial
securities laws of Canada, and, if requested by the Representatives, preparing
and printing a "Blue Sky Survey" or memorandum, and any supplements thereto,
advising the Underwriters of such qualifications, registrations and exemptions,
(vii) the filing fees incident to, and the reasonable fees and expenses of
counsel for the Underwriters in connection with, the NASD's review and approval
of the Underwriters' participation in the offering and distribution of the
Common Shares, (viii) the fees and expenses associated with listing the Common
Shares on the Nasdaq National Market, and (ix) all other fees, costs and
expenses referred to in Item 13 of Part II of the Registration Statement.
Except as provided in Section 4, Section 6, Section 8 and Section 9 hereof, the
Underwriters shall pay their own expenses, including the fees and disbursements
of their counsel.
The OA Stockholders (including the Selling Stockholder) further agree with
each Underwriter to pay (directly or by reimbursement) all fees and expenses
incident to the performance of their obligations under this Agreement which are
not otherwise specifically provided for herein, including but not limited to (i)
fees and expenses of counsel and other advisors for such OA Stockholders, (ii)
fees and expenses of the Custodian and (iii) expenses and taxes incident to the
sale and delivery of the Common Shares to be sold by such OA Stockholders to the
Underwriters hereunder (which taxes, if any, may be deducted by the Custodian
under the provisions of Section 2 of this Agreement).
This Section 4 shall not affect or modify any separate, valid agreement
relating to the allocation of payment of expenses between the Company, on the
one hand, and the OA Stockholders, on the other hand.
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SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Common
Shares as provided herein on the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy of the representations and warranties on the part of the Company and
the OA Stockholders (including the Selling Stockholder) set forth in Sections
1(A) and 1(B) hereof as of the date hereof and as of the First Closing Date as
though then made and, with respect to the Optional Common Shares, as of the
Second Closing Date as though then made, to the timely performance by the
Company and the OA Stockholders (including the Selling Stockholder) of their
respective covenants and other obligations hereunder, and to each of the
following additional conditions:
(a) Accountants' Comfort Letter. On the date hereof, the
Representatives shall have received from KPMG Peat Marwick LLP, independent
public or certified public accountants for the Company, a letter dated the
date hereof addressed to the Underwriters, in form and substance
satisfactory to the Representatives, containing statements and information
of the type ordinarily included in accountant's "comfort letters" to
underwriters, delivered according to Statement of Auditing Standards No. 72
(or any successor bulletin), with respect to the audited and unaudited
financial statements and certain financial information contained in the
Registration Statement and the Prospectus (and the Representatives shall
have received an additional [___] conformed copies of such accountants'
letter for each of the several Underwriters).
(b) Compliance with Registration Requirements; No Stop Order; No
Objection from NASD. For the period from and after effectiveness of this
Agreement and prior to the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date:
(i) the Company shall have filed the Prospectus with the Commission
(including the information required by Rule 430A under the Securities
Act) in the manner and within the time period required by Rule 424(b)
under the Securities Act; or the Company shall have filed a post-
effective amendment to the Registration Statement containing the
information required by such Rule 430A, and such post-effective
amendment shall have become effective; or, if the Company elected to
rely upon Rule 434 under the Securities Act and obtained the
Representatives's consent thereto, the Company shall have filed a Term
Sheet with the Commission in the manner and within the time period
required by such Rule 424(b);
(ii) no stop order suspending the effectiveness of the Registration
Statement, any Rule 462(b) Registration Statement, or any post-effective
amendment to the Registration Statement, shall be in effect and no
proceedings for such purpose shall have been instituted or threatened by
the Commission; and
(iii) the NASD shall have raised no objection to the fairness and
reasonableness of the underwriting terms and arrangements.
(c) No Material Adverse Change or Ratings Agency Change. For the
period from and after the date of this Agreement and prior to the First
Closing Date and, with respect to the Optional Common Shares, the Second
Closing Date:
(i) in the judgment of the Representatives there shall not have
occurred any Material Adverse Change; and
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(ii) there shall not have occurred any downgrading, nor shall any
notice have been given of any intended or potential downgrading or of
any review for a possible change that does not indicate the direction of
the possible change, in the rating accorded any securities of the
Company or any of its subsidiaries by any "nationally recognized
statistical rating organization" as such term is defined for purposes of
Rule 436(g)(2) under the Securities Act.
(d) Opinion of Counsel for the Company. On each of the First Closing
Date and the Second Closing Date the Representatives shall have received
the favorable opinion of O'Melveny & Myers LLP, counsel for the Company,
dated as of such Closing Date, the form of which is attached as Exhibit A
---------
(and the Representatives shall have received an additional [___] conformed
copies of such counsel's legal opinion for each of the several
Underwriters).
(e) Opinion of Counsel for the Underwriters. On each of the First
Closing Date and the Second Closing Date the Representatives shall have
received the favorable opinion of Brobeck, Phleger & Harrison LLP, counsel
for the Underwriters, dated as of such Closing Date, with respect to the
matters set forth in paragraphs[(i), (vii) (with respect to subparagraph
(i) only, (viii), (ix), (x) (xi) and (xiii) (with respect to the captions
"Description of Capital Stock" and "Underwriting" under subparagraph (i)
only), (xii),] and [the next-to-last paragraph] of Exhibit A (and the
---------
Representatives shall have received an additional [___] conformed copies of
such counsel's legal opinion for each of the several Underwriters).
(f) Officers' Certificate. On each of the First Closing Date and the
Second Closing Date the Representatives shall have received a written
certificate executed by the Chairman of the Board, Chief Executive Officer
or President of the Company and the Chief Financial Officer or Chief
Accounting Officer of the Company, dated as of such Closing Date, to the
effect set forth in subsections (b)(ii) and (c)(ii) of this Section 5, and
further to the effect that:
(i) for the period from and after the date of this Agreement and
prior to such Closing Date, there has not occurred any Material Adverse
Change;
(ii) the representations, warranties and covenants of the Company
set forth in Section 1(A) of this Agreement are true and correct in all
material respects with the same force and effect as though expressly
made on and as of such Closing Date; and
(iii) the Company has complied in all material respects with all
the agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to such Closing Date.
(g) Bring-down Comfort Letter. On each of the First Closing Date and
the Second Closing Date the Representatives shall have received from KPMG
Peat Marwick LLP, independent public or certified public accountants for
the Company, a letter dated such date, in form and substance satisfactory
to the Representatives, to the effect that they reaffirm the statements
made in the letter furnished by them pursuant to subsection (a) of this
Section 5, except that the specified date referred to therein for the
carrying out of procedures shall be no more than three business days prior
to the First Closing Date or Second Closing Date, as the case may be (and
the Representatives shall have received an additional [___] conformed
copies of such accountants' letter for each of the several Underwriters).
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(h) Opinion of Counsel for the Selling Stockholder and the OA
Stockholders. On each of the First Closing Date (as may be appropriate)
and the Second Closing Date the Representatives shall have received the
favorable opinion of Quarles & Brady, counsel for the Selling Stockholder
and the OA Stockholders (other than the Company), dated as of such Closing
Date, the form of which is attached as Exhibit B (and the Representatives
---------
shall have received an additional [___] conformed copies of such counsel's
legal opinion for each of the several Underwriters).
(i) Selling Stockholder's and OA Stockholders' Certificates. On each
of the First Closing Date and the Second Closing Date, as may be
appropriate, the Representatives shall received a written certificate
executed by the Attorney-in-Fact of the Selling Stockholder and the OA
Stockholders, dated as of such Closing Date, to the effect that:
(i) the representations, warranties and covenants of such Selling
Stockholder or such OA Stockholder set forth in Section 1(B) of this
Agreement are true and correct in all material respects with the same
force and effect as though expressly made by such Selling Stockholder or
such OA Stockholder on and as of such Closing Date; and
(ii) such Selling Stockholder or such OA Stockholder has complied
in all material respects with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or prior to such
Closing Date.
(j) Selling Stockholder's and OA Stockholders' Documents. On the date
hereof, the Company, and the Selling Stockholder and the OA Stockholders
shall have furnished for review by the Representatives copies of the Powers
of Attorney and Custody Agreements executed by each of the Selling
Stockholder and the OA Stockholders and such further information,
certificates and documents as the Representatives may reasonably request.
(k) Lock-Up Agreement from Certain Stockholders of the Company Other
than the Selling Stockholder and the OA Stockholders. On the date hereof,
the Company shall have furnished to the Representatives an agreement in the
form of Exhibit C hereto from each officer, director and 1% or greater
---------
(based on shares outstanding immediately prior to the First Closing)
Stockholders of the Company, and such agreements shall be in full force and
effect on each of the First Closing Date and the Second Closing Date.
(l) Additional Documents. On or before each of the First Closing Date
and the Second Closing Date, the Representatives and counsel for the
Underwriters shall have received such information, documents and opinions
as they may reasonably require for the purposes of enabling them to pass
upon the issuance and sale of the Common Shares as contemplated herein, or
in order to evidence the accuracy of any of the representations and
warranties, or the satisfaction of any of the conditions or agreements,
herein contained.
If any condition specified in this Section 5 is not satisfied when and
as required to be satisfied, this Agreement may be terminated by the
Representatives by notice to the Company, the Selling Stockholder and the OA
Stockholders at any time on or prior to the First Closing Date and, with respect
to the Optional Common Shares, at any time prior to the Second Closing Date,
which termination shall be without liability on the part of any party to any
other party, except that Section 4, Section 6, Section 8 and Section 9 shall at
all times be effective and shall survive such termination.
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SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this Agreement is
terminated prior to the First Closing by the Representatives pursuant to Section
5 (except subsections 5(b)(iii) and 5(e), or Section 11 (except as set forth in
clauses (i), (ii) and (iii) of Section 11 or Section 17, or if the sale to the
Underwriters of the Common Shares on the First Closing Date is not consummated
because of any refusal, inability or failure on the part of the Company or the
Selling Stockholder to perform any agreement herein or to comply with any
provision hereof, the Company agrees to reimburse the Representatives and the
other Underwriters (or such Underwriters as have terminated this Agreement with
respect to themselves), severally, upon demand for all out-of-pocket expenses
that shall have been reasonably incurred by the Representatives and the
Underwriters in connection with the proposed purchase and the offering and sale
of the Common Shares, including but not limited to fees and disbursements of
counsel, printing expenses, travel expenses, postage, facsimile and telephone
charges.
SECTION 7. [RESERVED]
SECTION 8. INDEMNIFICATION.
(a) Indemnification of the Underwriters. Each of the Company, the
Selling Stockholder and, subject to Section 8(e) each of the OA
Stockholders, jointly and severally, agree to indemnify and hold harmless
each Underwriter, its officers and employees, and each person, if any, who
controls any Underwriter within the meaning of the Securities Act and the
Exchange Act against any loss, claim, damage, liability or expense, as
reasonably incurred, to which such Underwriter or such controlling person
may become subject, under the Securities Act, the Exchange Act or other
federal or state statutory law or regulation, or at common law or otherwise
(including in settlement of any litigation, if such settlement is effected
with the written consent of the Company), insofar as such loss, claim,
damage, liability or expense (or actions in respect thereof as contemplated
below) arises out of or is based (i) upon any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement, or any amendment thereto, including any information deemed to be
a part thereof pursuant to Rule 430A or Rule 434 under the Securities Act,
or the omission or alleged omission therefrom of a material fact required
to be stated therein or necessary to make the statements therein not
misleading; or (ii) upon any untrue statement or alleged untrue statement
of a material fact contained in any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto), or the omission or
alleged omission therefrom of a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they
were made, not misleading; or (iii) in whole or in part upon any inaccuracy
in the representations and warranties of the Company, the Selling
Stockholder or the OA Stockholders contained herein; or (iv) in whole or in
part upon any failure of the Company, the Selling Stockholder or the OA
Stockholders to perform their respective obligations hereunder or under
law; or (v) any act or failure to act or any alleged act or failure to act
by any Underwriter in connection with, or relating in any manner to, the
Common Stock or the offering contemplated hereby, and which is included as
part of or referred to in any loss, claim, damage, liability or action
arising out of or based upon any matter covered by clause (i) or (ii)
above, provided that the Company shall not be liable under this clause (v)
to the extent that a court of competent jurisdiction shall have determined
by a final judgment that such loss, claim, damage, liability or action
resulted directly from any such acts or failures to act undertaken or
omitted to be taken by such Underwriter through its bad faith or willful
misconduct; and to reimburse each Underwriter and each such controlling
person for any and all reasonable expenses (including the fees and
disbursements of counsel chosen by Montgomery Securities) as such expenses
are reasonably incurred by such Underwriter or such controlling person in
connection with investigating, defending, settling, compromising or paying
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any such loss, claim, damage, liability, expense or action; provided,
however, that the foregoing indemnity agreement shall not apply to any
loss, claim, damage, liability or expense to the extent, but only to the
extent, arising out of or based upon any untrue statement or alleged untrue
statement or omission or alleged omission made in reliance upon and in
conformity with written information furnished to the Company, the Selling
Stockholder or the OA Stockholders by the Representatives expressly for use
in the Registration Statement, any preliminary prospectus or the Prospectus
(or any amendment or supplement thereto); and provided, further, that with
respect to any preliminary prospectus, the foregoing indemnity agreement
shall not inure to the benefit of any Underwriter from whom the person
asserting any loss, claim, damage, liability or expense purchased Common
Shares, or any person controlling such Underwriter, if copies of the
Prospectus were timely delivered to the Underwriter pursuant to Section 2
and a copy of the Prospectus (as then amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) was not
sent or given by or on behalf of such Underwriter to such person, if
required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Common Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect
giving rise to such loss, claim, damage, liability or expense. The
indemnity agreement set forth in this Section 8(a) shall be in addition to
any liabilities that the Company, the Selling Stockholder or the OA
Stockholders may otherwise have.
(b) Indemnification of the Company, its Directors and Officers. Each
Underwriter agrees, severally and not jointly, to indemnify and hold
harmless the Company, each of its directors, each of its officers who
signed the Registration Statement, the Selling Stockholder, the OA
Stockholders and each person, if any, who controls the Company, the Selling
Stockholder or any OA Stockholder within the meaning of the Securities Act
or the Exchange Act, against any loss, claim damage, liability, or expense,
as incurred, to which the Company, or any such director, officer, Selling
Stockholder, OA Stockholder or controlling person may become subject, under
the Securities Act, the Exchange Act, or other federal or state statutory
law or regulation, or at common law or otherwise (including in settlement
of any litigation, if such settlement is effected with the written consent
of such Underwriter), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises out of
or is based upon any untrue or alleged untrue statement of a material fact
contained in the Registration Statement, any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto), or arises out of or is
based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent,
that such untrue statement or alleged untrue statement or omission or
alleged omission was made in the Registration Statement, any preliminary
prospectus, the Prospectus (or any amendment or supplement thereto), in
reliance upon and in conformity with written information furnished to the
Company, the Selling Stockholder or the OA Stockholder by the
Representatives expressly for use therein; and to reimburse the Company, or
any such director, officer, Selling Stockholder, OA Stockholder or
controlling person for any legal and other expense as reasonably incurred
by the Company, or any such director, officer, Selling Stockholder OA
Stockholder or controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action. Each of the Company, the Selling Stockholder
and each of the OA Stockholders hereby acknowledges that the only
information that the Underwriters have furnished to the Company, the
Selling Stockholder and the OA Stockholders expressly for use in the
Registration Statement, any preliminary prospectus or the Prospectus (or
any amendment or supplement thereto) are the statements set forth (A) as
the last paragraph on the inside front
22
<PAGE>
cover page of the Prospectus concerning stabilization and passive market
making by the Underwriters and (B) in the table in the first paragraph and
as the second paragraph under the caption "Underwriting" in the Prospectus;
and the Underwriters confirm that such statements are correct. The
indemnity agreement set forth in this Section 8(b) shall be in addition to
any liabilities that each Underwriter may otherwise have.
(c) Notifications and Other Indemnification Procedures. Promptly
after receipt by an indemnified party under this Section 8 of notice of the
commencement of any action, such indemnified party will, if a claim in
respect thereof is to be made against an indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement
thereof, but the omission so to notify the indemnifying party will not
relieve it from any liability which it may have to any indemnified party
for contribution or otherwise than under the indemnity agreement contained
in this Section 8 or to the extent it is not prejudiced as a proximate
result of such failure. In case any such action is brought against any
indemnified party and such indemnified party seeks or intends to seek
indemnity from an indemnifying party, the indemnifying party will be
entitled to participate in, and, to the extent that it shall elect, jointly
with all other indemnifying parties similarly notified, by written notice
delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with
counsel reasonably satisfactory to such indemnified party; provided,
however, if the defendants in any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have
reasonably concluded that a conflict may arise between the positions of the
indemnifying party and the indemnified party in conducting the defense of
any such action or that there may be legal defenses available to it and/or
other indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnified party or parties shall
have the right to select separate counsel to assume such legal defenses and
to otherwise participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of such indemnifying party's election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified
party under this Section 8 for any legal or other expenses subsequently
incurred by such indemnified party in connection with the defense thereof
unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being
understood, however, that the indemnifying party shall not be liable for
the expenses of more than one separate counsel (together with local
counsel), approved by the indemnifying party (Montgomery Securities in the
case of Section 8(b) and Section 9), representing the indemnified parties
who are parties to such action) or (ii) the indemnifying party shall not
have employed counsel satisfactory to the indemnified party to represent
the indemnified party within a reasonable time after notice of commencement
of the action, in each of which cases the fees and expenses of counsel
shall be at the expense of the indemnifying party.
(d) Settlements. The indemnifying party under this Section 8 shall
not be liable for any settlement of any proceeding effected without its
written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party against any loss, claim, damage, liability or expense by
reason of such settlement or judgment. Notwithstanding the foregoing
sentence, if at any time an indemnified party shall have requested an
indemnifying party to reimburse the indemnified party for fees and expenses
of counsel as contemplated by Section 8(c) hereof, the indemnifying party
agrees that it shall be liable for any settlement of any proceeding
effected without its written consent if (i) such settlement is entered into
more than 30 days after receipt by such indemnifying party of
23
<PAGE>
the aforesaid request and (ii) such indemnifying party shall not have
reimbursed the indemnified party in accordance with such request prior to
the date of such settlement. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement,
compromise or consent to the entry of judgment in any pending or threatened
action, suit or proceeding in respect of which any indemnified party is or
could have been a party and indemnity was or could have been sought
hereunder by such indemnified party, unless such settlement, compromise or
consent includes an unconditional release of such indemnified party from
all liability on claims that are the subject matter of such action, suit or
proceeding.
(e) Limitation Liability. The liability of each OA Stockholder
(except the Company) under this Section 8 shall not exceed an amount equal
to the proceeds received by such OA Stockholder from the sale of securities
pursuant to this Agreement.
SECTION 9. CONTRIBUTION. If the indemnification provided for in Section 8
is for any reason held to be unavailable to or otherwise insufficient to hold
harmless an indemnified party in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount paid or payable by such indemnified party, as
incurred, as a result of any losses, claims, damages, liabilities or expenses
referred to therein (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company, the Selling Stockholder and the OA
Stockholders, on the one hand, and the Underwriters, on the other hand, from the
offering of the Common Shares pursuant to this Agreement or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of the Company, the
Selling Stockholder and the OA Stockholders, on the one hand, and the
Underwriters, on the other hand, in connection with the statements or omissions
or inaccuracies in the representations and warranties herein which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the
Company, the Selling Stockholder and the OA Stockholders, on the one hand, and
the Underwriters, on the other hand, in connection with the offering of the
Common Shares pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the Common
Shares pursuant to this Agreement (before deducting expenses) received by the
Company, the Selling Stockholder and the OA Stockholders, and the total
underwriting discount received by the Underwriters, in each case as set forth on
the front cover page of the Prospectus (or, if Rule 434 under the Securities Act
is used, the corresponding location on the Term Sheet) bear to the aggregate
initial public offering price of the Common Shares as set forth on such cover.
The relative fault of the Company, the Selling Stockholder and the OA
Stockholders, on the one hand, and the Underwriters, on the other hand, shall be
determined by reference to, among other things, whether any such untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact or any such inaccurate or alleged inaccurate
representation or warranty relates to information supplied by the Company, the
Selling Stockholder or the OA Stockholders, on the one hand, or the
Underwriters, on the other hand, and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission.
The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include,
subject to the limitations set forth in Section 8(c), any legal or other fees or
expenses reasonably incurred by such party in connection with investigating or
defending any action or claim. The provisions set forth in Section 8(c) with
respect to notice of commencement of any action shall apply if a claim for
contribution is to be made under this Section 9; provided, however, that no
additional notice shall be required with respect to any action for which notice
has been given under Section 8(c) for purposes of indemnification.
24
<PAGE>
The Company the Selling Stockholder, the OA Stockholders and the
Underwriters agree that it would not be just and equitable if contribution
pursuant to this Section 9 were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other method
of allocation which does not take account of the equitable considerations
referred to in this Section 9.
Notwithstanding the provisions of this Section 9, no Underwriter shall be
required to contribute any amount in excess of the underwriting commissions
received by such Underwriter in connection with the Common Shares underwritten
by it and distributed to the public. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several, and not joint, in proportion to their
respective underwriting commitments as set forth opposite their names in
Schedule A. For purposes of this Section 9, each officer and employee of an
- ----------
Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights to
contribution as such Underwriter, and each director of the Company, each officer
of the Company who signed the Registration Statement, and each person, if any,
who controls the Company with the meaning of the Securities Act and the Exchange
Act shall have the same rights to contribution as the Company.
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITER. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the several Underwriters shall fail or refuse to purchase Common Shares
that it or they have agreed to purchase hereunder on such date, and the
aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Common Shares to be purchased on such date, the other
Underwriters shall be obligated, severally, in the proportions that the number
of Firm Common Shares set forth opposite their respective names on Schedule A
----------
bears to the aggregate number of Firm Common Shares set forth opposite the names
of all such non-defaulting Underwriters, or in such other proportions as may be
specified by the Representatives with the consent of the non-defaulting
Underwriters, to purchase the Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the Underwriters shall fail or refuse to purchase Common Shares and the
aggregate number of Common Shares with respect to which such default occurs
exceeds 10% of the aggregate number of Common Shares to be purchased on such
date, and arrangements satisfactory to the Representatives and the Company for
the purchase of such Common Shares are not made within 48 hours after such
default, this Agreement shall terminate without liability of any party to any
other party except that the provisions of Section 4, Section 8 and Section 9
shall at all times be effective and shall survive such termination. In any such
case either the Representatives or the Company shall have the right to postpone
the First Closing Date or the Second Closing Date, as the case may be, but in no
event for longer than seven days in order that the required changes, if any, to
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed to
include any person substituted for a defaulting Underwriter under this Section
10. Any action taken under this Section 10 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
SECTION 11. TERMINATION OF THIS AGREEMENT. Prior to the First Closing
Date this Agreement may be terminated by the Representatives by notice given to
the Company and the Selling Stockholder if at any time (i) trading or quotation
in any of the Company's securities shall have been suspended or
25
<PAGE>
limited by the Commission or by the Nasdaq Stock Market, or trading in
securities generally on either the Nasdaq Stock Market or the New York Stock
Exchange shall have been suspended or limited, or minimum or maximum prices
shall have been generally established on any of such stock exchanges by the
Commission or the NASD; (ii) a general banking moratorium shall have been
declared by any of federal, New York, Delaware or California authorities; (iii)
there shall have occurred any outbreak or escalation of national or
international hostilities or any crisis or calamity, or any material adverse
change in the United States or international financial markets, or any
substantial change or development involving a prospective substantial change in
United States' or international political, financial or economic conditions, as
in the judgment of the Representatives is material and adverse and makes it
impracticable to market the Common Shares in the manner and on the terms
described in the Prospectus or to enforce contracts for the sale of securities;
(iv) in the judgment of the Representatives there shall have occurred any
Material Adverse Change; or (v) the Company shall have sustained a loss by
strike, fire, flood, earthquake, accident or other calamity of such character as
in the judgment of the Representatives may interfere materially with the conduct
of the business and operations of the Company regardless of whether or not such
loss shall have been insured. Any termination pursuant to this Section 11 shall
be without liability on the part of (a) the Company, the Selling Stockholder or
the OA Stockholders to any Underwriter, except that the Company, the Selling
Stockholder and the OA Stockholders shall be obligated to reimburse the expenses
of the Representatives and the Underwriters pursuant to Sections 4 and 6 hereof,
(b) any Underwriter to the Company, the Selling Stockholder and the OA
Stockholders, or (c) of any party hereto to any other party except that the
provisions of Section 8 and Section 9 shall at all times be effective and shall
survive such termination.
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations, warranties and other
statements of the Company, of its officers, of the Selling Stockholder, of the
OA Stockholders and of the several Underwriters set forth in or made pursuant to
this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter or the Company or any of
its or their partners, officers or directors or any controlling person, the
Selling Stockholder or the OA Stockholders, as the case may be, and will survive
delivery of and payment for the Common Shares sold hereunder and any termination
of this Agreement.
SECTION 13. NOTICES. All communications hereunder shall be in writing and
shall be mailed, hand delivered or telecopied and confirmed to the parties
hereto as follows:
If to the Representatives:
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5558
Attention: Richard A. Smith
Piper Jaffray Inc.
222 South Ninth Street
Minneapolis, Minnesota 55402
Facsimile: (612) 342-1068
Attention: [____________]
26
<PAGE>
with a copy to:
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: David A. Baylor, Esq.
If to the Company:
New Century Financial Corporation
4910 Birch Street, Suite 100
Newport Beach, California 92660
Facsimile: (714) 440-7033
Attention: Robert K. Cole
If to the Selling Stockholder:
[Custodian]
[address]
Facsimile: [___]
Attention: [___]
with a copy to:
Quarles & Brady
One East Camelback
Suite 400
Phoenix, Arizona 85012
Facsimile: (602) 230-5598
Attention: Steven P. Emerick
27
<PAGE>
If to the OA Stockholders:
[Custodian]
[address]
Facsimile: [___]
Attention: [___]
with a copy to:
Quarles & Brady
One East Camelback
Suite 400
Phoenix, Arizona 85012
Facsimile: (602) 230-5598
Attention: Steven P. Emerick
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
SECTION 14. SUCCESSORS. This Agreement will inure to the benefit of and
be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 10 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 8 and Section 9, and in
each case their respective successors, and personal representatives, and no
other person will have any right or obligation hereunder. The term "successors"
shall not include any purchaser of the Common Shares as such from any of the
Underwriters merely by reason of such purchase.
SECTION 15. PARTIAL UNENFORCEABILITY. The invalidity or unenforceability
of any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
SECTION 16. (a) Governing Law Provisions. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF
NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
(b) Consent to Jurisdiction. Any legal suit, action or proceeding
arising out of or based upon this Agreement or the transactions
contemplated hereby ("Related Proceedings") may be instituted in the
federal courts of the United States of America located in the City and
County of San Francisco or the courts of the State of California in each
case located in the City and County of San Francisco (collectively, the
"Specified Courts"), and each party irrevocably submits to the exclusive
jurisdiction (except for proceedings instituted in regard to the
enforcement of a judgment of any such court (a "Related Judgment"), as to
which such jurisdiction is non-exclusive) of such courts in any such suit,
action or proceeding. Service of any process, summons, notice or document
by mail to such party's address set forth above shall be effective service
of process for any suit, action or other proceeding brought in any such
court. The parties irrevocably and unconditionally waive any objection to
the laying of venue of any suit, action or other proceeding in the
Specified Courts and irrevocably and unconditionally waive and agree not
28
<PAGE>
to plead or claim in any such court that any such suit, action or other
proceeding brought in any such court has been brought in an inconvenient
forum.
(c) Waiver of Immunity. With respect to any Related Proceeding, each
party irrevocably waives, to the fullest extent permitted by applicable
law, all immunity (whether on the basis of sovereignty or otherwise) from
jurisdiction, service of process, attachment (both before and after
judgment) and execution to which it might otherwise be entitled in the
Specified Courts, and with respect to any Related Judgment, each party
waives any such immunity in the Specified Courts or any other court of
competent jurisdiction, and will not raise or claim or cause to be pleaded
any such immunity at or in respect of any such Related Proceeding or
Related Judgment, including, without limitation, any immunity pursuant to
the United States Foreign Sovereign Immunities Act of 1976, as amended.
SECTION 17. FAILURE OF ONE OR MORE OF THE OA STOCKHOLDERS TO SELL AND
DELIVER COMMON SHARES. If one or more of the Stockholders shall fail to sell
and deliver to the Underwriters the Common Shares to be sold and delivered by
such OA Stockholders at the Second Closing Date pursuant to this Agreement, then
the Underwriters may at their option, by written notice from the Representatives
to the Company and the OA Stockholders, either (i) terminate this Agreement
without any liability on the part of any Underwriter or, except as provided in
Sections 4, 6, 8 and 9 hereof, the Company, the Selling Stockholder or the OA
Stockholders, or (ii) purchase the shares which other OA Stockholders have
agreed to sell and deliver in accordance with the terms hereof. If one or more
of the OA Stockholders shall fail to sell and deliver to the Underwriters the
Common Shares to be sold and delivered by such OA Stockholders pursuant to this
Agreement at the Second Closing Date, then the Underwriters shall have the
right, by written notice from the Representatives to the Company and the OA
Stockholders, to postpone the Second Closing Date, as the case may be, but in no
event for longer than seven days in order that the required changes, if any, to
the Registration Statement and the Prospectus or any other documents or
arrangements may be effected.
SECTION 18. GENERAL PROVISIONS. This Agreement constitutes the entire
agreement of the parties to this Agreement and supersedes all prior written or
oral and all contemporaneous oral agreements, understandings and negotiations
with respect to the subject matter hereof. This Agreement may be executed in
two or more counterparts, each one of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement may not be amended or modified unless in writing by all of the
parties hereto, and no condition herein (express or implied) may be waived
unless waived in writing by each party whom the condition is meant to benefit.
The Table of Contents and the Section headings herein are for the convenience of
the parties only and shall not affect the construction or interpretation of this
Agreement.
Each of the parties hereto acknowledges that it is a sophisticated
business person who was adequately represented by counsel during negotiations
regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 8 and the contribution provisions of
Section 9, and is fully informed regarding said provisions. Each of the parties
hereto further acknowledges that the provisions of Sections 8 and 9 hereto
fairly allocate the risks in light of the ability of the parties to investigate
the Company, its affairs and its business in order to assure that adequate
disclosure has been made in the Registration Statement, any preliminary
prospectus and the Prospectus (and any amendments and supplements thereto), as
required by the Securities Act and the Exchange Act.
29
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company and the Custodian the enclosed
copies hereof, whereupon this instrument, along with all counterparts hereof,
shall become a binding agreement in accordance with its terms.
Very truly yours,
NEW CENTURY FINANCIAL CORPORATION
By:__________________________
Robert K. Cole
President
SELLING STOCKHOLDER
By:__________________________
(Attorney-in-fact)
OA STOCKHOLDERS
By:__________________________
(Attorney-in-fact)
The foregoing Underwriting Agreement is hereby confirmed and accepted by
the Representatives in San Francisco, California as of the date first above
written.
MONTGOMERY SECURITIES
PIPER JAFFRAY INC.
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By: MONTGOMERY SECURITIES
By:_____________________________
30
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF FIRM
COMMON SHARES TO BE
UNDERWRITERS PURCHASED
------------ -------------------
<S> <C>
Montgomery Securities [_____]
Piper Jaffray Inc. [_____]
[_____] [_____]
[_____] [_____]
[_____] [_____]
Total 3,500,000
</TABLE>
SA-1
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
MAXIMUM NUMBER
OF OPTIONAL
COMMON SHARES TO
OA STOCKHOLDER BE SOLD
- -------------- ----------------
<S> <C>
Cornerstone Fund I, L.L.C.
5050 North 40th Street
Suite 310
Phoenix, Arizona 85018
Attention: Sherman I. Chu............... [257,400]
Cornerstone Equity Partners L.L.C.
5050 North 40th Street
Suite 310
Phoenix, Arizona 85018
Attention: Sherman I. Chu............... [35,100]
New Century Financial Corporation
4910 Birch Street, Suite 100
Newport Beach, California 92660 232,500
Attention: Brad Morrice.................
Total:.......................... 525,000
</TABLE>
SB-1
<PAGE>
EXHIBIT A
The final opinion in draft form should be attached as Exhibit A at the time this
Agreement is executed.
Opinion of counsel for the Company to be delivered pursuant to Section 5(e) of
the Underwriting Agreement.
References to the Prospectus in this Exhibit A include any supplements thereto
---------
at the Closing Date.
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and authority to own, lease and
operate its properties and to conduct its business as described in the
Prospectus and to enter into and perform its obligations under the
Underwriting Agreement.
(iii) The Company is duly qualified as a foreign corporation to transact
business and is in good standing in the State of California and in each other
jurisdiction in which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except for such
jurisdictions (other than the State of California) where the failure to so
qualify or to be in good standing would not, individually or in the aggregate,
result in a Material Adverse Change.
(iv) Each significant subsidiary (as defined in Rule 405 under the
Securities Act) has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus and, to
the best knowledge of such counsel, is duly qualified as a foreign corporation
to transact business and is in good standing in each jurisdiction in which
such qualification is required, whether by reason of the ownership or leasing
of property or the conduct of business, except for such jurisdictions where
the failure to so qualify or to be in good standing would not, individually or
in the aggregate, result in a Material Adverse Change.
(v) All of the issued and outstanding capital stock of each such
significant subsidiary has been duly authorized and validly issued, is fully
paid and non-assessable and is owned by the Company, directly or through
subsidiaries, free and clear of any security interest, mortgage, pledge, lien,
encumbrance or, to the best knowledge of such counsel, any pending or
threatened claim.
(vi) The authorized, issued and outstanding capital stock of the Company
(including the Common Stock) conform to the descriptions thereof set forth or
incorporated by reference in the Prospectus. All of the outstanding shares of
Common Stock (including the shares of Common Stock owned by the OA
Stockholders) have been duly authorized and validly issued, are fully paid and
nonassessable and, to the best of such counsel's knowledge , have been issued
in compliance with the registration and qualification requirements of federal
and state securities laws. The form of certificate used to evidence the
Common Stock is in due and proper form and complies with all applicable
requirements of the charter and by-laws of the Company and the General
Corporation Law of the State of Delaware. The description of the Company's
stock option, stock bonus and other stock plans or arrangements, and the
options or other rights granted and exercised thereunder, set forth in the
Prospectus accurately and fairly presents the information required to be shown
with respect to such plans, arrangements, options and rights.
EA-1
<PAGE>
(vii) No stockholder of the Company or any other person has any preemptive
right, right of first refusal or other similar right to subscribe for or
purchase securities of the Company arising (i) by operation of the charter or
by-laws of the Company or the General Corporation Law of the State of Delaware
or (ii) to the best knowledge of such counsel, otherwise.
(viii) The Underwriting Agreement has been duly authorized, executed and
delivered by, and is a valid and binding agreement of, the Company,
enforceable in accordance with its terms, except as rights to indemnification
thereunder may be limited by applicable law and except as the enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium
or other similar laws relating to or affecting creditors' rights generally or
by general equitable principles.
(ix) The Common Shares to be purchased by the Underwriters from the
Company have been duly authorized for issuance and sale pursuant to the
Underwriting Agreement and, when issued and delivered by the Company pursuant
to the Underwriting Agreement against payment of the consideration set forth
therein, will be validly issued, fully paid and nonassessable.
(x) Each of the Registration Statement and the Rule 462(b) Registration
Statement, if any, has been declared effective by the Commission under the
Securities Act. To the best knowledge of such counsel, no stop order
suspending the effectiveness of either of the Registration Statement or the
Rule 462(b) Registration Statement, if any, has been issued under the
Securities Act and no proceedings for such purpose have been instituted or are
pending or are contemplated or threatened by the Commission. Any required
filing of the Prospectus and any supplement thereto pursuant to Rule 424(b)
under the Securities Act has been made in the manner and within the time
period required by such Rule 424(b).
(xi) The Registration Statement, including any Rule 462(b) Registration
Statement, the Prospectus including any document incorporated by reference
therein, and each amendment or supplement to the Registration Statement and
the Prospectus including any document incorporated by reference therein, as of
their respective effective or issue dates (other than the financial statements
and supporting schedules included or incorporated by reference therein or in
exhibits to or excluded from the Registration Statement, as to which no
opinion need be rendered) comply as to form in all material respects with the
applicable requirements of the Securities Act.
(xii) The Common Shares have been approved for listing on the Nasdaq
National Market.
(xiii) The statements (i) in the Prospectus under the captions "Risk
Factors--," "Description of Capital Stock," "Management's Discussion and
Analysis and Results of Operations--Liquidity," "Business--Litigation,"
"Business--Intellectual Property," "Certain Relationships and Related
Transactions," "Shares Eligible for Future Sale," "Certain United States
Income Tax Considerations" and "Underwriting" and (ii) in Item 14 and Item 15
of the Registration Statement, insofar as such statements constitute matters
of law, summaries of legal matters, the Company's charter or by-law
provisions, documents or legal proceedings, or legal conclusions, has been
reviewed by such counsel and fairly present and summarize, in all material
respects, the matters referred to therein.
(xiv) To the best knowledge of such counsel, there are no legal or
governmental actions, suits or proceedings pending or threatened which are
required to be disclosed in the Registration Statement, other than those
disclosed therein.
EA-2
<PAGE>
(xv) To the best knowledge of such counsel, there are no Existing
Instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed or incorporated by reference as exhibits thereto;
and the descriptions thereof and references thereto are correct in all
material respects.
(xvi) No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority or
agency, is required for the Company's execution, delivery and performance of
the Underwriting Agreement and consummation of the transactions contemplated
thereby and by the Prospectus, except as required under the Securities Act,
applicable state securities or blue sky laws and from the NASD.
(xvii) The execution and delivery of the Underwriting Agreement by the
Company and the performance by the Company of its obligations thereunder
(other than performance by the Company of its obligations under the
indemnification section of the Underwriting Agreement, as to which no opinion
need be rendered) (i) have been duly authorized by all necessary corporate
action on the part of the Company; (ii) will not result in any violation of
the provisions of the charter or by-laws of the Company or any subsidiary;
(iii) will not constitute a breach of, or Default or a Debt Repayment
Triggering Event under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company or any of its
subsidiaries pursuant to, (A) the Company's revolving credit facilities with
First Bank National Association and Guaranty Federal Bank and Salomon
Brothers, as lenders, or (B) to the best knowledge of such counsel, any other
material Existing Instrument; or (iv) to the best knowledge of such counsel,
will not result in any violation of any law, administrative regulation or
administrative or court decree applicable to the Company or any subsidiary.
(xviii) The Company is not, and after receipt of payment for the Common
Shares will not be, an "investment company" within the meaning of Investment
Company Act.
(xix) Except as disclosed in the Prospectus, to the best knowledge of
such counsel, there are no persons with registration or other similar rights
to have any equity or debt securities registered for sale under the
Registration Statement or included in the offering contemplated by the
Underwriting Agreement, other than the OA Stockholders, except for such rights
as have been duly waived.
(xx) To the best knowledge of such counsel, neither the Company nor any
subsidiary is in violation of its charter or by-laws or any law,
administrative regulation or administrative or court decree applicable to the
Company or any subsidiary or is in Default in the performance or observance of
any obligation, agreement, covenant or condition contained in any material
Existing Instrument, except in each such case for such violations or Defaults
as would not, individually or in the aggregate, result in a Material Adverse
Change.
[(xxi) [No Default] or [Event of Default] (as defined in that certain
Mortgage Loan Purchase Agreement by and between Salomon Brothers Mortgage
Securities VII, Inc. ("Salomon Brothers") and New Century Mortgage Corporation
dated February 25, 1997), no [Events of Servicing Termination or increase in
the Reserve Account Required Amount] (as defined in that certain Pooling and
Servicing Agreement by and among Salomon Brothers, the Subsidiary and First
Trust National Association, dated February 1, 1997) has occurred and, to the
best of the such counsels knowledge, there is no event which, with the giving
of notice or the passage of time or both, would give rise to such an event.]
EA-3
<PAGE>
(xxii) The description of whole loan sales effected by the Company, as
contained in the Registration Statement and the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus), is
true and complete in all material respects and no event or series of events
has occurred that would result in any of the securities issued in
securitizations using such loans being downgraded or placed on a watch list
with negative implications by any rating agency or similar organization, or
that would impair the Company's or New Century Mortgage Corporation's (the
"Subsidiary") ability to consummate future whole loan sales or to securitize
such loans itself upon economic terms consistent with past whole loan sales
and securitizations of such loans or otherwise cause the Company and the
Subsidiary to suffer any Material Adverse Change with respect to any past or
future whole loan sale or securitization (other than any such event or series
of events described in the Prospectus, (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus).
(xxiii) The Company has filed all reports required under the Exchange
Act with respect to the registration statements filed in connection with the
asset securitizations sponsored by the Company.
(xxiv) The description of past securitization transactions effected by
the Company, as contained in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), is true and complete in all material respects and to the
Company's best knowledge, no event or series of events has occurred that would
result in any of the securities issued in connection with any of such
transactions being downgraded or placed on a watch list with negative
implications by any rating agency or similar organization, or that would
impair the Company's or its subsidiaries' ability to consummate future
securitization transactions upon economic terms consistent with past
securitization transactions or otherwise cause the Company and its
subsidiaries to suffer any Material Adverse Effect with respect to any past or
future securitization transaction (other than any such event or series of
events described in the Prospectus, or, if the Prospectus is not yet in
existence, the most recent Preliminary Prospectus).
(xxv) The description of government rules and regulations as contained
in the Registration Statement and the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus) under the captions "Risk
Factors" and "Regulation" are true and correct in all material respects.
In addition, such counsel shall state that they have participated in
conferences with officers and other representatives of the Company,
representatives of the independent public or certified public accountants for
the Company and with representatives of the Underwriters at which the contents
of the Registration Statement and the Prospectus, and any supplements or
amendments thereto, and related matters were discussed and, although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus (other than as specified above), and
any supplements or amendments thereto, on the basis of the foregoing, nothing
has come to their attention which would lead them to believe that either the
Registration Statement or any amendments thereto, at the time the Registration
Statement or such amendments became effective, contained an untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary to make the statements therein not misleading or that the
Prospectus, as of its date or at the First Closing Date or the Second Closing
Date, as the case may be, contained an untrue statement of a material fact or
omitted to state a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (it being understood that such counsel need express no belief as to
the financial statements or
EA-4
<PAGE>
schedules or other financial or statistical data derived therefrom, included or
incorporated by reference in the Registration Statement or the Prospectus or any
amendments or supplements thereto).
In rendering such opinion, such counsel may rely (A) as to matters involving
the application of laws of any jurisdiction other than the General Corporation
Law of the State of Delaware, the General Corporation Law of the State of
California or the federal law of the United States, to the extent they deem
proper and specified in such opinion, upon the opinion (which shall be dated the
First Closing Date or the Second Closing Date, as the case may be, shall be
satisfactory in form and substance to the Underwriters, shall expressly state
that the Underwriters may rely on such opinion as if it were addressed to them
and shall be furnished to the Representatives) of other counsel of good standing
whom they believe to be reliable and who are satisfactory to counsel for the
Underwriters; provided, however, that such counsel shall further state that they
believe that they and the Underwriters are justified in relying upon such
opinion of other counsel, and (B) as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of the Company and public
officials.
EA-5
<PAGE>
EXHIBIT B
The final opinion in draft form should be attached as Exhibit B at the time this
Agreement is executed.
The opinion of such counsel pursuant to Section 5(h) shall be rendered to the
Representatives at the request of the Company and shall so state therein.
References to the Prospectus in this Exhibit B include any supplements thereto
---------
at the Closing Date. All references to the OA Stockholders shall include
reference to the Selling Stockholder.
(i) The Underwriting Agreement has been duly authorized, executed
and delivered by or on behalf of, and is a valid and binding agreement of,
such OA Stockholder, enforceable in accordance with its terms, except as
rights to indemnification thereunder may be limited by applicable law and
except as the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles.
(ii) The execution and delivery by such OA Stockholder of, and the
performance by such OA Stockholder of its obligations under, the Underwriting
Agreement and its Custody Agreement and its Power of Attorney will not
contravene or conflict with, result in a breach of, or constitute a default
under, the charter or by-laws, partnership agreement, trust agreement or other
organizational documents, as the case may be, of such OA Stockholder, or, to
the best of such counsel's knowledge, violate or contravene any provision of
applicable law or regulation, or violate, result in a breach of or constitute
a default under the terms of any other agreement or instrument to which such
OA Stockholder is a party or by which it is bound, or any judgment, order or
decree applicable to such OA Stockholder of any court, regulatory body,
administrative agency, governmental body or arbitrator having jurisdiction
over such OA Stockholder.
(iii) Such OA Stockholder has good and valid title to all of the
Common Shares which may be sold by such OA Stockholder under the Underwriting
Agreement and has the legal right and power, and all authorizations and
approvals required under its charter and by-laws, partnership agreement, trust
agreement or other organizational documents, as the case may be, to enter into
the Underwriting Agreement and its Custody Agreement and its Power of
Attorney, to sell, transfer and deliver all of the Common Shares which may
sold by such OA Stockholder under the Underwriting Agreement and to comply
with its other obligations under the Underwriting Agreement, its Custody
Agreement and its Power of Attorney.
(iv) Each of the Custody Agreement and Power of Attorney of such OA
Stockholder has been duly authorized, executed and delivered by such OA
Stockholder and is a valid and binding agreement of such OA Stockholder,
enforceable in accordance with its terms, except as rights to indemnification
thereunder may be limited by applicable law and except as the enforcement
thereof may be limited by bankruptcy, insolvency, reorganization, moratorium
or other similar laws relating to or affecting creditors' rights generally or
by general equitable principles.
Assuming that the Underwriters purchase the Common Shares which are sold by
such OA Stockholder pursuant to the Underwriting Agreement for value, in good
faith and without notice of any adverse claim, the delivery of such Common
Shares pursuant to the Underwriting Agreement will pass good and valid title to
such Common Shares, free and clear of any security interest, mortgage, pledge,
lieu encumbrance or other claim.
EB-1
<PAGE>
(v) To the best of such counsel's knowledge, no consent, approval,
authorization or other order of, or registration or filing with, any court or
governmental authority or agency, is required for the consummation by such OA
Stockholder of the transactions contemplated in the Underwriting Agreement,
except as required under the Securities Act, applicable state securities or
blue sky laws, and from the NASD.
In rendering such opinion, such counsel may rely (A) as to matters involving
the application of laws of any jurisdiction other than the General Corporation
Law of the State of Delaware, the General Corporation Law of the State of
California or the federal law of the United States, to the extent they deem
proper and specified in such opinion, upon the opinion (which shall be dated the
First Closing Date or the Second Closing Date, as the case may be, shall be
satisfactory in form and substance to the Underwriters, shall expressly state
that the Underwriters may rely on such opinion as if it were addressed to them
and shall be furnished to the Representatives) of other counsel of good standing
whom they believe to be reliable and who are satisfactory to counsel for the
Underwriters; provided, however, that such counsel shall further state that they
believe that they and the Underwriters are justified in relying upon such
opinion of other counsel, and (B) as to matters of fact, to the extent they deem
proper, on certificates of the Selling Stockholder, the OA Stockholders and
public officials.
EB-2
<PAGE>
EXHIBIT C
NEW CENTURY FINANCIAL CORPORATION
Form of Selling & Non-Selling Stockholders Lockup Agreement
__________, 1997
Montgomery Securities
As Representatives of the Several Underwriters
600 Montgomery Street
San Francisco, CA 94111
Ladies and Gentlemen:
The undersigned is the beneficial owner of ___________ shares of the
common stock ("Common Stock") of New Century Financial Corporation, a Delaware
corporation (the "Company"). The undersigned understands that the Company has
filed a Registration Statement on Form S-1 (the "Registration Statement") with
the Securities and Exchange Commission (the "Commission") for the registration
of 3,450,000 shares of Common Stock (including 450,000 shares subject to an
over-allotment option) (the "Offering"). The undersigned further understands
that you are contemplating entering into an Underwriting Agreement with the
Company in connection with the Offering. All terms not otherwise defined herein
shall have the same meanings as in the Underwriting Agreement.
In order to induce the Company, you and the other Underwriters to enter
into the Underwriting Agreement and to proceed with the Offering, the
undersigned agrees, for the benefit of the Company, you and the Underwriters,
that should the Offering be effected, the undersigned will not, without the
prior written consent of Montgomery Securities, on behalf of the Underwriters,
directly or indirectly, offer, sell, offer to sell, contract to sell, pledge,
transfer, grant any option to purchase (including, without limitation, any short
sale), establish an open "put equivalent position" within the meaning of Rule
16a-1(h) under the Exchange Act, or otherwise dispose of or transfer (or
announce any intention to do the foregoing) (i) any shares of Common Stock or
such similar securities or (ii) any other securities convertible into or
exchangeable or exercisable for any shares of Common Stock or such similar
securities, beneficially owned (within the meaning the Rule 13d-3 under the
Securities Exchange Act of 1934, as amended) by the undersigned on the date
hereof or hereafter acquired for a period of 180 days (the "Lockup Period")
subsequent to the date of the final Prospectus filed with the Commission
pursuant to Rule 424(b) of the Securities Act of 1933, as amended (the "Act")
promulgated by the Commission or if no filing under Rule 424(b) is made, the
date of the final Prospectus included in the Registration Statement when
declared effective under the Act. The Representative may, in its sole
discretion and at any time without notice, release all or any portion of the
securities subject to this Agreement.
EC-1
<PAGE>
Further, the undersigned agrees that prior to the effective date of the
Registration Statement, the undersigned will not, without the prior written
consent of Montgomery Securities on behalf of the Underwriters, directly or
indirectly, offer, offer to sell, sell, contract to sell or grant any option to
purchase or otherwise dispose or transfer (or announce any offer, offer of sale,
sale, contract of sale or grant of any option to purchase or other disposition
or transfer) of (i) any shares of Common Stock or of securities substantially
similar thereto or (ii) any other securities convertible into, or exchangeable
or exercisable for, any shares of Common Stock or such similar securities,
beneficially owned (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as amended) by the undersigned on the date hereof or
hereafter acquired without first requiring any such offering or acquiring
parties to execute and deliver to you an agreement of substantially the tenor
hereof.
Notwithstanding the foregoing, this Agreement does not prohibit (i) the
exercise of outstanding warrants and options to purchase Common Stock
beneficially owned by the undersigned (but applies to the Common Stock issued
upon the exercise thereof), as described in the Prospectus; and (ii) any
bonafide gift or gifts provided that any such donee(s) executes an agreement
subjecting all such shares of Common Stock to this Agreement for the balance of
the Lockup Period.
This Agreement shall terminate if the Registration Statement does not
become effective on or before July 31, 1997.
The undersigned, whether or not participating in the offering, confirms
that he, she or it understands that the Underwriters and the Company will rely
upon the representations set forth in this agreement in proceeding with the
Offering. This agreement shall be binding on the undersigned and his, or its
respective successors, heirs, personal representatives and assigns.
Very truly yours,
By: By:
---------------------------- ------------------------
Print Stockholder's Name Stockholder's Signature
The foregoing is accepted and agreed to
as of the date first above written:
MONTGOMERY SECURITIES
By:
-----------------------------
EC-2
<PAGE>
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
NUMBER SHARES
SD
NEW CENTURY FINANCIAL
CORPORATION
INCORPORATED UNDER THE LAWS SEE REVERSE FOR CERTAIN DEFINITIONS
OF THE STATE OF DELAWARE CUSIP 64352D 10 1
This certifies that
is the record holder of
FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, $.01 PAR VALUE, OF
NEW CENTURY FINANCIAL CORPORATION
transferable on the books of the Corporation in person or by duly
authorized attorney on surrender of this certificate properly endorsed.
This certificate shall not be valid until countersigned and registered by
the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the signature of its
duly authorized officers.
[SEAL]
/s/ /s/
Secretary President
<PAGE>
The Corporation shall furnish without charge to each stockholder who so
requests a statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock of the
Corporation or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights. Such requests shall be made to
the Corporation's Secretary at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
-------------------------
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to
survivorship and not as tenants Minors Act _______________
in common (State)
COM PROP - as community property UNIF TRF MIN ACT - Custodian (until age )
--------------------------
(Cust)
____________ under Uniform
(Minor)
Transfers to Minors Act
__________________________
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value Received, _______________________ hereby sell(s), assign(s) and
transfer(s) unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
______________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________ attorney-in-fact
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated __________________
___________________________________________________________
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION
OR ENLARGEMENT OR ANY CHANGE WHATSOEVER.
Signature Guaranteed:
_________________________________________
THE SIGNATURE SHOULD BE GUARANTEED BY A
COMMERCIAL BANK OR A MEMBER BROKER OF
EITHER THE NEW YORK STOCK EXCHANGE,
AMERICAN STOCK EXCHANGE, MIDWEST STOCK
EXCHANGE OR PACIFIC COAST STOCK EXCHANGE.
<PAGE>
EXHIBIT 5.1
June
17th
1 9 9 7
619,481-3
NB1-312357.V1
New Century Financial Corporation
4910 Birch Street, Suite 100
Newport Beach, California 92660
Re: New Century Financial Corporation
Form S-1 Registration Statement
---------------------------------
Ladies and Gentlemen:
At your request, we have examined the Registration Statement on Form
S-1 filed by you with the Securities and Exchange Commission in connection with
the registration under the Securities Act of 1933, as amended, of 4,025,000
shares of Common Stock, $0.01 par value (the "Shares"), of New Century Financial
Corporation, a Delaware corporation (the "Corporation"). We are familiar with
the proceedings taken and proposed to be taken by you in connection with the
authorization and proposed issuance and sale of the Shares.
It is our opinion that, subject to said proceedings being duly taken
and completed by you as now contemplated prior to the issuance of the Shares,
which proceedings include the approval of the initial public offering price by
the Board of Directors or a committee thereof, payment for the Shares by the
underwriters and the execution and delivery by the Company of certificates
representing the Shares, the Shares will, upon issuance and sale thereof in the
manner referred to in the Registration Statement, be legally and validly issued,
fully paid and nonassessable shares of Common Stock of the Corporation.
The law covered by this opinion is limited to the present General
Corporation Law of the State of Delaware. We express no opinion as to the laws
of any other jurisdiction and no opinion regarding the statutes, administrative
decisions, rules, regulations or requirements of any county, municipality,
subdivision or local authority of any jurisdiction.
<PAGE>
Page 2 - New Century Financial Corporation - June 17, 1997
We consent to your filing this opinion as an exhibit to the
Registration Statement and to the reference to us in the Registration Statement
under the heading "Legal Matters."
Respectfully submitted,
/s/ O'Melveny & Myers LLP
<PAGE>
EXHIBIT 10.1
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (this "Agreement") is made as of
____________, 1997 by and between New Century Financial Corporation, a Delaware
corporation (the "Company"), and the individual whose name appears below the
word "Indemnitee" on the signature page (the "Indemnitee"), a director and/or
officer of the Company.
BACKGROUND
A. The Indemnitee is currently serving as a director and/or officer of the
Company and in such capacity has rendered valuable services to the Company.
B. The Company has investigated the availability and sufficiency of
liability insurance and Delaware statutory indemnification provisions to provide
its directors and officers with adequate protection against various legal risks
and potential liabilities to which directors and officers are subject due to
their position with the Company and has concluded that insurance and statutory
provisions may provide inadequate and unacceptable protection to certain
individuals requested to serve as its directors and officers.
C. In order to induce and encourage highly experienced and capable
persons, such as the Indemnitee, to continue to serve as a director and/or
officer of the Company, the Board of Directors has determined, after due
consideration and investigation of the terms and provisions of this Agreement
and the various other options available to the Company and the Indemnitee in
lieu of this Agreement, that this Agreement is not only reasonable and prudent
but necessary to promote and ensure the best interests of the Company and its
stockholders.
AGREEMENT
In consideration of the continued services of the Indemnitee and in order
to induce the Indemnitee to continue to serve as a director and/or officer of
the Company, the Company and the Indemnitee agree as follows:
SECTION 1. DEFINITIONS
-----------
As used in this Agreement:
(a) A "Change in Control" shall occur if (i) any "person" (as that term is
used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")), other than a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or a
1
<PAGE>
corporation owned directly or indirectly by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the Company,
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of the Company representing 20% or
more of the total voting power represented by the Company's then outstanding
voting securities, or (ii) during any period of two consecutive years,
individuals who at the beginning of the two year period constitute the Board of
Directors of the Company and any new director whose election by the Board of
Directors or nomination for election by the Company's stockholders was approved
by a vote of at least two-thirds (2/3) of the directors then still in office who
either were directors at the beginning of the period or whose election or
nomination for election was previously so approved, cease for any reason to
constitute a majority of the Board of Directors, or (iii) the stockholders of
the Company approve a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior to such a merger
or consolidation continuing to represent (either by remaining outstanding or by
being converted into voting securities of the surviving entity) at least 80% of
the total voting power represented by the voting securities of the Company or
the surviving entity outstanding immediately after the merger or consolidation,
or the stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company (in one
transaction or a series of transactions) of all or substantially all the
Company's assets.
(b) The term "Expenses" includes, without limitation, attorneys' fees,
disbursements and retainers, accounting and witness fees, travel and deposition
costs, expenses of investigations, judicial or administrative proceedings or
appeals, amounts paid in settlement by or on behalf of Indemnitee, and any
expenses of establishing a right to indemnification, pursuant to this Agreement
or otherwise, including reasonable compensation for time spent by the Indemnitee
in connection with the investigation, defense or appeal of a Proceeding or
action for indemnification for which the Indemnitee is not otherwise compensated
by the Company or any third party. The term "Expenses" does not include the
amount of judgments, fines, penalties or ERISA excise taxes actually levied
against the Indemnitee.
(c) The term "Indemnified Costs" means all Expenses, judgments, fines,
penalties and ERISA excise taxes actually and reasonably incurred by the
Indemnitee in connection with the investigation, defense, appeal or settlement
of any Proceeding.
(d) A "Potential Change in Control" shall occur if (i) the Company enters
into an agreement or arrangement, the
2
<PAGE>
consummation of which would result in the occurrence of a Change in Control;
(ii) any person (including the Company) publicly announces an intention to take
or to consider taking actions which if consummated would constitute a Change in
Control; or (iii) the Board adopts a resolution to the effect that, for purposes
of this Agreement, a Potential Change in Control has occurred.
(e) The term "Proceeding" shall include any threatened, pending or
completed action, suit or proceeding (including appeals thereof), whether
brought by or in the name of the Company or otherwise and whether of a civil,
criminal or administrative or investigative nature, by reason of the fact that
the Indemnitee is or was a director and/or officer of the Company, or is or was
serving at the request of the Company as a director, officer, employee or agent
of another enterprise, whether or not the Indemnitee is serving in such capacity
at the time any liability or Expense is incurred for which indemnification or
reimbursement is to be provided under this Agreement.
SECTION 2. INDEMNIFICATION
---------------
2.1 Indemnification in Third Party Actions. The Company shall indemnify
--------------------------------------
the Indemnitee if the Indemnitee is a party to, is threatened to be made a party
to, is a witness or other participant in, or is otherwise involved in any
Proceeding (other than a Proceeding by or in the name of the Company to procure
a judgment in its favor), because the Indemnitee is or was a director and/or
officer of the Company or is or was serving at the request of the Company as a
director, officer, employee or agent of another enterprise, against all
Indemnified Costs, to the fullest extent permitted by applicable law. Any
settlement must be approved in writing by the Company.
2.2 Indemnification in Proceedings By or In the Name of the Company. The
---------------------------------------------------------------
Company shall indemnify the Indemnitee if the Indemnitee is a party to, is
threatened to be made a party to, is a witness or other participant in, or is
otherwise involved in any Proceeding by or in the name of the Company to procure
a judgment in its favor by reason of the fact that Indemnitee was or is a
director and/or officer of the Company or is or was serving at the request of
the Company as a director, officer, employee or agent of another enterprise,
against all Expenses actually and reasonably incurred by Indemnitee in
connection with the defense or settlement of the Proceeding, to the fullest
extent permitted by applicable law.
2.3 Partial Indemnification. If the Indemnitee is entitled under any
-----------------------
provision of this Agreement to indemnification by the Company for some or a
portion of, but not the total amount of, the Indemnified Costs, the Company
shall nevertheless
3
<PAGE>
indemnify the Indemnitee for the portion of the Indemnified Costs to which the
Indemnitee is entitled.
2.4 Indemnification Hereunder Not Exclusive. The indemnification provided
---------------------------------------
by this Agreement is not exclusive of any other rights to which the Indemnitee
may be entitled under the Company's Certificate of Incorporation, its Bylaws,
any agreement, any vote of stockholders or disinterested directors, applicable
law, or otherwise, both as to action in the Indemnitee's official capacity and
as to action in another capacity on behalf of the Company.
2.5 Indemnification of Expenses of Successful Party. Notwithstanding any
-----------------------------------------------
other provisions of this Agreement, to the extent that the Indemnitee has been
successful in defense of any Proceeding or in defense of any claim, issue or
matter in the Proceeding, on the merits or otherwise, including, but not limited
to, the dismissal of a Proceeding without prejudice, the Indemnitee shall be
indemnified against all Indemnified Costs incurred in connection therewith to
the fullest extent permitted by applicable law.
2.6 Advances of Expenses. The Indemnified Costs by the Indemnitee in any
--------------------
Proceeding shall be paid promptly by the Company in advance of the final
disposition of the Proceeding at the written request of the Indemnitee to the
fullest extent permitted by applicable law. The advances to be made will be
paid by the Company to the Indemnitee within 30 days following delivery to the
Company of such written request which is accompanied by substantiating
documentation.
2.7 Limitations on Indemnification. No payments pursuant to this
------------------------------
Agreement shall be made by the Company to:
(a) indemnify or advance Indemnified Costs to the Indemnitee with respect
to Proceedings initiated or brought voluntarily by the Indemnitee and not by way
of defense, except with respect to Proceedings brought to establish or enforce a
right to indemnification under this Agreement or any other statute or law or
otherwise as required under applicable law; provided, however, that the
indemnification or advancement of Indemnified Costs may be provided by the
Company with respect to Proceedings initiated or brought voluntarily by the
Indemnitee and not by way of defense if the Board of Directors finds such
indemnification or advancement appropriate;
(b) indemnify the Indemnitee for any Indemnified Costs for which payment
is actually made to the Indemnitee under a valid and collectible insurance
policy, except for any excess beyond the amount of payment under the policy;
4
<PAGE>
(c) indemnify the Indemnitee for any Indemnified Costs sustained in any
Proceeding for an accounting of profits made from the purchase or sale by the
Indemnitee of securities of the Company pursuant to the provisions of Section
16(b) of the Exchange Act, the rules and regulations promulgated thereunder and
amendments thereto or similar provisions of any federal, state or local
statutory law;
(d) indemnify the Indemnitee for any Indemnified Costs resulting from
Indemnitee's conduct which is finally adjudged by a court of competent
jurisdiction to have been willful misconduct, knowingly fraudulent or
deliberately dishonest; or
(e) indemnify the Indemnitee if a court of competent jurisdiction shall
finally determine that such payment is unlawful.
SECTION 3. PRESUMPTIONS
------------
3.1 Presumption Regarding Standard of Conduct. The Indemnitee shall be
-----------------------------------------
conclusively presumed to have met the relevant standards of conduct as defined
by applicable law for indemnification pursuant to this Agreement unless a
determination that the Indemnitee has not met the relevant standards is made by
(i) a majority vote of the directors of the Company who are not parties to the
Proceeding, even though less than a quorum, (ii) a majority vote of the
stockholders of the Company, or (iii) in a written opinion by independent legal
counsel, selection of whom has been made by the Company's Board of Directors and
approved by the Indemnitee.
3.2 Determination of Right to Indemnification.
-----------------------------------------
(a) If a claim under this Agreement is not paid by the Company within 30
days of receipt of written notice, the right to indemnification as provided by
this Agreement shall be enforceable by the Indemnitee in any court of competent
jurisdiction. The Company shall bear the burden of proving by clear and
convincing evidence that indemnification or advances are not appropriate.
Neither (i) the failure of the directors, stockholders or independent legal
counsel to have made a determination prior to the commencement of the action
that indemnification or advances are proper in the circumstances because the
Indemnitee has met the applicable standard of conduct, nor (ii) an actual
determination by the directors, stockholders or independent legal counsel that
the Indemnitee has not met the applicable standard of conduct, shall be a
defense to the action or create a presumption that the Indemnitee has not met
the applicable standard of conduct.
(b) The Indemnitee's Expenses incurred in connection with any Proceeding
concerning the Indemnitee's right to
5
<PAGE>
indemnification or advances in whole or in part pursuant to this Agreement shall
also be indemnified by the Company regardless of the outcome of the Proceeding,
unless a court of competent jurisdiction determines that each of the material
assertions made by the Indemnitee in the Proceeding was not made in good faith
or was frivolous.
SECTION 4. CHANGE IN CONTROL
-----------------
The Company agrees that if there is a Change in Control or Potential Change
in Control of the Company (other than a Change in Control or Potential Change in
Control which has been approved by a majority of the Company's Board of
Directors who were directors immediately prior to the Change in Control or
Potential Change in Control), then with respect to all matters thereafter
arising concerning the rights of Indemnitee to be indemnified for Indemnified
Costs, the Company shall seek legal advice only from independent counsel who is
selected by Indemnitee and reasonably satisfactory to the Company and who has
not otherwise performed services for the Company or Indemnitee within the last
five years (the "Special Independent Counsel"). The Special Independent
Counsel, among other things, shall render its written opinion to the Company and
Indemnitee as to whether and to what extent the Indemnitee would be permitted to
be indemnified under applicable law. The Company agrees to pay the reasonable
fees and expenses of the Special Independent Counsel and may fully indemnify the
Special Independent Counsel against any and all expenses (including attorneys'
fees), claims, liabilities and damages arising out of or relating to this
Agreement.
SECTION 5. INDEMNIFICATION PROCEDURE
-------------------------
5.1 Notice. Promptly after receipt by the Indemnitee of notice of the
------
commencement of any Proceeding, the Indemnitee will, if a claim is to be made
against the Company under this Agreement, notify the Company of the commencement
of the Proceeding. The failure to notify the Company will not relieve the
Company from any liability which the Company may have to the Indemnitee, except
to the extent the Company is materially damaged by the failure of the Indemnitee
to so notify the Company.
5.2 Company Participation. With respect to any Proceeding for which
---------------------
indemnification is requested, the Company will be entitled to participate in the
Proceeding at its own expense and, except as otherwise provided below, to the
extent that it may desire, the Company may assume the defense of the Proceeding,
with counsel reasonably satisfactory to the Indemnitee. After the Company
notifies the Indemnitee of the Company's election to assume the defense of a
Proceeding, during the Company's good faith active defense the Company will not
be
6
<PAGE>
liable to the Indemnitee under this Agreement for any legal or other expenses
subsequently incurred by the Indemnitee in connection with the defense of the
Proceeding, other than reasonable costs of investigation, out-of-pocket or as
otherwise provided below. The Indemnitee shall have the right to employ the
Indemnitee's counsel in any Proceeding but the fees and expenses of the counsel
incurred after notice from the Company of its assumption of the defense of the
Proceeding shall be at the expense of the Indemnitee, unless (i) the employment
of counsel by the Indemnitee has been authorized by the Company, (ii) the
Indemnitee has reasonably concluded that there may be a conflict of interest
between the Company and the Indemnitee in the conduct of the defense of a
Proceeding, (iii) the Company has not in fact employed counsel to assume the
defense of a Proceeding, or (iv) the Company has returned defense of the
Proceeding to Indemnitee. In each of the foregoing cases the reasonable fees
and expenses of the Indemnitee's counsel shall be at the expense of the Company.
The Company shall not be entitled to assume the defense of any Proceeding
brought by or on behalf of the Company or as to which the Indemnitee has made
the conclusion that there may be a conflict of interest between the Company and
the Indemnitee.
5.3 Settlement. Neither the Company nor the Indemnitee shall settle or
----------
compromise any Proceeding in any manner which would impose any penalty or
limitation on either the Indemnitee or the Company without the written consent
of either the Company or the Indemnitee, as the case may be; provided, however,
that neither the Company nor the Indemnitee shall unreasonably withhold such
consent.
5.4 Subrogation. If the Company pays Indemnified Costs, the Company will
-----------
be subrogated to the extent of such payment to all of the rights of recovery of
the Indemnitee against third parties. The Indemnitee will do all things
reasonably necessary to secure such rights, including the execution of documents
necessary to enable the Company effectively to bring suit to enforce such
rights.
SECTION 6. MAINTENANCE OF LIABILITY INSURANCE
----------------------------------
6.1 Affirmative Covenant of the Company. As long as the Indemnitee shall
-----------------------------------
continue to serve as a director and/or officer of the Company and thereafter so
long as the Indemnitee shall be subject to any possible Proceeding, the Company
shall promptly obtain and maintain in full force and effect directors' and
officers' liability insurance ("D&O Insurance") in reasonable amounts from
established and reputable insurers which shall include, without limitation,
coverage for securities liabilities. Notwithstanding the foregoing, the Company
shall have no obligation to obtain or maintain D&O Insurance if the Company
determines in good faith that insurance is not reasonably available, the premium
costs for insurance are disproportionate
7
<PAGE>
to the amount of coverage provided, the coverage provided by insurance is so
limited by exclusions that it provides an insufficient benefit, or the
Indemnitee is covered by similar insurance maintained by a subsidiary of the
Company. If the Company has D&O Insurance at the time the Company receives
notice that a Proceeding has commenced, the Company will give prompt notice of
such commencement to the insurers as required by the applicable insurance
policies. The Company will thereafter take all necessary or desirable action to
cause such insurers to pay, on behalf of the Indemnitee, all amounts payable as
a result of such Proceeding in accordance with the terms of such policies.
6.2 Indemnitee Named as Insured. In all D&O Insurance policies, the
---------------------------
Indemnitee shall be named as an insured in a manner that provides the Indemnitee
the same rights and benefits as are accorded to the most favorably insured of
the Company's directors and/or officers.
SECTION 7. AGREEMENT TO SERVE; REPAYMENT
-----------------------------
7.1 Agreement to Serve. Indemnitee will serve or continue to serve as a
------------------
director and/or officer of the Company for so long as the Indemnitee is duly
elected or appointed or until the Indemnitee voluntarily resigns. Any present
or future employment agreement between the Indemnitee and the Company is not
modified by this Agreement and nothing contained herein creates in the
Indemnitee any right of continued employment.
7.2 Repayment of Indemnified Costs. The Indemnitee will reimburse the
------------------------------
Company for all Indemnified Costs paid by the Company in defending any
Proceeding against the Indemnitee if and only to the extent that a court of
competent jurisdiction finally decides that the Indemnitee is not entitled to be
indemnified by the Company for such Indemnified Costs under the provisions of
applicable law, the Company's Certificate of Incorporation, its Bylaws, this
Agreement, or otherwise. The Indemnitee will repay such amounts advanced only
if, and to the extent that, it is ultimately determined that Indemnitee is not
entitled to be indemnified for such Indemnified Costs by the Company pursuant to
this Agreement.
7.3 Repayment. The Indemnitee will promptly repay to the Company any
---------
amounts paid to the Indemnitee pursuant to other rights of indemnification or
under any insurance policy, to the extent those payments are duplicative of
payments under this Agreement.
SECTION 8. MISCELLANEOUS
-------------
8.1 Successors and Assigns. This Agreement shall be binding upon, and
----------------------
shall inure to the benefit of the Indemnitee and the Indemnitee's spouse, heirs,
successors, personal
8
<PAGE>
representatives and assigns, and the Company and its successors and assigns.
Nothing in this Agreement, express or implied, is intended to confer any rights
or remedies upon any other person.
8.2 Separability. Each provision of this Agreement is a separate and
------------
distinct agreement and independent of the others, so that if any provision of
this Agreement shall be held to be invalid or unenforceable for any reason, the
invalidity or unenforceability shall not affect the validity or enforceability
of the other provisions of this Agreement. To the extent required, any
provision of this Agreement may be modified by a court of competent jurisdiction
to preserve its validity and to provide the Indemnitee with the broadest
possible indemnification permitted under applicable law.
8.3 Savings Clause. If this Agreement or any portion of it is invalidated
--------------
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee as to Indemnified Costs with respect to any
Proceeding to the full extent permitted by any applicable portion of this
Agreement that shall not have been invalidated or by any other applicable law.
8.4 Interpretation; Governing Law. This Agreement shall be construed as a
-----------------------------
whole and in accordance with its fair meaning. Headings are for convenience
only and shall not be used in construing meaning. This Agreement shall be
governed and interpreted in accordance with the laws of the State of Delaware.
8.5 Amendments; Waivers; Nature of Rights. No amendment, waiver,
-------------------------------------
modification, termination or cancellation of this Agreement shall be effective
unless in writing signed by the party against whom enforcement is sought. No
failure or delay in exercising any right will be deemed a waiver of such right.
The indemnification rights afforded to the Indemnitee by this Agreement are
contract rights and may not be diminished, eliminated or otherwise affected by
amendments to the Company's Certificate of Incorporation, its Bylaws or any
agreement, including, without limitation, D&O Insurance policies.
8.6 Counterparts. This Agreement may be executed in one or more
------------
counterparts, all of which shall be considered one and the same agreement and
shall become effective when one or more counterparts have been signed by each
party and delivered to the other.
8.7 Notices. Any notice required to be given hereunder shall be in
-------
writing and, if directed to the Company, at 4910 Birch Street, Suite 100,
Newport Beach, California, 92660, Attention: Brad A. Morrice, and, if directed
to the Indemnitee, at the Indemnitee's most recent address on the books and
records of the Company, or to another address as either shall designate in
writing.
9
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first written above.
INDEMNITEE
___________________________________
Print Name: _______________________
NEW CENTURY FINANCIAL CORPORATION,
a Delaware corporation
By:________________________________
Title:_____________________________
10
<PAGE>
EXHIBIT 10.15
STOCK PURCHASE AGREEMENT
This Stock Purchase Agreement is made and entered into as of May 30,
1997, between Comerica Incorporated, a Delaware corporation and bank holding
company ("Buyer") and New Century Financial Corporation, a Delaware corporation
(the "Seller").
R E C I T A L S
WHEREAS, Seller desires to sell, and Buyer desires to acquire 545,000
shares of Common Stock of the Seller (the "Stock"), subject to the terms and
conditions of this Agreement and for the consideration described herein.
A G R E E M E N T
NOW, THEREFORE, in consideration of the mutual promises contained
herein and intending to be legally bound the parties agree as follows:
ARTICLE I
PURCHASE & SALE
1.1 Sale of Stock. Subject to the terms and conditions of this
Agreement, Seller agrees to sell to Buyer the Stock and deliver the certificates
evidencing the Stock to Buyer at the closing of the transactions contemplated by
this Agreement (the "Closing"), which shall occur contemporaneously with the
execution and delivery of this Agreement.
1.2 Purchase Price and Number of Shares. Buyer agrees to acquire the
Stock at a purchase price (the "Purchase Price") of $7.50 per share of Stock.
1.3 Receipt of Purchase Price. Buyer hereby acknowledges receipt in
the sum of $4,087,500 as payment in full for the stock.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF SELLER
Seller represents, warrants and agrees:
2.1 Organization and Standing. Seller is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Seller has all necessary corporate power and authority to execute
and deliver this Agreement and to perform its obligations hereunder. Seller has
all requisite corporate power and authority to lease, own and operate its
<PAGE>
properties and assets and to carry on its business as now conducted.
2.2 Authorized Capital Stock. Effective as of the Closing or within
five (5) business days thereafter, the authorized capital stock of the Seller
consists, or will consist, of 45,000,000 shares of Common Stock, $0.01 par
value, and 7,500,000 shares of Preferred Stock, $0.01 par value, of which no
shares are, or will be, issued and outstanding. The issued shares of Common
Stock and the number of authorized and outstanding warrants and options after
the Closing and after the Seller's proposed initial public offering shall be as
set forth on Exhibit G hereto. The Stock has been duly authorized by all
necessary corporate action on the part of the Seller and, upon payment for and
delivery of the Stock in accordance with this Agreement, the Stock will be
validly issued, fully paid and non-assessable.
2.3 No Conflicts. The execution, delivery and performance of this
Agreement by Seller will not (i) violate any provision of Seller's charter
documents or bylaws, (ii) violate any statute or law or any judgment, decree,
order, regulation or rule of any court or governmental authority to which Seller
is bound or affected, (iii) result in the breach (or an event which, with notice
or lapse of time or both, would constitute a breach) under any term or provision
of, or constitute a default under, any agreement listed in an exhibit to
Seller's Registration Statement on Form S-1, as filed with the Securities and
Exchange Commission (the "SEC") on April 18, 1997 (the "Registration
Statement"), or (iv) violate any other agreement to which Seller is a party.
2.4 Authorization. The execution, delivery and performance of this
Agreement by Seller has been duly and validly authorized by the Board of
Directors and stockholders of Seller and by all other necessary corporate action
on the part of Seller. This Agreement constitutes the legally valid and binding
obligation of Seller, enforceable against Seller in accordance with its terms,
except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws and equitable principles
relating to or limiting creditors' rights generally.
2.5 Consents. All material consents or approvals of third parties
necessary for the execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby by Seller have been
obtained.
2.6 Licenses and Permits. All licenses and permits necessary for the
conduct of Seller's business are in full force and effect to the extent material
to the conduct of Seller's business.
2.7 Compliance with Law. Seller is organized and has conducted
business in accordance with applicable laws in all
<PAGE>
material respects and the practices of Seller are in compliance with all such
laws, to the extent applicable, in all material respects.
2.8 Legal Proceedings. There is no order or action pending, or, to
the best knowledge of Seller, threatened, against or affecting Seller or its
assets that if determined adversely would reasonably be expected to have a
material adverse effect on the Seller's business or on Seller's ability to
perform its obligations hereunder.
2.9 Tax Matters. Seller has timely filed, or will file, (or where
permitted or required, its direct or indirect parents have timely filed or will
file) all tax returns required of it and has paid all taxes due for all periods
or portions of periods ending on or before the Closing (except as provided in
the following sentence). Adequate provision has been made in the books and
records of Seller, and to the extent required by GAAP in the Financial
Statements for all taxes whether or not due and payable and whether or not
disputed to the extent not paid.
2.10 Performance of Obligations. Seller has performed in all
material respects all of the obligations required to be performed by it under
any covenant, contract, lease, indentures or other covenant to which it is a
party and is not in default or material breach of any term of the foregoing.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents, warrants and agrees:
3.1 Organization and Related Matters. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Buyer has the necessary corporate power and authority to execute and
deliver this Agreement and to perform its obligations hereunder.
3.2 Consents and Authorization. All material consents or approvals
of third parties necessary for the execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby by Buyer
have been obtained. The execution, delivery and performance of this Agreement
by Buyer has been duly and validly authorized by all necessary corporate action
on the part of Buyer. This Agreement constitutes the legally valid and binding
obligation of Buyer, enforceable against Buyer in accordance with its terms,
except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws and equitable principles
relating to or limiting creditors' rights generally.
<PAGE>
3.3 No Conflicts. The execution, delivery and performance of this
Agreement by Buyer will not (i) violate any provision in the Buyer's charter
documents or bylaws, (ii) result in the breach (or an event which, with notice
or lapse of time or both, would constitute a breach) under any term or provision
of, or constitute a default under, any material indenture, mortgage, deed of
trust or other agreement or arrangement to which Buyer is a party or by which it
is bound, or (iii) violate any statute or law or any judgment, decree, order,
regulation or rule of any court or governmental authority to which Buyer is
bound or affected.
3.4 Investment. Buyer is acquiring the Stock from Seller for Buyer's
own account, for investment purposes only and not with a view to or for sale in
connection with the distribution thereof.
3.5 Business Relationship. Buyer is generally familiar with the
business and affairs of Seller and has discussed with Seller and its plans,
operations and financial condition with one or more of the officers or directors
of Seller. Buyer has read and analyzed, and is familiar with the information
contained in, the Registration Statement, including all of the documents
incorporated therein by reference.
3.6 Qualified Institutional Buyer. Buyer represents that it is a
"qualified institutional buyer" (as such term is defined in Rule 144A under the
Securities Act of 1933, as amended (the "Act")).
3.7 Accredited Investor. Buyer represents that it is an "accredited
investor" (as such term is defined in Regulation D under the Act) and it is
knowledgeable, sophisticated and experienced in business and financial matters
and has previously invested in securities similar to the Stock being acquired
hereunder.
3.8 Disclosure. Seller has disclosed to Buyer that:
(i) the sale of the Stock has not been registered under the Act,
or qualified under the securities laws of any state and the Stock must be
held indefinitely unless a sale or transfer of the Stock is subsequently
registered under the Act and qualified under applicable state securities
laws or exemptions therefrom are available; and
(ii) any certificates representing the Stock will bear the
following legend restricting transfer:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, but are issued in reliance on the
representation that they are taken for investment and not for
redistribution. As a condition of any transfer hereof, the Company
may require
<PAGE>
an opinion of counsel satisfactory to it that all statutory
registration provisions have been met or do not apply.
The Company is authorized to issue stock in one or more classes or
series. The Company will furnish without charge to any shareholder
who so requests a statement as to the powers, designations,
preferences and relative, participating, optional or other special
rights of each class of stock or series thereof and the
qualifications, limitations or restrictions of such preferences and/or
rights.
The shares of capital stock of the Company represented by this stock
certificate and the disposition thereof are subject to the terms of a
Shareholders Agreement dated as of November 22, 1995 (the
"Shareholders Agreement") by and among the Company and certain other
parties. A copy of the Shareholders Agreement is on file at the
principal office of the Company and may be inspected by the registered
owner of this stock certificate or a duly authorized representative of
such owner upon request during the Company's normal business hours."
3.9 Rule 144. Buyer understands that, in addition to the
restrictions described above: (i) the shares which constitute the Stock are
restricted securities within the meaning of Rule 144 promulgated under the Act;
(ii) exemption from registration under Rule 144 will not be available in any
event for at least one year from the date of sale of the Stock to Buyer, and
even then, Rule 144 will not be available unless: (a) a public trading market
then exists for the Common Stock of Seller, (b) adequate information concerning
Seller is then available to the public, and (c) the other terms and conditions
of Rule 144 are met; and (iii) any unregistered sale of the Stock may be made by
Buyer only in accordance with the terms and conditions of Rule 144.
3.10 Discharge of Implied Warranties. Buyer represents to Seller that
Buyer has performed extensive due diligence and investigations with respect to
Seller with the intention of forming its own conclusions regarding the condition
(financial and otherwise), value, property, liabilities, contracts,
contingencies, prospects, risks and other incidents of the business of Seller in
response to the parties' express intention and agreement that as of the Closing,
the sale hereunder shall be without representation and warranty of any kind
(express or implied) regarding the Seller or the Stock, except as set forth in
Section 2 hereof. Buyer will rely solely on its own business judgment and
investigations with respect to Seller and the Stock. Buyer expressly
acknowledges and agrees that Seller has not provided any further representations
or warranties (express or implied) to Buyer.
<PAGE>
ARTICLE IV
COVENANT OF BUYER
Upon request of the underwriters of the Offering, Buyer agrees to
execute and deliver a 180-day Lock-Up Agreement in substantially the form of
Exhibit A hereto.
ARTICLE V
DOCUMENTS DELIVERED CONTEMPORANEOUSLY WITH PURCHASE
5.1 The parties have executed and delivered the following agreements
on the date hereof;
1. Letter of Intent providing for the negotiation, execution and
delivery of the following documents in substantially the form set forth in
Exhibit B:
(a) Sub-Servicing Agreement with respect to the time period prior to
Seller's sale of loans in the secondary market;
(b) Sub-Servicing Agreement with respect to the time period after
Seller's securitization of loans or sale of loans on a servicing-
retained basis;
(c) Service Provider Agreement regarding loan referrals from Buyer's
bank and mortgage branches; and
(d) A Service Provider Agreement regarding loan referrals resulting
from Buyer's consumer loan portfolio.
2. The First Amendment to Shareholders' Agreement substantially in
the form of Exhibit D (it has been acknowledged by the parties that the
Shareholders Agreement will be terminated upon the closing of Seller's
contemplated initial public offering);
3. A Registration Rights Agreement substantially in the form of
Exhibit C hereto;
4. A letter agreement(with respect to the waiver of preemptive
rights and related matters) by the stockholders of Seller substantially in the
form of Exhibit E;
5. Additional representation by Seller. Seller hereby represents
and warrants to Buyer that:
(a) Stockholders of Seller holding not less than ninety percent
(90%) of the 4,922,144 outstanding warrants to purchase shares of Seller's
Common Stock have elected to exercise such warrants for cash or on a
cashless basis in accordance with the terms thereof; and
<PAGE>
(b) Stockholders of Seller holding not less than ninety percent (90%)
of the 5,820,000 outstanding shares of Series A and Series B Preferred
Stock of the Seller shall have elected to convert such preferred shares
into Common Stock of the Seller.
ARTICLE VI
CONVENANT OF SELLER
On the date hereof, Seller has issued a warrant to Buyer for 100,000
shares of Seller's Common Stock. Seller shall issue to Buyer additional
warrants to purchase the number of additional shares of Seller's Common Stock
indicated below, such warrants to be in substantially the form attached hereto
as Exhibit F, upon the occurrence of the following events:
(i) 50,000 shares upon the commencement of servicing operations
pursuant to the Sub-Servicing Agreements contemplated by the Letter of Intent
(provided, however, that the grant of such warrants shall not be deferred if
Buyer is prepared to commence servicing operations but such commencement is
delayed beyond September 30, 1997 because Seller is not prepared to commence
servicing operations)
(ii) 50,000 shares after one (1) year of operations under the Sub-
Servicing Agreements contemplated by the Letter of Intent; provided that at the
end of such year Buyer is not in material default under or in material breach of
the terms of such Sub-Servicing Agreements after having had an opportunity to
cure;
(iii) 25,000 shares upon the funding by Seller of an aggregate of
$10.0 million of loans resulting from the First Service Provider Agreement
referred to in the Letter of Intent;
(iv) 25,000 shares upon the execution by Buyer and the funding by
Seller of an aggregate of $10.0 million of loans resulting from the Second
Service Provider Agreement referred to in the Letter of Intent; and
(v) 83,333 shares upon the agreement of Buyer and Seller to one or
more additional strategic relationships between Buyer and Seller, such agreement
to be based upon one or more proposals to be made by Buyer, which proposals
shall not be unreasonably declined by Seller.
The Purchase Price for shares purchased under the foregoing warrants
shall be equal to the greater of (A) $7.50 per share or, (B) if Seller completes
an initial public offering of its Common Stock within six months after the
Closing, the initial public offering price. The five year exercise period for
all of the foregoing warrants shall commence on the date of the Closing and each
such warrant shall vest whether or not already awarded in
<PAGE>
three equal installments on December 31, 1997, 1998 and 1999, respectively,
subject to satisfaction (but not conditioned by) of the performance events
specified above and subject to acceleration under the circumstances set forth in
the form of warrant attached hereto as Exhibit F.
ARTICLE VII
[INTENTIONALLY LEFT BLANK]
ARTICLE VIII
GENERAL
8.1 No Brokers or Finders. Seller and Buyer each represent to the
other that, except for Seller's retention of Montgomery Securities, no agent,
broker, finder or investment or commercial banker, or other firms engaged by or
acting on behalf of either Buyer, Seller or any of their affiliates in
connection with the negotiation, execution or performance of this Agreement or
the transactions contemplated by this Agreement, is or will be entitled to any
broker's or finder's or similar fees or other commissions as a result of this
Agreement or such transactions, and that Seller shall pay the fees of Montgomery
Securities.
8.2 Amendments; Waivers. This Agreement and any schedule or exhibit
attached hereto may be amended only by agreement in writing of Buyer and Seller.
No waiver of any provision nor consent to any exception to the terms of this
Agreement or any agreement contemplated hereby shall be effective unless in
writing and signed by the party to be bound and then only to the specific
purpose, extent and instance so provided.
8.3 Schedules; Exhibits; Integration. Each schedule delivered
pursuant to the terms of this Agreement shall be in writing and shall constitute
a part of this Agreement, although schedules need not be attached to each copy
of this Agreement. This Agreement, together with such schedules and the
exhibits attached hereto, constitutes the entire agreement among the parties
pertaining to the subject matter hereof and supersedes all prior agreements and
understandings of the parties in connection therewith.
8.4 Further Assurances. Each party agrees to cooperate fully with
the other party and to execute and deliver such further instruments,
certificates, agreements and other documents and take such other actions as may
be necessary or appropriate to consummate or implement the transactions
contemplated hereby or to evidence such events or matters.
8.5 Governing Law. This Agreement and the legal relations between
the parties shall be governed by and construed in accordance with the laws of
the State of California applicable to
<PAGE>
contracts made and performed in such State and without regard to conflicts of
law doctrines, except to the extent that certain matters are preempted by
federal law or are governed by the law of the jurisdiction of organization of
the respective parties. Any court action arising out of this Agreement shall be
brought in any court of competent jurisdiction within the State of California,
County of Orange.
8.6 No Assignment. Neither this Agreement nor any rights or
obligations under it are assignable.
8.7 Headings. The descriptive headings of the Articles, Sections and
subsections of this Agreement are for convenience only and do not constitute a
part of this Agreement.
8.8 Counterparts. This Agreement and any amendment hereto or any
other agreement (or document) delivered pursuant hereto may be executed in one
or more counterparts and by different parties in separate counterparts. All of
such counterparts shall constitute one and the same agreement (or other
document) and shall become effective (unless otherwise provided therein) when
one or more counterparts have been signed by each party and delivered to the
other party.
8.9 Publicity and Reports. For a period of three (3) months after
the date hereof, Seller and Buyer shall coordinate all publicity relating to the
transactions contemplated by this Agreement and no party shall issue any press
release, publicity statement or other public notice relating to this Agreement,
or the transactions contemplated by this Agreement, without obtaining the prior
consent of Seller and Buyer and their respective counsel, except to the extent
that either party and its counsel in good faith conclude a particular action is
required under federal securities or other applicable law.
8.10 Parties in Interest. This Agreement shall be binding upon and
inure to the benefit of each party, and nothing in this Agreement, express or
implied, is intended to confer upon any other person any rights or remedies of
any nature whatsoever under or by reason of this Agreement. Nothing in this
Agreement is intended to relieve or discharge the obligation of any third person
to any party to this Agreement.
8.11 Notices. Any notice or other communication hereunder must be
given in writing and (a) delivered in person, (b) transmitted by telex, telefax
or telecommunications mechanism or (c) mailed by certified or registered mail,
postage prepaid, receipt requested as follows:
<PAGE>
If to Buyer, addressed to:
Comerica, Incorporated
Comerica Tower at One Detroit
500 Woodward, MC 3391
Detroit, Michigan 48226
Facsimile Number: (313) 222-9480
Attn: Mark W. Yonkman, Assistant Secretary
With a copy to:
Comerica Incorporated
3551 Hamlin Road
M/C 7132
Auburn Hills, Michigan 48326
Facsimile Number: 810-370-6907
Attn: John R. Haggerty, Executive Vice President
If to Seller, addressed to:
New Century Financial Corporation
4910 Birch Street, Suite 100
Newport Beach, California 92660
Facsimile Number: (714) 440-7033
Attn: Brad A. Morrice, President
With a copy to:
O'Melveny & Myers LLP
610 Newport Center Drive, Suite 1700
Newport Beach, California 92660-6429
Facsimile Number: (714) 669-6994
Attn: David A. Krinsky, Esq.
or to such other address or to such other person as either party shall have last
designated by such notice to the other party. Each such notice or other
communication shall be effective (i) if given by telecommunication, when
transmitted to the applicable number so specified in (or pursuant to) this
Section 7.11 and an appropriate answer back is received, (ii) if given by mail,
three days after such communication is deposited in the mails with first class
postage prepaid, addressed as aforesaid or (iii) if given by any other means,
when actually received at such address.
8.12 Expenses and Attorneys Fees. Seller and Buyer shall each pay
their own expenses incident to the negotiation, preparation and performance of
this Agreement and the transactions contemplated hereby, including but not
limited to the fees, expenses and disbursements of their respective accountants
and counsel.
<PAGE>
8.13 Survival. The representations and warranties contained in or
made pursuant to this Agreement shall expire on the first anniversary of the
Closing.
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed by its duly authorized officers as of the day and year
first above written.
BUYER:
COMERICA INCORPORATED,
a Delaware corporation
By: /s/ MARK W. YONKMAN
____________________________
Name: Mark W. Yonkman
Its: First Vice President
and Assistant Secretary
SELLER:
NEW CENTURY FINANCIAL CORPORATION,
a Delaware corporation
By: /s/ ROBERT K. COLE
____________________________
Name: Robert K. Cole
Its: Chairman & CEO
<PAGE>
Exhibits
EXHIBIT A Form of Lock-Up Agreement
EXHIBIT B Letter of Intent regarding the following:
(a) Subservicing Agreement with respect to the time period prior
to Seller's sale of loans in the secondary market;
(b) Subservicing Agreement with respect to the time period after
Seller's securitization of loans or sale of loans on a servicing
retained basis;
(c) Service Provider Agreement regarding loan referrals from
Buyer's bank and mortgage branches; and
(d) Service Provider Agreement regarding loan referrals resulting
from Buyer's consumer loan portfolio
EXHIBIT C Form of Registration Rights Agreement
EXHIBIT D Form of First Amendment to Stockholders' Agreement
EXHIBIT E Form of Waiver of Preemptive Rights
EXHIBIT F Form of Warrant
EXHIBIT G Schedule of Outstanding Shares, Options and Warrants
<PAGE>
EXHIBIT 11.1
NEW CENTURY FINANCIAL CORPORATION
STATEMENT REGARDING COMPUTATION OF PRO FORMA PER SHARE EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, MARCH 31,
1996 1997
PRO FORMA PRIMARY EARNINGS PER SHARE ------------ ----------
<S> <C> <C>
Computation for Statement of Operations:
Net earnings per Statement of Operations used in
Primary Earnings Per Share computation............... $1,335,000 $2,347,000
Adjustment related to revisions in compensation and
incentive compensation plan............................ (142,000) (88,000)
---------- ----------
Net Earnings as Adjusted................................ $1,193,000 $2,259,000
========== ==========
Weighted Average Number of Shares Outstanding........... 10,992,374 10,992,374
Shares issuable pursuant to the assumption of the
exercise of warrants and options, as determined by the
application of the Treasury Stock Method............... 638,065 650,833
---------- ----------
Weighted Average Number of Shares Outstanding........... 11,630,439 11,643,207
========== ==========
Pro Forma Primary Earnings Per Share, As Adjusted....... $ 0.10 $ 0.19
</TABLE>
Fully diluted earnings per share were not materially different.
<PAGE>
EXHIBIT 23.1
The Board of Directors of
New Century Financial Corporation:
We consent to the use of our report included herein and to the reference to
our firm under the headings "Selected Consolidated Financial and Other Data"
and "Experts" in the Prospectus.
/s/ KPMG Peat Marwick LLP
-------------------------------------
KPMG Peat Marwick LLP
Orange County, California
June 17, 1997
