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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-22633
----------------
NEW CENTURY FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0683629
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
18400 VON KARMAN, SUITE 1000, IRVINE, CALIFORNIA 92612
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)(ZIP CODE)
(714) 440-7030
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
----------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of Common Stock held by non-affiliates of the
Registrant on March 16, 1998 was approximately $61.0 million based on the
closing sales price for the Common Stock on such date of $11.00 as reported on
the Nasdaq National Market. All outstanding shares, except for shares held by
executive officers and members of the Board of Directors and their affiliates,
are deemed to be held by non-affiliates.
As of March 16, 1998, the Registrant had 14,402,360 shares of Common Stock
outstanding.
PART III INCORPORATES INFORMATION BY REFERENCE FROM THE REGISTRANT'S
DEFINITIVE PROXY STATEMENT FOR ITS 1998 ANNUAL MEETING OF STOCKHOLDERS TO BE
FILED WITH THE COMMISSION WITHIN 120 DAYS OF DECEMBER 31, 1997.
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PART I
ITEM 1. BUSINESS
GENERAL
New Century Financial Corporation ("New Century" or the "Company") is a
specialty finance company engaged in the business of originating, purchasing,
selling and servicing subprime mortgage loans secured primarily by first
mortgages on single family residences. The Company originates and purchases
loans through its Wholesale and Retail Divisions. From the commencement of
lending operations in February 1996 through the fiscal year ended December 31,
1997, the Company originated and purchased $2.3 billion in mortgage loans. The
Company's loan originations and purchases have grown from $4.3 million for the
first quarter of 1996 to $707.0 million for the fourth 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 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 through conventional
methods, and 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. Although the Company's underwriting guidelines include five levels of
credit risk classification, approximately 66.4% of the principal balance of
the loans originated and purchased by the Company in 1997 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 89.8% of
its loans originated or purchased during 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 1997 was approximately 74.0%. Approximately 96.9% of the loans originated
and purchased by the Company during 1997 were secured by first mortgages, and
the remainder of the loans the Company originated and purchased for such
period was secured by second mortgages.
The Wholesale Division originates loans through, and purchases closed loans
from, independent loan brokers which accounted for $1.3 billion, or 64.4%, of
the Company's loan production during 1997. As of December 31, 1997, the
Wholesale Division originated loans through its four regional operating
centers located in Southern California, Northern California, Chicago and
Atlanta and through 33 additional sales offices located in 21 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 20 to 30 days
following conditional approval.
The Retail Division originates loans through the direct solicitation of
borrowers and accounted for $578.7 million, or 29.5%, of the Company's loan
production during 1997. As of December 31, 1997, the Retail Division
originated loans through a network of 27 sales offices located in California
and 47 sales offices located in 24 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
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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.
In mid 1997, the Company began purchasing small, bulk packages of closed
loans ("bulk acquisitions") from mortgage bankers and financial institutions
("correspondents"). Bulk acquisitions totaled $120.8 million, or 6.1%, of the
Company's total loan production during 1997. By focusing on small bulk
purchases, the Company believes that its bulk acquisitions program complements
its existing marketing efforts to brokers and may, from time to time, enable
the Company to increase loan production on a cost-effective basis. The Company
does not expect bulk acquisitions to account for a significant portion of its
loan production volume in 1998.
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. The Company's senior underwriters with credit
approval authority have an average of 9.5 years of subprime mortgage lending
experience. The experience of its underwriting personnel allows the Company to
exercise flexibility within its underwriting process based on the specific
characteristics of each loan application. In addition, all appraisals are
reviewed by qualified Company personnel or a qualified appraiser retained by
the Company. Along with its thorough underwriting process, the Company
maintains strong corporate controls throughout the lending process, including
subjecting all loans to a series of pre- and post-funding audits to verify the
accuracy of the loan application data and to assure compliance with the
Company's underwriting policies, procedures and guidelines. The Company
believes that its underwriting and review processes provide the necessary
support to continue the Company's rapid loan origination growth while
maintaining loan quality.
New Century sells its mortgage loans through securitizations as well as
through bulk sales of whole loans to institutional purchasers. During 1997,
the Company sold $617.2 million of loans through whole loan sales transactions
at a weighted average sales price equal to 104.6% of the original principal
balance of the loans sold. The Company also securitized $1.1 billion of its
mortgage loans through seven securitization transactions during 1997. Four of
the seven securitizations, totaling $501.3 million in mortgage loans, were
credit enhanced by an insurance policy provided through a monoline insurance
company. The other three securitizations, totaling $622.3 million in mortgage
loans, were credit enhanced through the use of subordinated certificates
instead of an insurance policy. The Company used credit enhancements in each
of its securitizations to allow 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 continue to sell
its loans through both securitizations and 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. Prior to September 1997, the Company, while retaining
servicing rights as the master servicer on the securitized loans, outsourced
its servicing operations to Advanta. Advanta's current relationship with the
Company includes conducting all of the Company's servicing operations for its
first five securitizations. Since September 1997 the Company has boarded
substantially all of its loans on a joint servicing platform which it has
developed with Comerica Bank ("Comerica"). The Company is in the process of
expanding its internal servicing infrastructure and intends to begin assuming
the servicing functions which it currently outsources by the third quarter of
1998. See "--Loan Servicing and Delinquencies." As of December 31, 1997, the
Company's servicing portfolio consisted of 15,321 loans with an aggregate
principal balance of approximately $1.6 billion, of which 2,845 loans with an
aggregate principal balance of $272.0 million were held for sale and serviced
on an interim basis, 10,073 loans with an aggregate principal balance of $1.1
billion had been securitized, and 2,403 loans with an aggregate principal
balance of $264.8 million were serviced on behalf of the whole loan
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purchasers thereof. As of December 31, 1997, approximately 44.5% of the loans
in the Company's servicing portfolio were serviced by Advanta and
approximately 55.5% of the loans in the Company's servicing portfolio were
serviced by the Company on its joint servicing platform with Comerica.
GROWTH AND OPERATING STRATEGIES
Increasing Growth of Retail Production. The Company intends to continue to
emphasize the growth of retail loan production during 1998 through geographic
expansion and increased consumer marketing efforts. The Company opened 54
retail sales offices during 1997 and intends to open 10 or more additional
retail sales offices during the first three quarters of 1998. In addition, the
Company intends to open approximately 25 new "hometown" offices in the first
three quarters of 1998. A hometown office is a sales office, generally staffed
with only one employee, in cities with a population of less than 100,000. 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 and telemarketing with the goals of generating
revenues for each such office within 60 to 90 days after opening and achieving
break-even operations within five to eight months. The Company also intends to
increase its consumer marketing, which includes the use of direct mail, a
centralized retail originations program, telemarketing 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 per month in January
1997 to approximately two million mailers per month as of January 1998. See
"--Marketing."
Continuing Growth of Wholesale Production. The Company intends to 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 plans to continue its geographic expansion
through the further development of lending operations in the Southeast and
Northeast regions of the country. In connection with its expansion, the
Company plans to open five 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 104 as of
December 31, 1997 to approximately 175 by December 1998.
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. To this end, the Company has placed
decision makers closer to local brokers, enabling the Company to refine its
procedures to reflect local market practices and conditions and enabling the
Company to provide a higher level of service to brokers. The Company expects
to further improve service to brokers by (i) 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 (ii) expanding product offerings to provide brokers with a
broader selection of borrowing alternatives for their customers.
Enhancing Profitability while Managing Cash Flow. In addition to adding new
retail and wholesale sales offices, the Company intends to focus on the
profitability of its existing sales offices. This will be accomplished by (i)
increasing the origination fees received on retail loan originations, (ii)
decreasing the yield spread premium paid to wholesale brokers, and (iii)
decreasing the cost of origination per loan. The increase in retail
origination fees and decrease in the yield spread premium will be achieved
through pricing adjustments on loans and through the establishment of
incentive programs for the sales staff. The decrease in the cost of
origination will be achieved primarily by the increase in productivity
projected for retail branches and wholesale regions which have been open less
than nine months and which have not yet reached targeted efficiencies.
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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 and reduce the risks inherent in retaining residual interests. 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 facilities and
borrowing against the value of the residual interests received in its
securitizations. The residual interests retained by the Company constitute an
investment which the Company believes will provide attractive 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.
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. In March 1997, the Company
commenced loan originations through its Alternative Mortgage Products Program
through which the Company offers loans to borrowers meeting conventional
mortgage lending standards and offers a broad selection of second mortgage
products, including loans with loan-to-value ratios of up to 125% for
borrowers with good credit histories. The Company believes that offering these
high loan-to-value products is beneficial to the Company because they generate
fee-based cash income for the Company. The Company also believes that these
mortgage products will enable the Company to increase loan production from
brokers 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 Company expects that the
mortgage loans originated through its Alternative Mortgage Products Program
will be sold by the Company on a broker or correspondent basis, rather than
through securitizations or servicing-retained sales.
Acquisition Strategy. The Company may from time to time seek to acquire
originators of its mortgage products. On January 12, 1998, the Company
completed the acquisition of Primewest Funding Corporation ("PWF"). PWF is a
retail originator of loans and was one of the Company's largest
correspondents, generating over $70 million in loan origination volume for the
12 months ended December 31, 1997 of which $54 million was purchased by the
Company. In the twelve months ending December 31, 1997, PWF originated an
average of $5.8 million in loans per month, with $9.0 million originated in
December. The terms of the acquisition provided for the payment by the Company
of cash and Common Stock, in addition to a three year earnout feature based on
the net earnings of PWF's business after the acquisition. The key executives
of PWF, who combined have over 20 years of experience in the mortgage banking
industry, are expected to continue in their current positions under three year
employment agreements.
COMERICA STRATEGIC ALLIANCE
In May 1997, the Company sold 545,000 shares of Common Stock of the Company
to Comerica for $4,087,500. Comerica is a bank holding company which had
assets of approximately $36 billion at December 31, 1997 and is the parent of
Comerica Bank. In connection with the sale of stock to Comerica, the Company
and Comerica agreed to enter into certain arrangements concerning servicing
and other strategic relationships. See "--Loan Servicing and Delinquencies."
In order to increase the likelihood of success of such strategic
relationships, the Company issued warrants, at an exercise price of $11.00 per
share, to purchase an aggregate of 100,000 shares of Common Stock to Comerica
and agreed to issue Comerica warrants to purchase an additional 233,333 shares
of Common Stock, subject to the completion by Comerica of certain performance
events related
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to the strategic relationships. Comerica has notified the Company that it
intends to exit from the servicing business. As a consequence, the Company
intends to take full control of the servicing function on its loans. In light
of these changes, the Company is re-evaluating other aspects of the strategic
relationship with Comerica.
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.
Under the Company's centralized retail originations program, the Company
utilizes its direct marketing methodology in markets where the Company does
not currently maintain a sales office. The Company also continues to emphasize
retail loan generation through more traditional marketing methods, such as
referrals and individual loan officer sales efforts, and provides each sales
office with a promotional budget to support these activities. The Company will
also be expanding its outbound telemarketing program during 1998.
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.
LOAN ORIGINATIONS AND PURCHASES
The Company originates and purchases loans primarily through its Wholesale
and Retail Divisions, and has purchased loans through its bulk acquisition
program. The Wholesale Division originates and purchases loans through a
network of independent mortgage brokers, the Retail Division solicits loans
directly from prospective borrowers and the bulk acquisition program purchases
small, bulk packages of 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 $1.3 billion in loans, or
64.4% of the Company's total loan production, during 1997. As of December 31,
1997, the Wholesale Division was operating through four regional operating
centers located in Southern California, Northern California, Chicago and
Atlanta and through 33 additional sales offices located in Arizona (2),
California (2), Colorado, Florida (4), Hawaii, Indiana (3), Iowa, Maryland,
Michigan, Minnesota, Missouri (2), Nevada, New Mexico, Ohio (3), Pennsylvania
(2), Texas (4), Utah, Washington and Wisconsin, employing a total of 104
account executives. As of December 31, 1997, the Company had approximately
1,982 approved mortgage brokers and during 1997 originated loans through
approximately 1,277 brokers. During 1997, New Century's 10 largest producing
brokers originated approximately 15.5% of the Company's loans, with the
largest broker accounting for approximately 3.9%.
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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 20 to 30 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 bulk
acquisition program, during the periods shown:
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997 1997 1997
------------ --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Principal balance (in
thousands)............. $138,356 $176,186 $286,197 $358,605 $444,145
Average principal
balance per loan
(in thousands)......... $ 108 $ 107 $ 109 $ 104 $ 108
Combined weighted
average initial loan-
to-value ratio......... 70.8% 70.5% 73.3% 74.3% 74.5%
Percent of first
mortgage loans......... 98.5% 99.4% 98.9% 98.4% 98.6%
Property securing loans:
Owner occupied........ 88.7% 87.7% 87.9% 88.2% 90.3%
Non-owner occupied.... 11.3% 12.3% 12.1% 11.8% 9.7%
Weighted average
interest rate:
Fixed-rate............ 10.5% 10.0% 9.9% 9.7% 9.8%
ARMs.................. 9.4% 9.4% 9.6% 9.6% 9.6%
Margin--ARMs.......... 7.1% 7.1% 7.0% 7.3% 6.7%
</TABLE>
The Wholesale Division also purchases closed loans on an individual or
"flow" basis from independent mortgage brokers and financial institutions. The
Company reviews an application for approval from each lender seeking to sell
the Company a closed loan. The Company analyzes the mortgage broker's
underwriting guidelines and financial condition, including its licenses and
financial statements. The Company requires each mortgage broker to enter into
a purchase and sale agreement with customary representations and warranties
regarding the loans such mortgage broker 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.
Retail Division. During 1997, the Company originated $578.7 million in
loans, or 29.5% of its total loan production, through its Retail Division. As
of December 31, 1997, the Retail Division employed 291 retail loan officers,
located in 74 sales offices in Arizona (3), California (27), Colorado (2),
Florida (4), Georgia, Hawaii (2),
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Idaho (2), Illinois (4), Maryland (2), Michigan, Minnesota (2), Missouri (2),
Montana, Nevada, New Mexico, North Carolina (2), Ohio (3), Oregon,
Pennsylvania (3), Tennessee, Texas (2) Utah, Virginia, Washington (4) 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 may contribute 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 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 centralized
retail originations 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 QUARTERS ENDED
-----------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997 1997 1997
------------ --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Principal balance (in
thousands)............. $38,410 $74,384 $122,774 $179,613 $201,903
Average principal
balance per loan
(in thousands)......... $ 95 $ 108 $ 97 $ 93 $ 90
Combined weighted
average initial
loan-to-value ratio.... 72.3% 72.4% 74.3% 75.1% 75.3%
Percent of first
mortgage loans......... 94.6% 95.7% 94.3% 93.7% 92.6%
Property securing loans:
Owner occupied........ 93.9% 90.0% 91.4% 92.2% 92.1%
Non-owner occupied.... 6.1% 10.0% 8.6% 7.8% 7.9%
Weighted average
interest rate:
Fixed-rate............ 10.0% 9.7% 9.8% 9.5% 9.8%
ARMs.................. 8.9% 8.4% 8.8% 9.3% 9.2%
Margins--ARMs......... 7.0% 7.0% 7.2% 7.5% 6.5%
</TABLE>
Service Provider Program. In January 1997, the Company implemented a new
program intended to generate new loan originations through working with
financial institutions, collection agencies and other related companies.
Through this program, the Company seeks to develop new relationships and
expand on existing relationships with banks and other financial institutions
across the country. The goal is to encourage participating financial
institutions to identify potential borrowers who do not qualify for a loan
from the respective financial institution but do meet the Company's target
borrower profile. Participating financial institutions are compensated by the
Company based on the level of services performed by the institution. As of
December 31, 1997, the Company had service provider relationships with 65
companies, 38 of which were producing loan volume for the Company. In January
1998, the Company produced approximately $3 million in new loan originations
from the service provider program.
Bulk Acquisition Program. In mid 1997, the Company began purchasing small,
bulk packages of closed loans from mortgage bankers and financial
institutions. Bulk acquisitions totaled $120.8 million, or 6.1%, of the
Company's total loan production during 1997. Bulk acquisitions allow the
Company to supplement its own loan production with limited overhead expenses.
Loans purchased by the Company under the bulk acquisition 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.
The Company does not expect the bulk acquisition program to account for a
significant portion of its loan production volume in 1998.
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PRODUCT TYPES
The Company offers both fixed-rate and adjustable-rate loans ("ARMs"), 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 "start 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 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+" or "A-." Loans originated or purchased by
the Company in 1997 had an average loan amount of approximately $101,988 and
an average loan-to-value ratio of approximately 74.0%. Unless prohibited by
state law or otherwise waived by the Company, the Company generally imposes a
prepayment penalty on the borrower. Approximately 66.8% of the loans the
Company originated or purchased during 1997 provided for the payment by the
borrower of a prepayment charge in limited circumstances on certain full or
partial prepayments.
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. The Company's senior underwriters with credit
approval authority have an average of 9.5 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.
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
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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
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. 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 currently include two levels of applicant
documentation requirements, referred to as the "Full Documentation" and
"Stated Income Documentation" programs. Until early 1998, the Company also
allowed a third level of applicant documentation, "Limited Documentation."
Under the Full Documentation and Stated Income Documentation 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, three or five years of fixed payments before the
initial interest rate adjustment or (iii) one percent above the initial
interest rate on other adjustable-rate loans. The Underwriting Guidelines
require that mortgage loans be underwritten in a standardized procedure which
complies with applicable federal and state laws and regulations and requires
the Company's underwriters to be satisfied that the value of the property
being financed, as indicated by an appraisal and a review of the appraisal,
currently supports the outstanding loan balance. In general, the maximum loan
amount for mortgage loans originated under the programs is $500,000; however,
larger loans may be approved on a case-by-case basis. The Underwriting
Guidelines permit one-to-four-family residential property loans to have loan-
to-value ratios at origination of generally up to 80%, or up to 90% for
borrowers in the Company's highest credit grade categories, depending on,
among other things, the purpose of the mortgage loan, a borrower's credit
history, repayment ability and debt service-to-income ratio, as well as the
type and use of the property. With respect to mortgage loans secured by
mortgaged properties acquired by a borrower under a "lease option purchase,"
the loan-to-value of the related mortgage loan is based on the lower of the
appraised value at the time of origination of such mortgage loan or the sale
price of the related mortgaged property if the "lease option purchase price"
was set less than six months prior to origination. If the "lease option
purchase price" was set six months or more prior to origination, the loan-to-
value is based on the appraised value at the time of origination.
Under the Full Documentation program, applicants generally are required to
submit two written forms of verification of stable income for at least twelve
months. Under the Stated Income Documentation program, an applicant may be
qualified based upon monthly income as stated on the mortgage loan application
if the applicant
10
<PAGE>
meets certain criteria. Under the Limited Documentation program, which was
terminated in early 1998, applicants were required to submit one written form
of verification of stable income for twelve months. 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%.
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<PAGE>
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.
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 three 30- Maximum one 60- Late payments Maximum of two
30-day late day late payments day late payment maximum of two 90-day late
payment and no and no 60-day within last 12 90-day late payments and
60-day late late payments months; must be payments within one 120-day
payments within within last 12 less than 60 last 12 months; late last 12
last 12 months; months; required days must be less than months, less
must be current at to be current at late at funding. 90 days late at than 90
application time; funding. funding. days late
must have a LTV at funding.
of 90% or less No current NOD.
Other credit........ FICO score of 640 or FICO score of 620 FICO score of 600 Significant prior Significant
higher; or no open or higher; or minor or higher; or defaults defaults
collection derogatory items prior defaults acceptable; acceptable;
accounts or allowed; not acceptable; not generally, not open
charge-offs open more than $500 in more than more than charge-offs or
after funding. open collection $1,000 in open $2,500 in open collection
accounts or collection collection accounts may
charge-offs open accounts or accounts or remain open
after funding. charge-offs open charge-offs open after funding;
after funding. after funding; on a on a case
case by case basis by case basis
Bankruptcy filings.. Generally, no Generally, no Generally, no Generally, no Bankruptcy,
bankruptcy or notice bankruptcy or bankruptcy or bankruptcy or permitted on
of default filings notice of default notice of notice of default a case by
in filings in last 3 default filings in last 12 case basis;
last 3 years. years. filings in last months. Chapter 13
2 bankruptcy
years. paid through
closing.
Debt service to
income ratio... 42-45% 50% or less 55% or less 59% or less 59% or less
Maximum loan-to-
value ratio:(2)
Owner occupied:
single family...... 90% 90% 80% 75% 70%
Owner occupied:
condo/two-to-four
unit............... 85% 80% 75% 70% 65%
Non-owner occupied.. 85% 80% 75% 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 10% for stated income applications, if
applicable. Under the Limited Documentation program formerly used by the
Company, the LTV was reduced by 5% for Limited Documentation applicants as
applicable. Additionally, if the borrower's FICO score meets or exceeds
the risk category and debt ratio guidelines, consumer credit may be
disregarded.
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<PAGE>
In addition to the five risk grade categories described above, the Company
also has a Mortgage Credit Only program. The Mortgage Credit Only program
allows no more than three 30-day late payments and no 60-day late payments
within the last 12 months on an existing mortgage loan if the loan-to-value is
75% or less. An existing mortgage loan is not required to be current at the
time the application is submitted. Derogatory credit report items are allowed
as to non-mortgage credit, and a letter of explanation may be required under
the Full Documentation program. No bankruptcy or notice of default filings may
have occurred during the preceding two years; provided, however, that if the
borrower's bankruptcy has been discharged during the past two years and the
borrower has re-established a credit history otherwise complying with the
credit parameters set forth in this paragraph, the borrower may then qualify
under the Mortgage Credit Only program The mortgaged property must be in at
least average condition. A maximum loan-to-value of 75% for A- is permitted
for a mortgage loan on a single family owner-occupied property. The debt
service-to-income ratio is generally limited to a maximum of 50% for A- credit
grade or lower.
The Company has established a sub-category of its C- credit grade (the "Home
Saver Program") for borrowers faced with at least one of the following credit
scenarios: (i) the borrower has an existing mortgage currently in foreclosure,
(ii) the borrower is subject to a notice of default filing, (iii) the borrower
has had a serious mortgage delinquency for more than one 120 day period in the
last 12 months or is more than 90 days late at the time of funding, or (iv)
the borrower is in an open Chapter 13 or Chapter 11 bankruptcy. The Home Saver
Program is available only to Full Documentation borrowers and permits a
maximum loan-to-value of 65% and a maximum debt service-to-income ratio of
59%. The maximum loan is $250,000 and all derogatory credit report items must
either be brought current or paid through the loan proceeds. A maximum of 3%
of the loan proceeds may be paid to the borrower in cash. If the borrower is
in an open Chapter 13 or Chapter 11 bankruptcy, the bankruptcy must be
discharged through the proceeds of the loan.
The Company 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 adopts underwriting guidelines appropriate to new loan products, such
as those offered by the Alternative Mortgage Products Program. The
conventional mortgage loans and second mortgage loans, including 125% loan-to-
value loans, offered by the Alternative Mortgage Products Program 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.
13
<PAGE>
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 QUARTERS ENDED
----------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997 1997 1997
------------ --------- -------- ------------- ------------
<S> <C> <C> <C> <C> <C>
A+ Risk Grade:
Percent of total
purchases and
originations........... 19.3% 20.2% 28.0% 31.8% 32.9%
Combined weighted
average initial
loan-to-value ratio.... 72.7 73.0 76.2 77.6 76.8
Weighted average
interest rate:
Fixed-rate............ 9.9 9.5 9.9 9.5 9.7
ARMs.................. 8.6 8.7 9.1 9.2 9.2
Margin--ARMs.......... 6.7 6.8 6.7 7.1 6.4
A- Risk Grade:
Percent of total
purchases and
originations........... 32.8% 36.1% 36.3% 35.6% 37.5%
Combined weighted
average initial
loan-to-value ratio.... 73.2 72.4 74.8 75.5 75.9
Weighted average
interest rate:
Fixed-rate............ 9.9 9.6 9.7 9.4 9.7
ARMs.................. 8.8 8.7 9.2 9.3 9.3
Margin--ARMs.......... 6.9 6.8 7.0 7.1 6.6
B Risk Grade:
Percent of total
purchases and
originations........... 24.1% 23.2% 17.7% 17.0% 15.1%
Combined weighted
average initial
loan-to-value ratio.... 71.9 71.2 74.1 74.2 74.5
Weighted average
interest rate:
Fixed-rate............ 10.5 10.3 10.0 9.8 10.1
ARMs.................. 9.4 9.4 9.5 9.6 9.8
Margin--ARMs.......... 7.2 7.2 7.2 7.4 6.8
C Risk Grade:
Percent of total
purchases and
originations........... 14.3% 12.1% 9.0% 8.2% 6.9%
Combined weighted
average initial
loan-to-value ratio.... 68.1 68.6 68.0 71.9 70.9
Weighted average
interest rate:
Fixed-rate............ 11.0 10.8 10.7 10.8 11.2
ARMs.................. 10.3 10.0 10.2 10.4 10.3
Margin--ARMs.......... 7.5 7.4 7.4 7.6 7.1
C- Risk Grade:
Percent of total
purchases and
originations........... 9.5% 8.4% 9.0% 7.4% 7.6%
Combined weighted
average initial
loan-to-value ratio.... 63.3 62.3 64.9 64.2 64.6
Weighted average
interest rate:
Fixed-rate............ 12.3 11.4 10.6 10.7 11.2
ARMs.................. 11.1 10.6 10.7 10.8 10.7
Margin--ARMs.......... 7.7 7.5 7.6 7.6 7.1
</TABLE>
14
<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 QUARTERS ENDED
------------------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997 1997 1997
-------------- -------------- -------------- -------------- --------------
AMOUNT % AMOUNT % AMOUNT % AMOUNT % AMOUNT %
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
California.............. $ 98,952 56.0% $124,698 49.8% $184,184 42.5% $234,170 40.8% $260,470 36.8%
Illinois................ 32,671 18.5% 44,674 17.8% 66,027 15.2% 70,851 12.3% 77,008 10.9%
Ohio.................... 10,814 6.1% 13,190 5.3% 20,714 4.8% 27,932 4.9% 34,405 4.9%
Arizona................. 11,120 6.3% 15,451 6.2% 24,564 5.7% 29,840 5.2% 30,357 4.3%
Colorado................ 6,790 3.8% 12,980 5.2% 25,407 5.9% 26,439 4.6% 29,767 4.2%
Utah.................... 6,176 3.5% 9,316 3.7% 13,420 3.1% 16,836 2.9% 19,351 2.7%
Other................... 10,243 5.8% 30,261 12.0% 98,702 22.8% 167,980 29.3% 255,607 36.2%
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total.................. $176,766 100.0% $250,570 100.0% $433,018 100.0% $574,048 100.0% $706,965 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
LOAN SALES AND SECURITIZATIONS
The Company currently intends to continue to sell the loans it originates or
purchases through both securitizations and 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 disposed 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. In December
1997, the Company for the first time retained the servicing rights, subject to
the purchaser's right to transfer such servicing rights in the future, on one
of its whole loan sales. The Company may retain the servicing rights on future
whole loan sales. During 1996 and 1997, the Company sold $298.7 million and
$617.2 million, respectively, of loans through whole loan sales transactions
at a weighted average sales price equal to 105.0% and 104.6%, respectively, of
the original principal balance of the loans sold. The Company did not sell any
loans through securitization during 1996; however, substantially all of the
loans sold by the Company in 1996 and 1997 ultimately were securitized by the
purchasers thereof.
The Company seeks to maximize its premium on whole loan sales 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, including Amresco,
which accounted for 51.4% of all purchases and Salomon, which accounted for
32.2% of all purchases. During 1997, the Company sold loans to more than 20
institutional purchasers, including Salomon, which accounted for 40.5% of all
purchases and Amresco, which accounted for 37.5% of all purchases.
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 initial months following the date the loan
is funded, unless other arrangements are made between the Company and the
purchaser. The Company is also required in some cases to repurchase or
substitute a loan if the loan documentation is alleged to contain fraudulent
misrepresentations made by the borrower.
Securitizations. The Company completed the sale of loans through seven
securitization transactions during 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
15
<PAGE>
Company sells loans that it has originated or purchased to a trust for a cash
purchase price and an interest in the loans securitized called residual
interests. The cash purchase price is raised through an offering of senior
certificates by the trust. Following the securitization, purchasers of senior
certificates receive the principal collected, including prepayments, and the
investor pass-through interest rate on the principal balance, while the
Company receives the cash flows from the residual interests, after payment of
servicing fees, guarantor fees and other trust expenses, and provided the
specified over-collateralization requirements are met. The Company recognizes
gain 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.
Four of the seven aforementioned securitizations were credit enhanced by an
insurance policy provided through a monoline insurance company. The other
three securitizations were credit enhanced through the use of subordinated
certificates instead of an insurance policy. The Company used credit
enhancements in each of its securitizations to allow the senior certificates
in the related trusts to receive ratings of "AAA" from Standard & Poor's
Rating 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. In response to the uncertainties created by the recent prepayment
activities of its borrowers and the overall level of prepayment activity by
subprime borrowers, the Company recorded a $5.2 million reduction in the value
of its residual securities and established a $3.0 million general allowance in
the fourth quarter of 1997. See "--Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations."
LOAN SERVICING AND DELINQUENCIES
Servicing. Until February 1997, the Company sold all of its loan production
on a servicing-released basis. Beginning with its first securitization in
February 1997, the Company has retained the servicing rights on the loans sold
through its securitizations. In addition, 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. The Company generally makes its whole loan sales on a servicing-
released basis. However, in December 1997, the Company retained the servicing
rights, subject to the purchaser's rights to transfer such servicing rights in
the future, on one whole loan sales transaction. Even as to those whole loan
sales transactions in which the loans are sold on a servicing-released basis,
in some cases, whole loan purchasers may request that the Company continue to
service the loans purchased for an interim period following the sale.
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. Prior to September 1997, the Company outsourced substantially all
of its servicing operations to Advanta Mortgage Corp. USA ("Advanta"), an
approved third party sub-servicer. Advanta currently sub-services loans sold
through each of the Company's first five securitizations pursuant to the
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, however the Company will reimburse Advanta for
certain expenses in accordance with the terms of the Advanta Securitization
Agreement.
16
<PAGE>
If the Company terminates the Advanta Securitization 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's first five securitizations, the
Company will not be able to terminate the servicer without the approval of the
trustee for such securitization.
Comerica. In September 1997, the Company began boarding loans on a joint
servicing platform with Comerica ("the Comerica Agreement"). Under the
Comerica Agreement, Comerica has agreed to act as a sub-servicer for the
Company, providing certain servicing functions with respect to the Company's
mortgage loans. Comerica is a FNMA and FHLMC approved servicer and as of
December 31, 1997, based on information obtained from Comerica, serviced
residential mortgage loans with an aggregate principal balance exceeding
$4.0 billion and also serviced consumer loans with an aggregate principal
balance exceeding $4.0 billion.
Comerica's role under the Comerica Agreement is to provide the basic loan
setup functions, including payment processing, investor reporting and customer
service calls. In addition, Comerica is responsible for performing tax,
insurance and escrow administration functions. In connection with these
arrangements, the Company pays 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 sub-servicing functions. The Company's role under the Comerica
Agreement includes: (i) placing the initial welcome call to the borrower to
insure that the loan is set-up properly; (ii) maintaining all collection
contact with the borrower; and (iii) performing all foreclosure and loss
mitigation functions using its 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 has been successful in recruiting additional personnel and
installing appropriate systems in order to facilitate its servicing operations
under the Comerica Agreement.
The Company believes that the Comerica Agreement has benefited the Company
by allowing the Company to retain control of the collections and default
management process while leveraging off of Comerica's existing servicing
expertise with respect to certain standardized servicing functions.
As of December 31, 1997, the Company's servicing portfolio consisted of
15,321 loans with an aggregate principal balance of approximately $1.6
billion, of which 2,845 loans with an aggregate principal balance of
$272.0 million were held for sale and serviced on an interim basis, 10,073
loans with an aggregate principal balance of $1.1 billion had been
securitized, and 2,403 loans with an aggregate principal balance of
$264.8 million were serviced on behalf of the whole loan purchasers thereof.
As of December 31, 1997, approximately 44.5% of the loans in the Company's
servicing portfolio were serviced by Advanta and approximately 55.5% of the
loans in the Company's servicing portfolio were serviced through the Comerica
Agreement.
The Company is in the process of developing the infrastructure necessary to
perform all of the servicing functions which the Company currently outsources.
The Company believes that by internalizing the servicing function, it can
better manage the servicing relationship with its borrowers and oversee the
performance of its loans more directly. The Company anticipates assuming the
functions currently performed by Comerica under the Comerica Agreement during
the third quarter of 1998 and assuming control of the loans serviced by
Advanta by the end of 1998 or early 1999.
Delinquencies and Foreclosures. Loans originated or purchased by the Company
are secured by mortgages, deeds of trust, security deeds or deeds to secure
debt, depending upon the prevailing practice in the state in which the
property securing the loan is located. Depending on local law, foreclosure is
effected by judicial action or nonjudicial sale, and is subject to various
notice and filing requirements. In general, the borrower, or any person having
a junior encumbrance on the real estate, may cure a monetary default by paying
17
<PAGE>
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. The Company began selling loans
through securitizations in 1997 and in connection with these securitizations
has established reporting systems to track historical delinquency, bankruptcy,
foreclosure and default experience for the loans included in its
securitizations as well as the Company's total portfolio of loans. Delinquency
information is being presented by the Company for the first time. The
Company's securitized loans remain relatively young from a delinquency
perspective, and there has not yet been any losses incurred on these loans.
Because of the age of the Company's securitized loans, current delinquency and
loss information is not yet expected to be representative of future
delinquencies and losses.
The following table sets forth certain delinquency statistics as of December
31, 1997 for the Company's securitized loans and total portfolio:
<TABLE>
<CAPTION>
60-89 90+ FORECLOSURE/
DAYS DAYS BANKRUPTCY REO
----- ---- ------------ ---
<S> <C> <C> <C> <C>
Securitized Loans........................... 0.76% 0.33% 1.44% --
Total Portfolio............................. 0.73% 0.48% 1.07% --
</TABLE>
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 and aggregation 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. The Company has instituted a hedge on the five-year adjustable rate
mortgage loans that are included in one of its securitizations to protect
against the five-year fixed rate payable to holders of interests in the
securitization. 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.
18
<PAGE>
COMPETITION
The Company faces intense competition in the business of originating,
purchasing and selling mortgage loans. The Company's competitors in the
industry include other consumer finance companies, mortgage banking companies,
commercial banks, credit unions, thrift institutions, credit card issuers and
insurance finance companies. Many of these competitors are substantially
larger and have considerably greater financial, technical and marketing
resources than the Company. In addition, many financial services organizations
that are much larger than the Company have formed national loan origination
networks offering loan products that are substantially similar to the
Company's loan programs. Competition among industry participants can take many
forms, including convenience in obtaining a loan, customer service, marketing
and distribution channels, amount and term of the loan, loan origination fees
and interest rates. In addition, the current level of gains realized by the
Company and its competitors on the sale of subprime loans could attract
additional competitors into this market. Additional competition may lower the
rates the Company can charge borrowers, thereby potentially lowering gain on
future loan sales and securitizations. To the extent any of the Company's
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 that low interest rates combined with increased competition
in the industry have contributed to an increase in prepayment rates, which
adversely impacts the value of the Company's residual interests in its
securitizations.
The Company believes that one of its key competitive strengths is its
employees, with their strong commitment to customer service and their team-
oriented approach. In addition to the strength of the Company's work force,
the Company believes that its competitive strengths include: (i) providing a
high level of service to brokers and their customers; (ii) offering
competitive loan programs for borrowers whose needs are not met by
conventional mortgage lenders; (iii) the Company's high-volume targeted direct
mail marketing program and database screening methodology; and (iv) its
performance-based compensation structure which allows the Company to attract,
retain and motivate qualified personnel.
REGULATION
The mortgage lending 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 and state government authorities. These
regulations impose obligations and restrictions on the Company's loan
origination, loan purchase and servicing activities. In addition, these
regulations may 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 licensing 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 and loan purchase 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 December 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 47 states and the District of
Columbia and second mortgages in 45 states and the District of Columbia. 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,
and their implementing regulations.
19
<PAGE>
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 gives
consumers, among other things, a three business day right to rescind certain
refinance loan transactions originated by the Company 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 amends 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 $435, 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 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
1974, as amended, and Regulation X promulgated thereunder 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
disclosures 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 mortgage 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 December 31, 1997, the Company employed 1,140 full-time employees and 11
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.
20
<PAGE>
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position with the Company
of each person who is an executive officer or key employee of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
EXECUTIVE OFFICERS:
Robert K. Cole.......... 51 Chairman of the Board, Chief Executive Officer,
Director
Brad A. Morrice......... 41 Vice Chairman, President, Secretary, Director
Edward F. Gotschall..... 43 Vice Chairman, Chief Operating Officer
Finance/Administration, Director
Steve Holder............ 40 Vice Chairman, Chief Operating Officer
Production/Operations, Director
KEY EMPLOYEES:
Patrick J. Flanagan..... 33 Director, Executive Vice President and Chief
Operating Officer, New Century Mortgage(1)
Shahid S. Asghar........ 35 Director, Senior Vice President Wholesale
Operations, New Century Mortgage(1)
Paul L. Rigdon.......... 37 Director, Senior Vice President Retail
Operations, New Century Mortgage(1)
</TABLE>
- - --------
(1) New Century Mortgage Corporation ("New Century Mortgage") is a wholly-
owned subsidiary of the Company.
ROBERT K. COLE has been the Chairman of the Board and Chief Executive
Officer of the Company since December 1995 and a director of the Company since
November 1995. Mr. Cole also serves on the Board of Directors of New Century
Mortgage. From February 1994 to March 1995, he was the President and Chief
Operating Officer-Finance of Plaza Home Mortgage Corporation ("Plaza Home
Mortgage"), a publicly-traded savings and loan holding company specializing in
the origination and servicing of residential mortgage loans. In addition, Mr.
Cole served as a director of Option One Mortgage Corporation ("Option One"), a
subsidiary of Plaza Home Mortgage specializing in the origination, sale and
servicing of subprime mortgage loans. From June 1990 to January 1994, Mr. Cole
was the President of Triple Five, Inc., an international real estate
development 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
and President, Secretary and a director of the Company since November 1995.
Mr. Morrice also served as the Company's General Counsel from December 1995 to
December 1997. 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.
21
<PAGE>
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.
STEVE 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 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
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 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.
YEAR 2000 ASSESSMENT
The Company has performed a review of its internal systems to identify and
resolve the effect of Year 2000 software issues on the integrity and
reliability of the Company's financial and operational systems. Based on this
review, management believes that its internal systems are substantially
compliant with the Year 2000 issues. In addition, the Company is also
communicating with its principal service providers to ensure Year 2000 issues
will not have an adverse impact on the Company. Based upon its internal review
and communications with external service providers, the Company believes that
the costs of achieving Year 2000 compliance will not have a material adverse
impact on the Company's business, operations or financial condition.
ITEM 2. PROPERTIES
The Company's executive and administrative offices are located in Irvine,
California and consist of approximately 143,000 square feet. The two leases
covering the executive and administrative offices expire in June 2002 and
December 2002 and the combined monthly rent is $222,224.
The Company leases space for its regional operating centers in Chicago,
Illinois, Atlanta, Georgia, and San Ramon, California. The Company also leases
space for its sales offices. As of December 31, 1997, these facilities had an
annual aggregate base rental of approximately $2,052,848 and the sales offices
ranged in size
22
<PAGE>
from 100 to 12,840 square feet with lease terms typically ranging from one to
five years. As of December 31, 1997, annual base rents for the sales offices
ranged from approximately $4,200 to $258,192. In general, the terms of these
leases vary as to duration and rent escalation provisions and the leases
expire between January 1998 and February 2003 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.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of the fiscal year covered by this report.
23
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
On June 26, 1997 the Company's Common Stock began trading on the Nasdaq
National Market under the symbol "NCEN". The high and low bid prices of the
Company's Common Stock during the second, third and fourth quarters of fiscal
1997 were as follows:
<TABLE>
<CAPTION>
FISCAL 1997
-------------
QUARTER HIGH LOW
------- ------ ------
<S> <C> <C>
Fourth..................................................... $19.50 $ 9.63
Third...................................................... $19.50 $14.25
Second(1).................................................. $14.50 $13.63
</TABLE>
- - --------
(1) From June 26, 1997 through June 30, 1997
As of March 16, 1998 the closing sales price of the Company's Common Stock,
as reported on the Nasdaq National Market, was $11.00.
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
certain of its credit facilities without the prior approval of the lenders.
As of March 16, 1998 the number of holders of record of the Company's Common
Stock was approximately 48 and there were approximately 980 beneficial owners
of the Company's Common Stock.
24
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated statements of operations and balance
sheet data as of December 31, 1997, 1996 and 1995 and for the years ended
December 31, 1997 and 1996 and 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. 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,
FOR THE YEAR FOR THE YEAR 1995) THROUGH
ENDED DECEMBER 31, ENDED DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------------- ------------------- --------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Gain on sale of loans. $67,939 $11,630 $ --
Interest income....... 25,071 2,846 14
Servicing income...... 5,623 29 --
------- ------- ------
Total revenues...... 98,633 14,505 14
Operating Expenses.... 68,041 12,200 95
------- ------- ------
Earnings (loss) before
income taxes
(benefit)............ 30,592 2,305 (81)
Income taxes
(benefit)............ 12,849 970 1
------- ------- ------
Net earnings (loss)... $17,743 $ 1,335 $ (82)
======= ======= ======
Basic earnings (loss)
per share............ $ 2.18 $ 2.53 $(0.16)
======= ======= ======
Diluted earnings
(loss) per share..... $ 1.40 $ 0.20 $(0.16)
======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------
1997 1996 1995
-------- ------- ------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Loans receivable held for sale, net.................... $276,506 $57,990 $ --
Residual interests in securitizations.................. 97,260 -- --
Total assets........................................... 398,128 64,638 3,151
Borrowings under warehouse lines of credit............. 184,426 41,702 --
Borrowings under aggregation lines of credit........... 70,937 13,957 --
Residual financing..................................... 53,427 -- --
Other borrowings....................................... 3,222 1,326 --
Total stockholders' equity............................. 60,836 4,403 3,068
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
AS OF OR FOR THE AS OF OR FOR THE
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1997 1996
---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING STATISTICS:
Loan origination and
purchase activities:
Wholesale originations.... $1,265,133 $290,452
Retail originations....... 578,674 66,487
Bulk acquisitions......... 120,794 --
---------- --------
Total loan originations
and purchases.......... $1,964,601 $356,939
========== ========
Average principal balance
per loan................... $ 102 $ 106
Percent of loans secured by
first mortgages............ 96.9% 97.3%
Weighted average initial
loan-to-value ratio........ 74.0% 71.5%
Originations by product
type:
ARMs...................... $1,394,133 $264,510
Fixed-rate mortgages...... 570,468 92,429
Weighted average interest
rates:
Fixed-rate mortgages...... 9.8% 10.4%
ARMs...................... 9.5% 9.3%
Margin-ARMs............... 7.0% 7.0%
Loan Sales:
Loans sold through whole
loan transactions........ $ 617,182 $298,713
Loans sold through
securitizations.......... $1,123,618 --
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and the Notes thereto for the years ended
December 31, 1997 and 1996 and the period from November 17, 1995 (inception)
to December 31, 1995.
GENERAL
New Century is a specialty finance company engaged in the business of
originating, purchasing, selling and servicing subprime mortgage loans secured
primarily by first mortgages on single family residences. The Company
originates and purchases loans through its Wholesale and Retail Divisions and
has purchased loans through its bulk acquisition program. From the
commencement of lending operations in February 1996 through December 31, 1997,
the Company originated and purchased $2.3 billion in mortgage loans. The
Company's loan originations and purchases have grown from $4.3 million for the
first quarter of 1996 to $707.0 million for the fourth 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.
LOAN ORIGINATION AND PURCHASES
As of December 31, 1997, the Company's Wholesale Division was operating
through four regional operating centers located in Southern California,
Northern California, Atlanta and Chicago, and through 33 additional sales
offices located in 21 states. The Wholesale Division funded $1.3 billion in
loans, or 64.4%, of the Company's total loan production during the year ended
December 31, 1997. As of December 31, 1997, the Retail Division was operating
through 27 retail sales offices in California, and 47 retail sales offices in
24 other states. The Retail Division funded $578.7 million in loans, or 29.5%,
of total loan production during the
26
<PAGE>
year ended December 31, 1997. The Company expects to increase the percentage
of loans originated within the Retail Division in the future. Under the bulk
acquisition program, established in mid 1997, the Company purchases closed
loans from other mortgage bankers and financial institutions. This program is
designed to complement wholesale production efforts and accounted for $120.8
million, or 6.1%, of the Company's total loan production during the year ended
December 31, 1997.
The following table summarizes the Company's loan originations and purchases
for the periods shown.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
FOR THE YEAR ENDED DECEMBER 31, 1997 1996
------------------------------------------ ---------------------------------
WHOLESALE RETAIL BULK TOTAL WHOLESALE RETAIL BULK TOTAL
---------- -------- -------- ---------- --------- ------- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal balance (in
thousands)............. $1,265,133 $578,674 $120,794 $1,964,601 $290,452 $66,487 -- $356,939
Number of loans......... 11,855 6,139 1,269 19,263 2,633 745 -- 3,378
Average principal
balance (in thousands). $ 107 $ 94 $ 95 $ 102 $ 110 $ 89 -- $ 106
Weighted average
interest rates:
Fixed-rate............. 9.8% 9.7% 11.0% 9.8% 10.5% 10.1% -- 10.4%
ARMs................... 9.6% 9.0% 10.4% 9.5% 9.4% 9.1% -- 9.3%
Margin--ARMs........... 7.0% 7.0% 6.6% 7.0% 7.0% 6.9% -- 7.0%
Weighted average initial
loan-to-value
ratios(1).............. 73.6% 74.7% 75.9% 74.0% 71.3% 72.0% -- 71.5%
Percentage of loans:
ARMs................... 79.1% 52.7% 73.4% 71.0% 79.3% 51.2% -- 74.1%
Fixed-rate............. 20.9% 47.3% 26.6% 29.0% 20.7% 48.8% -- 25.9%
Percentage of loans
secured by first and
second mortgages:
Percentage of loans
secured by first
mortgages............. 98.7% 93.7% 93.7% 96.9% 98.1% 93.8% -- 97.3%
Percentage of loans
secured by second
mortgages............. 1.3% 6.3% 6.3% 3.1% 1.9% 6.2% -- 2.7%
</TABLE>
- - --------
(1) 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 mortgage 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
during 1997 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 QUARTERS ENDED
---------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
WHOLESALE
Volume......................... $176,186 $286,197 $358,605 $444,145
Offices (including regional
operating centers)............ 21 25 36 37
Account Executives............. 46 58 90 104
RETAIL
Volume......................... $ 74,384 $122,774 $179,613 $201,903
Offices........................ 30 44 62 74
Loan Officers.................. 105 149 243 291
BULK
Volume......................... -- $ 24,047 $ 35,830 $ 60,917
TOTAL
Volume......................... $250,570 $433,018 $574,048 $706,965
Offices........................ 51 69 98 111
</TABLE>
27
<PAGE>
LOAN SALES AND SECURITIZATIONS
The Company's loan sale strategy 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 in securitizations.
The Company's primary source of revenue is the recognition of gains from the
sale of its loans through whole loan sales and securitizations. In a whole
loan sale, the Company recognizes and receives a cash gain upon sale. In a
securitization, the Company recognizes a gain on sale at the time the loans
are sold, but receives corresponding cash flows, represented by the over-
collateralization amount ("OC") and the Net Interest Receivable ("NIR")
(combined, the "Residuals"), over the actual life of the loans. The
securitizations are generally structured as follows: first, the Company sells
a portfolio of mortgage loans to a special purpose entity ("SPS") which has
been established for the limited purpose of buying and reselling the Company's
mortgage loans. The SPS then transfers the same mortgage loans to a Real
Estate Mortgage Investment Conduit or owners trust (the "REMIC" or "Trust"),
and the Trust in turn issues interest-bearing asset-backed securities (the
"Certificates") generally in an amount equal to the aggregate principal
balance of the mortgage loans. The Company typically sells these certificates
at face value and without recourse except that representations and warranties
customary to the mortgage banking industry are provided by the Company to the
Trust. One or more investors purchase these Certificates and the proceeds from
the sale of the certificates are used as consideration to purchase the
mortgage loans from the Company. In addition, the Company may provide a credit
enhancement for the benefit of the investors in the form of additional
collateral (over-collateralization account or "OC Account") held by the Trust.
The OC Account is required by the servicing agreement (the Company's servicing
agreements are collectively referred to as the "Servicing Agreements") to be
maintained at specified levels.
At the closing of each securitization, the Company removes from its
consolidated balance sheet the loans held for sale and adds to its
consolidated balance sheet (i) the cash received and (ii) the estimated fair
value of the portion of the mortgage loans retained from the securitizations
(the Residuals), which consist of (a) the OC Account and (b) the net interest
receivables (NIRs). NIRs represent the discounted estimated cash flows to be
received by the Trust in the future. The excess of the cash received and the
assets retained by the Company over the carrying value of the mortgage loans
sold, less transaction costs, equals the net gain on sale of mortgage loans
recorded by the Company.
The Company allocates its basis in the mortgage loans between the portion of
the mortgage loans sold through the Certificates and the portion retained (the
Residuals) 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
changes in the fair value of the Residuals, 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 Residuals and,
accordingly, the Company determines the estimated fair value of the Residuals
by discounting the expected cash flows released from the OC Account (the cash
out method) using a discount rate which the Company believes is commensurate
with the risks involved. The Company has utilized an effective discount rate
of approximately 12% on the estimated cash flows released from the OC Account
to value the Residuals.
The Company receives periodic servicing fees for the servicing and
collection of the mortgage loans as master servicer of the securitized loans.
In addition, the Company is entitled to the cash flows from the Residuals that
represent collections on the mortgage loans in excess of the amounts required
to pay the Certificate principal and interest, the servicing fees and certain
other fees such as trustee and custodial fees. At the end of each collection
period, the aggregate cash collections from the mortgage loans are allocated
first to the base servicing fees and certain other fees such as trustee and
custodial fees for the period, then to the Certificateholders for interest at
the pass-through rate on the certificates plus principal as defined in the
Servicing Agreements. If the amount of cash required for the above allocations
exceeds the amount collected during the collection period, the
28
<PAGE>
shortfall is drawn from the OC Account. If the cash collected during the
period exceeds the amount necessary for the above allocations, and there is no
shortfall in the related OC Account, the excess is released to the Company. If
the OC Account balance is not at the required credit enhancement level, the
excess cash collected is retained in the OC Account until the specified level
is achieved. The cash and collateral in the OC Account is restricted from use
by the Company. Pursuant to certain Servicing Agreements, cash held in the OC
Accounts may be used to make accelerated principal paydowns on the
certificates to create additional excess collateral in the OC Account which is
held by the Trusts on behalf of the Company as the Residual holder. The
specified credit enhancement levels are defined in the Servicing Agreements as
the OC Account balance expressed generally as a percentage of the current
collateral principal balance.
The Company has, to date, elected to fund the required OC Account at the
closing of each securitization for all but two securitizations. The over-
collateralization requirement ranges from two to four percent of the initial
securitization bond debt principal balance or four to six percent of the
remaining principal balance after thirty to thirty-six months of principal
amortization. When funding all of the OC Account up front, the Company begins
to receive cash flow from the Residual immediately, and in those cases where a
portion of the OC Account is funded up front, the Company will begin to
receive cash flow from the Residual more quickly than in cases where no
initial funding is undertaken, in both cases subject to certain delinquency or
credit loss tests, as defined by the rating agencies or the bond insurance
companies.
The Annual Percentage Rate ("APR") on the mortgage loans is relatively high
in comparison to the pass-through rate on the certificates; accordingly, the
Residuals described above are a significant asset of the Company. In
determining the value of the Residuals described above, the Company must
estimate the future rates of prepayments, prepayment penalties to be received
by the Company, delinquencies, defaults and default loss severity as they
impact the amount and timing of the estimated cash flows. The Company uses a
0.45% to 0.65% default rate estimate. The Company's default loss estimates
result in cumulative loss estimates as a percentage of the original principal
balance of the mortgage loans of 1.91% to 2.08%. These estimates are based on
historical loss data for comparable loans and the specific characteristics of
the loans originated by the Company. The Company estimates prepayments by
evaluating historical prepayment performance of comparable mortgage loans and
the impact of trends in the industry. The Company has used a prepayment curve
to estimate the prepayment characteristics of the mortgage loans. The rate of
increase, duration, severity and decrease of the curve depends on the age and
nature of the mortgage loans, primarily, whether the mortgage loans are fixed
or adjustable and the interest rate adjustment characteristics of the mortgage
loans (6 month, 1 year, 2 year or 3 year adjustment periods). The Company's
prepayment curve and default estimates have resulted in weighted average lives
of between 3.15 and 4.28 years.
In future periods, the Company will recognize additional revenue from the
Residuals if the actual performance of the mortgage loans is higher than the
original estimate or the Company may increase the estimated fair value of the
Residuals. If the actual performance of the mortgage loans is lower than the
original estimate, then an adjustment to the carrying value of the Residuals
may be required if the estimated fair value of the Residuals is less than its
carrying value.
As a result of timing differences in receiving cash from whole loan sales
versus securitizations, the relative percentage of whole loan sales to
securitizations will impact the Company's operating cash flow. For the year
ended December 31, 1997, 64.5% of the Company's total loan sales were in the
form of securitizations.
In connection with the origination and purchase of loans, the Company may
either receive or pay origination fees. These fees, referred to as "points" or
"premiums" in the mortgage industry, are dependent on the source of loan
production and typically correspond to the amount of further processing
required for a loan to be funded and are determined as a percentage of the
loan amount. The points received from the origination of loans and the
premiums paid to originate and acquire loans are included in the gain
recognized from the sale of loans in the income statement.
29
<PAGE>
The following table sets forth loan sales and securitizations for the
periods indicated (dollars in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------
<S> <C> <C>
Securitizations...................... $1,123,618 $ --
Whole loan sales..................... 617,182 298,713
---------- --------
Total.............................. $1,740,800 $298,713
========== ========
</TABLE>
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
The Company began lending operations in February 1996. Accordingly, results
for the year ended December 31, 1996 do not reflect a full year of lending
operations.
The Company originated and purchased $2.0 billion in loans for the year
ended December 31, 1997, compared to $356.9 million for the year ended
December 31, 1996. Loans originated and purchased through the Company's
Wholesale Division were $1.3 billion, or 64.4%, of total originations and
purchases for the year ended December 31, 1997. Loans originated through the
Company's Retail Division were $578.7 million, or 29.5%, of total originations
and purchases for the year ended December 31, 1997. Loans purchased through
bulk acquisition were $120.8 million, or 6.1%, of total originations and
purchases for the year ended December 31, 1997. For the same period in 1996,
Wholesale and Retail originations and purchases totaled $290.4 million, or
81.4%, and $66.5 million, or 18.6%, respectively, of total originations and
purchases for such period. There were no bulk acquisitions in the year ended
December 31, 1996.
Total revenues for the year ended December 31, 1997 increased to $98.6
million, from $14.5 million for the year ended December 31, 1996, due
primarily to the increase in loan originations and purchases and sales in
1997. Gain on sale of loans increased to $67.9 million for the year ended
December 31, 1997, from $11.6 million for the year ended December 31, 1996 due
to the increase in loan sales in 1997.
The Company sold $1.7 billion in loans for the year ended December 31, 1997,
of which $1.1 billion, or 64.5%, were sold through loan securitizations and
the remainder represented whole loan sales.
The components of the gain on sale of loans are illustrated in the following
table (dollars in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------
<S> <C> <C>
Gain from whole loan sale
transactions...................... $ 27,707 $15,335
Non-cash gain from securitizations. 89,770 --
Cash gain from securitizations..... 6,105 --
Securitization expenses............ (5,624) --
Accrued interest................... (7,188) --
Write-down of NIR.................. (5,175) --
General valuation allowance for
NIR............................... (3,000) --
Provision for losses............... (3,986) (706)
Non-refundable loan fees........... 24,514 3,548
Premiums paid...................... (24,739) (1,973)
Origination costs.................. (28,716) (4,291)
Hedging gains (losses)............. (1,729) (283)
-------- -------
Gain on sale of loans.............. $ 67,939 $11,630
======== =======
</TABLE>
During the fourth quarter, the Company experienced a shortfall in expected
cash flows from its first five Residuals as a result of (1) increases in
prepayment speeds on loans, (2) increases in the one-month LIBOR index
30
<PAGE>
used to calculate the monthly remittance to holders of the senior securities,
and (3) shortfalls in actual prepayment penalty income compared to expected
prepayment penalty income. While initial prepayment speeds were not
significantly different than the original assumptions used to record the
Residuals, the Company has revised its assumptions to reflect the recent
prepayment trends experienced to date and to take into consideration the high
prepayment speeds that the Company anticipates to continue for the immediate
future. The new assumptions, summarized below, resulted in a write-down to the
Residuals during the fourth quarter of $5.2 million (dollars in thousands):
<TABLE>
<CAPTION>
SECURITIZATIONS
-------------------------------------------------------------------
NC-1 NC-2 NC-3 NC-4 NC-5 NC-6 NC-7
------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Original Principal
Balance of Collateral.. $99,119 $129,337 $103,521 $279,368 $178,377 $164,990 $169,165
Weighted avg. life
(years)................ 3.15 3.32 3.41 3.39 3.49 4.28 4.28
Cumulative loss estimate
as a percentage of
Original Principal
Balance................ 1.91% 1.91% 1.97% 1.98% 1.97% 2.08% 2.08%
Discount rate........... 12% 12% 12% 12% 12% 12% 12%
</TABLE>
In addition, the Company established an additional $3 million general
valuation allowance due to the inherent uncertainties in estimating the fair
value of Residuals, including the lack of historical prepayment data on the
collateral, the uncertainty created by the recent prepayment experience of the
Company's first five securitizations and the level of the prepayments
experienced by the sub-prime industry in general.
The gain on securitization recorded by the Company represents the present
value of the Company's estimate of future excess cash flows and is the NIR
gain component of the Residuals in the consolidated balance sheet.
Accordingly, a comparison of the actual cash flows received to those projected
cash flows used in estimating the fair value of the Residuals is the most
significant measure of potential impairment of the Residual. In future
periods, the Company will recognize additional revenue from Residuals if the
actual performance of the mortgage loans is higher than the original estimate
or the Company may increase the estimated fair value of the Residuals. If the
actual performance of the mortgage loans is lower than the original estimate,
then an adjustment to the carrying value may be required if the estimated fair
value of the Residuals is less than the carrying value.
During the year ended December 31, 1997 the Trusts received $11,376,000 in
cash flows which, based on the revised assumptions discussed above, is
$477,000, or approximately 5.3%, in excess of the cash flows estimated to be
received by the Trusts in this period. Cash released by the Trusts to the
Company for the year ended December 31, 1997 was $10,597,000. Five of the
Company's securitizations are at the required credit enhancement level and
none of the Company's securitizations have violated any of the performance
measures that would require an increase in the credit enhancement levels.
Whole loan sales increased to $617.2 million for the year ended December 31,
1997, from $298.7 million for the corresponding period in 1996. This increase
is the result of the increase in loan originations and purchases.
Interest income increased to $25.1 million for the year ended December 31,
1997, from $2.8 million for the same period in 1996, primarily due to
increased interest income from loans held for sale. Interest income is earned
on loans held in inventory for sale. Such interest income accrues during
periods when loans are accumulated for future sales, and increases as loan
originations and purchases increase. The increase in interest income for the
year ended December 31, 1997 is the result of a higher average inventory of
loans held for sale compared to the corresponding period in 1996. The average
inventory of loans held for sale for the year ended December 31, 1997, based
on quarter-end balances, was $189.7 million, compared to $32.4 million for the
corresponding period in 1996.
Servicing income increased to $5.6 million for the year ended December 31,
1997, from $29,000 for the year ended December 31, 1996, as a result of the
increase in securitizations, pursuant to which the Company
31
<PAGE>
retains ownership of the servicing rights. Servicing income reflects servicing
fees received on loans sold or securitized by the Company of approximately
$400,000, as well as income recognized on residual cash flows from
securitizations of approximately $5.0 million. The increase in servicing
income for the year ended December 31, 1997 is due to the fact that the
Company securitized $1.1 billion in loans and retained the servicing rights,
while the Company sold substantially all of its loans through whole loan sale
transactions on a servicing-released basis in 1996.
Total expenses increased to $68.0 million for the year ended December 31,
1997, from $12.2 million for the year ended December 31, 1996. Interest
expense increased due to the higher level of loan inventory and corresponding
warehouse borrowing. All other expense components increased from 1996 to 1997
due primarily to (1) higher loan origination volume in the year ended December
31, 1997 compared to the same period in 1996; (2) an increase in staffing from
333 employees at December 31, 1996 to 1,151 employees at December 31, 1997;
and (3) the addition of 22 wholesale offices and 54 retail sales offices from
December 31, 1996 to December 31, 1997.
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
primarily due 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.
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 a $260 million
warehouse line of credit led by First Bank which expires in May 1998. The
Company utilizes the First Bank warehouse line to finance the actual funding
of its loan originations and purchases. The Company also has a $335 million
aggregation facility with Salomon, which is subject to renewal by Salomon on a
monthly basis, as well as a $250 million aggregation facility with Greenwich
Capital, which expires March 1998. 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 or Greenwich aggregation
facilities, 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 or Greenwich aggregation facility.
The Salomon and Greenwich aggregation facilities, and in some cases the First
Bank warehouse line, are paid down with the proceeds of loan
32
<PAGE>
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 residual financing agreements with Salomon and
Greenwich pursuant to which Salomon and Greenwich will provide the Company
with financing upon the Company's retention of residual interests in
securitizations on which Salomon or Greenwich is the lead underwriter. The
amount of residual financing provided 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 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 these credit facilities 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 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 lending activities and bulk acquisitions;
(ii) fees and expenses incurred in connection with the securitization and sale
of loans including over-collateralization requirements for securitization;
(iii) commissions paid to sales employees to originate loans; (iv) the
difference between the amount funded per loan and the amount advanced under
its current warehouse facility; and (v) income tax payments arising from the
recognition of gain on sale of loans. The Company also requires cash to fund
ongoing operating and administrative expenses, including sub-servicing
expenses incurred in the servicing of the Company's loans, capital
expenditures and debt service. The Company's sources of operating cash flow
include: (i) the premium advance component of the Salomon and Greenwich
aggregation facilities; (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 grow its loan origination, purchase and
securitization programs, the Company expects that its operating uses of cash
may continue to exceed its operating sources of cash. During 1997, the
Company's operations used approximately $78.1 million in cash, which is
attributable to the cash investments discussed above, and the cash invested in
the OC Accounts. For purposes of calculating cash used in operating
activities, the financing provided through the residual financing facilities
is excluded.
The gap between operating cash sources and uses 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 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. Moreover, to the extent that the Company
increases the percentage of loans sold through whole loan sale transactions,
increases operating efficiencies and increases the percentage of retail loan
volume, the Company anticipates that it can achieve neutral or positive cash
flow from operations.
The Company intends to rely on credit facilities and undertake capital
markets financings in order to generate funds to finance any negative cash
flow resulting from its operations, securitization and growth plans. The
Company's current credit facilities include: (i) the First Bank warehouse
line; (ii) the Salomon and Greenwich aggregation facilities; (iii) the
residual financing facilities; (iv) $9.0 million of long-term secured and
unsecured credit and lease financing facilities with First Bank; and (v) a
$5.25 million non-revolving operating lease with GE Capital.
First Bank has expanded participation in the $260 million warehouse line
facility to include seven other lenders. As of December 31, 1997, the
Company's outstanding balance under the warehouse line was $182.3 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
33
<PAGE>
LIBOR plus 1.25%. 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 $335
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 December 31, 1997, amounts payable by the
Company under this aggregation facility were $55.1 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 1.50%. No significant
financial or operating covenants have been imposed by Salomon in connection
with the aggregation or residual financing facilities. In 1997, the Company
committed to provide Salomon with a first right to have Salomon lead
underwrite loans sold through securitization by the Company in an aggregate
amount of $750 million. As of December 31, 1997, the Company fulfilled $178.3
million of such volume commitments to Salomon.
The Greenwich aggregation facility provides for the financing of up to $250
million in loans originated or purchased by the Company at an advance rate
equal to the lesser of market value as determined by Greenwich, or 103% of the
principal balance of the loans and a rate of interest generally equal to the
one-month LIBOR plus 1.25%. As of December 31, 1997, amounts payable by the
Company under this facility were $15.9 million. The Greenwich residual
financing facility provides for the financing of an amount calculated by
Greenwich 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 2.50%. No significant financial or other covenants have been imposed by
Greenwich in connection with the aggregation or residual financing facilities.
The Company has a discretionary, non-revolving $5.0 million line of credit
with an affiliate of First Bank secured by furniture and equipment owned by
the Company. 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 December 31, 1997,
amounts payable under this facility were $3.2 million, and the weighted
average interest rate was 9.05%.
The Company has a $5.25 million, non-revolving operating lease with GE
Capital for purposes of financing office property and equipment. Advances
under the lease are made periodically and a financing rate is established at
the time of each advance. Lease payments, which totaled $83,000 per month at
December 31, 1997, terminate from September 2000 to November 2000.
In March 1997, the Company established a $2.5 million unsecured line of
credit with First Bank for working capital purposes, which was increased to
$4.0 million in June 1997. As of December 31, 1997, $2.1 million was payable
under this facility. Outstanding balances under this line of credit bear
interest at a variable rate of 0.50% above First Bank's "reference rate",
which, at December 31, 1997, was 8.50%, and funds may be borrowed on a
revolving basis. The working capital facility is subject to the same covenants
as the warehouse line and has the same expiration date. As a sublimit under
the working capital line of credit, First Bank has provided the Company with a
$1.2 million letter of credit required by the landlord under the lease on the
Company's executive and administrative offices.
The Company anticipates that its current liquidity, credit facilities and
capital resources will be sufficient to fund its operations for the
foreseeable future.
34
<PAGE>
INCOME TAXES
The Company accounts for income taxes by 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 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive
Income" (SFAS No. 130) and "Disclosures about Segments of an Enterprise and
Related Information" (SFAS No. 131), respectively (collectively, the
Statements). The Statements are effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 established standards for reporting of
comprehensive income and its components in annual financial statements. SFAS
No. 131 establishes standards for reporting financial and descriptive
information about an enterprise's operating segments in its annual financial
statements and selected segment information in interim financial reports.
Reclassification or restatement of comparative financial statements or
financial information for earlier periods is required upon adoption of SFAS
No. 130 and SFAS No. 131, respectively. Application of the Statements'
requirements is not expected to have a material impact on the Company's
disclosures.
In February 1998, the FASB issued Statement of Financial Accounting
Standards No. 132 (SFAS 132), "Employers' Disclosure about Pensions and Other
Postretirement Benefits." SFAS 132 amends the disclosure requirements of SFAS
No. 87, "Employers' Accounting for Pensions," SFAS No. 88, "Employer's
Accounting for Settlements and Curtailments of Defined Benefit Pension Plans
and for Termination Benefits," and SFAS 106, "Employer's Accounting for
Retirement Benefits Other than Pensions." SFAS 132 standardizes the disclosure
requirements of SFAS Nos. 87 and 106 to the extent practicable and recommends
a parallel format for presenting information about pensions and other
retirement benefits. SFAS 132 is effective for fiscal years beginning after
December 15, 1997. Application of the Statement's requirements is not expected
to have a material impact on the Company's disclosures.
SAFE HARBOR STATEMENT
The preceding "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" sections contain certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange
Act of 1934 (the "Exchange Act"), and the Company intends that such forward-
looking statements be subject to the safe harbors created thereby. These
forward-looking statements include the plans and objectives of management for
future operations, including plans and objectives relating to the future
economic performance of the Company. The forward-looking statements and
associated risks set forth herein may include or relate to: (i) the
significance of bulk acquisitions to the Company's loan production volume;
(ii) the Company's expansion of its internal servicing infrastructure; (iii)
the Company's ability to assume the servicing functions currently performed
for it by Advanta and Comerica; (iv) the planned opening of 10 or more retail
sales offices during the first three quarters of 1998; (v) the planned opening
of approximately 25 hometown offices in the first three quarters of 1998; (vi)
the ability of the Company to meet its goals of generating revenue at each new
retail sales office within 60 to 90 days after opening and achieving break-
even operations within five to eight months; (vii) the Company's intent to
increase its consumer marketing; (viii) the Company's planned growth of its
Wholesale Division including the expansion of lending operations in the
Southeast and Northeast regions of the country; (ix) the planned opening of
five or more wholesale sales offices in markets surrounding the Company's
existing and planned regional operations centers; (x) the planned increase in
the total number of account executives from 104 as of December 31, 1997 to
approximately 175 by December 1998; (xi) the Company's ability to improve
service to brokers; (xii) the Company's ability to make improvements to its
computer and other support systems, and the
35
<PAGE>
impact of such improvements on the Company's speed, efficiency and consistency
in processing loan applications; (xiii) the Company's planned expansion of
product offerings; (xiv) the anticipated returns and future cash flow to the
Company from its residual interests in its securitizations; (xv) the
improvement of the Company's cash flow profile; (xvi) the ability of the
Company to increase loan production from brokers based on the Company's
planned expansion of product offerings; (xvii) the Company's plans to sell
loans originated through its Alternative Mortgage Products Program on a broker
or correspondent basis, rather than through securitizations or servicing-
retained sales; (xviii) the continuation of the key executives of PWF in their
current positions under their respective employment agreements; (xix) the
Company's planned expansion of its outbound telemarketing program during 1998;
(xx) the Company's expectation of growth in its wholesale originations
primarily due to 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; (xxi) the
Company's ability to increase the origination fees received on retail
originations; (xxii) the ability of the Company to decrease the yield spread
premium paid to wholesale brokers; (xxiii) the ability of the Company to
decrease the cost of origination per loan; (xxiv) the planned increase in
productivity for retail branches and wholesale regions which have been open
less than nine months and which have not yet reached targeted efficiencies;
(xxv) the Company's belief that achieving Year 2000 compliance will not have a
material adverse impact on the Company's business, operations or financial
condition; (xxvi) the Company's belief that its current liquidity, credit
facilities and capital resources will be sufficient to fund its operations for
the foreseeable future; and (xxvii) the Company's belief that any liability
resulting from litigation against the Company, individually or in the
aggregate, will not have a material adverse effect on the Company.
The forward-looking statements are further qualified by important factors
that could cause actual results to differ materially from those in the
forward-looking statements, including, without limitation, the following:
(i) an increase in the prepayment speed or default rate of the Company's
borrowers; (ii) the Company's access to funding sources and its ability to
renew, replace or add to its existing credit facilities; (iii) management's
ability to manage the Company's past growth and planned expansion; (iv) the
effect of changes in interest rates; (v) the effect of competitive pressures
from other subprime lenders or suppliers of credit in the Company's market;
(vi) changes in regulatory policies; (vii) the negative impact of economic
slowdowns or recessions; and (viii) the ability of the Company to attract,
retain and motivate qualified personnel. Results actually achieved thus may
differ materially from expected results in these statements. In addition, as
disclosed above, the business and operations of the Company are subject to
substantial risks which increase the uncertainty inherent in such forward-
looking statements. Any of the other factors disclosed above could cause the
Company's net income or growth in net income to differ materially from prior
results.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this item is set forth in "Index to Consolidated
Financial Statements."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
36
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of the executive officers of the Company and the
positions each of them has held for the past five years are included in Part I
of this Form 10-K as permitted by the General Instruction G(3). The
information required by this item regarding the Company's directors will be
included in the Company's Proxy Statement with respect to its 1998 Annual
Meeting of Stockholders to be filed with the Commission within 120 days of
December 31, 1997, under the caption "Election of Directors" and is
incorporated herein by this reference as if set forth in full herein.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be included in the Company's
Proxy Statement with respect to its 1998 Annual Meeting of Stockholders to be
filed with the Commission within 120 days of December 31, 1997 under the
captions "Executive Compensation," "Election of Directors," "Report of
Compensation Committee," "Performance Graph," and "Compensation Committee
Interlocks and Insider Participation" and is incorporated herein by this
reference as if set forth in full herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be included in the Company's
Proxy Statement with respect to its 1998 Annual Meeting of Stockholders to be
filed with the Commission within 120 days of December 31, 1997 under the
caption "Security Ownership of Principal Stockholders and Management", and is
incorporated herein by this reference as if set forth in full herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included in the Company's
Proxy Statement with respect to its 1998 Annual Meeting of Stockholders to be
filed with the Commission within 120 days of December 31, 1997 under the
caption "Certain Relationships and Related Transactions", and is incorporated
herein by this reference as if set forth in full herein.
37
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements--See "Index to Consolidated
Financial Statements"
2. Consolidated Financial Statement Schedule--See "Index to
Consolidated Financial Statements"
3. Exhibits--See "Exhibit Index"
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the last
quarter of the fiscal year ended December 31, 1997.
38
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
NEW CENTURY FINANCIAL CORPORATION
/s/ Brad A. Morrice
By: _________________________________
Brad A. Morrice
Vice Chairman and Secretary
Each person whose signature appears below hereby authorizes Brad A. Morrice
and Edward F. Gotschall or either of them, as attorneys-in-fact to sign on his
behalf, individually, and in each capacity stated below and to file all
amendments and/or supplements to the Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Brad A. Morrice Vice Chairman and Secretary March 30, 1998
____________________________________ and Director
Brad A. Morrice
/s/ Edward F. Gotschall Chief Operating Officer, March 30, 1998
____________________________________ Finance and Director
Edward F. Gotschall (Principal Financial and
Accounting Officer)
/s/ Robert K. Cole Chairman of the Board and March 30, 1998
____________________________________ CEO and Director
Robert K. Cole
/s/ Steve Holder Chief Operating Officer, March 30, 1998
____________________________________ Production/Operations and
Steve Holder Director
/s/ John C. Bentley Director March 30, 1998
____________________________________
John C. Bentley
/s/ Sherman I. Chu Director March 30, 1998
____________________________________
Sherman I. Chu
/s/ Fredric J. Forster Director March 30, 1998
____________________________________
Fredric J. Forster
/s/ Martin F. Ryan Director March 30, 1998
____________________________________
Martin F. Ryan
/s/ Michael M. Sachs Director March 30, 1998
____________________________________
Michael M. Sachs
</TABLE>
39
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*3.1 Certificate of Incorporation
*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
*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 USA 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 between 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
**10.17 Fifth Amendment to the Amended and Restated Credit Agreement between
the Company and First Bank National Association dated June 25, 1997
***10.18 Second Amended and Restated Credit Agreement by and between the
Company and First Bank National Association, dated July 31, 1997
</TABLE>
40
<PAGE>
EXHIBIT INDEX--(CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
---------- -----------
<C> <S>
10.19 First Amendment to Second Amended and Restated Credit Agreement by
and between New Century Mortgage Corporation and First Bank
National Association, dated November 26, 1997
10.20 Second Amendment to Second Amended and Restated Credit Agreement
and Agreement to Add Banks by and between New Century Mortgage
Corporation and First Bank National Association, dated December
22, 1997
10.21 Third Amendment to Second Amended and Restated Credit Agreement and
Amendment to Pledge and Security Agreement by and between New
Century Mortgage Corporation and First Bank National Association,
dated February 27, 1998
10.22 Office Building Lease by and between AGBRI Cowan and New Century
Financial Corporation, dated November 6, 1997
****10.23 Employee Stock Purchase Plan
*****10.24 Merger Agreement, dated as of December 17, 1997, by and among New
Century, NC Acquisition Corp., PWF, Kirk Redding and Paul Akers
*****10.25 First Amendment to Merger Agreement, dated January 12, 1998, by and
among New Century, NC Acquisition Corp., PWF, Kirk Redding and
Paul Akers
10.26 Master Loan and Security Agreement by and between New Century
Mortgage Corp. and Greenwich Capital Financial Products, Inc.,
dated November 18, 1997
10.27 Letter Agreement by and between New Century Mortgage Corp. and
Salomon Brothers Realty Corp., dated August 27, 1997
10.28 Master Lease Agreement by and between New Century Mortgage
Corporation and General Electric Capital Corporation, dated as of
October 24, 1997
10.29 Sub-Servicing Agreement by and between New Century Mortgage
Corporation and Comerica Mortgage Corporation, dated September 15,
1997
*21.1 List of Subsidiaries
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule
</TABLE>
- - --------
* Incorporated by reference from the Company's Form S-1 Registration
Statement (No. 333-25483) as filed with the Securities and Exchange
Commission on June 23, 1997.
** Incorporated by reference from the Company's Quarterly Report on Form
10-Q as filed with the Securities and Exchange Commission on August 13,
1997.
*** Incorporated by reference from the Company's Quarterly Report on Form
10-Q as filed with the Securities and Exchange Commission on November
14, 1997.
**** Incorporated by reference from the Company's Form S-8 Registration
Statement (No. 333-36129) as filed with the Securities and Exchange
Commission on September 22, 1997.
***** Incorporated by reference from the Company's Form 8-K as filed with the
Securities and Exchange Commission on January 26, 1998.
41
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
Independent Auditors' Report.......................................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996........ F-3
Consolidated Statements of Operations for the years ended December
31, 1997 and 1996, and the period from November 17, 1995
(inception) through December 31, 1995.............................. F-4
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1997 and 1996, and the period from
November 17, 1995 (inception) through December 31, 1995............ F-5
Consolidated Statements of Cash Flows for the years ended December
31, 1997 and 1996, and the period from November 17, 1995
(inception) through December 31, 1995.............................. F-6
Notes to Consolidated Financial Statements for the years ended
December 31, 1997 and 1996 and the period from November 17, 1995
(inception) through December 31, 1995.............................. F-7
</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, 1997 and 1996 and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for the years ended December 31, 1997 and 1996 and the period
from November 17, 1995 (inception) through 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, 1997 and 1996
and the results of their operations and their cash flows for the years ended
December 31, 1997 and 1996 and the period from November 17, 1995 (inception)
through December 31, 1995 in conformity with generally accepted accounting
principles.
KPMG PEAT MARWICK LLP
Orange County, California
February 9, 1998
F-2
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996
-------- -------
ASSETS
------
<S> <C> <C>
Cash and cash equivalents......................................... $ 12,701 $ 3,041
Loans receivable held for sale, net (notes 2 and 5)............... 276,506 57,990
Residual interests in securitizations (note 3).................... 97,260 --
Accrued interest receivable....................................... 3,974 786
Office property and equipment (notes 4 and 6)..................... 4,289 1,620
Prepaid expenses and other assets (note 10)....................... 3,398 1,201
-------- -------
$398,128 $64,638
======== =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Warehouse and aggregation lines of credit (note 5)................ $255,363 $55,659
Residual financing payable (note 5)............................... 53,427 --
Notes payable (note 6)............................................ 3,222 1,326
Income taxes payable.............................................. 1,789 839
Accounts payable and accrued liabilities (note 7)................. 15,454 2,283
Deferred income taxes (note 8).................................... 8,037 128
-------- -------
337,292 60,235
-------- -------
Stockholders' equity (notes 10 and 11):
Preferred stock, $.01 par value. Authorized 7,500,000 shares:
Series A convertible preferred stock issued and outstanding 0
and 5,500,000 shares at December 31, 1997 and 1996,
respectively................................................. -- 54
Series B convertible preferred stock issued and outstanding 0
and 320,000 shares at December 31, 1997 and 1996,
respectively................................................. -- 4
Common stock, $.01 par value. Authorized 45,000,000 shares;
issued and outstanding 14,165,974 and 528,618 shares at
December 31, 1997 and 1996, respectively....................... 142 6
Additional paid-in capital...................................... 43,486 3,086
Retained earnings, restricted................................... 18,996 1,253
Deferred compensation costs..................................... (1,788) --
-------- -------
Total stockholders' equity.................................. 60,836 4,403
Commitments and contingencies (notes 7 and 9).....................
Subsequent event (note 16)........................................
-------- -------
$398,128 $64,638
======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND THE PERIOD FROM
NOVEMBER 17, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- ------
<S> <C> <C> <C>
Revenues:
Gain on sales of loans (note 2)...................... $67,939 $11,630 $ --
Interest income (note 2)............................. 25,071 2,846 14
Servicing income (note 3)............................ 5,623 29 --
------- ------- ------
Total revenues..................................... 98,633 14,505 14
------- ------- ------
Expenses:
Personnel............................................ 24,840 6,083 54
General and administrative (note 12)................. 14,501 2,456 11
Interest............................................. 20,579 1,941 --
Advertising and promotion............................ 5,620 1,169 --
Servicing............................................ 1,536 269 --
Professional services................................ 965 282 30
------- ------- ------
Total expenses..................................... 68,041 12,200 95
------- ------- ------
Earnings (loss) before income taxes................ 30,592 2,305 (81)
Income taxes (note 8).................................. 12,849 970 1
------- ------- ------
Net earnings (loss)................................ $17,743 $ 1,335 $ (82)
======= ======= ======
Basic earnings (loss) per share........................ $ 2.18 $ 2.53 $(0.16)
======= ======= ======
Diluted earnings (loss) per share...................... $ 1.40 $ 0.20 $(0.16)
======= ======= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND THE PERIOD FROM
NOVEMBER 17, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A SERIES B RETAINED
PREFERRED PREFERRED COMMON ADDITIONAL EARNINGS
STOCK STOCK STOCK PAID-IN (DEFICIT), DEFERRED
AMOUNT AMOUNT AMOUNT CAPITAL RESTRICTED COMPENSATION TOTAL
--------- --------- ------ ---------- ---------- ------------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, November 17,
1995 (inception)....... $ -- $ -- $ -- $ -- $ -- $ -- $ --
Proceeds from issuance
of Series A preferred
stock (note 10)........ 54 -- -- 2,696 -- -- 2,750
Proceeds from issuance
of Series B preferred
stock (note 10)........ -- 4 -- 156 -- -- 160
Proceeds from issuance
of common stock (note
10).................... -- -- 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
Proceeds from issuance
of common stock (note
10).................... -- -- 74 36,129 -- -- 36,203
Conversion of preferred
stock (note 10)........ (54) (4) 58 -- -- -- --
Issuance of warrants
(note 10).............. -- -- -- 1,500 -- -- 1,500
Issuance of restricted
stock (note 10)........ -- -- 4 2,771 -- -- 2,775
Unamortized deferred
compensation (note 10). -- -- -- -- -- (1,788) (1,788)
Net earnings............ -- -- -- -- 17,743 -- 17,743
----- ----- ----- ------- ------- ------- -------
Balance, December 31,
1997................... $ -- $ -- $ 142 $43,486 $18,996 $(1,788) $60,836
===== ===== ===== ======= ======= ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997 AND 1996 AND THE PERIOD FROM
NOVEMBER 17, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- ------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss).......................... $ 17,743 $ 1,335 $ (82)
Adjustments to reconcile net earnings (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization.............. 2,835 260 --
Deferred income taxes...................... 7,909 128 --
NIR gains.................................. (89,770) -- --
Initial deposit to over-collateralization
account................................... (20,445) -- --
Deposits to over-collateralization account. (11,376) -- --
Release of cash from over-collateralization
account................................... 10,597 -- --
Amortization of NIR........................ 5,559 -- --
Write down of NIR.......................... 5,175 -- --
General valuation allowances for NIR....... 3,000 -- --
Provision for losses....................... 3,986 706 --
Loans originated or acquired for sale...... (1,968,842) (357,727) --
Loan sales, net............................ 1,740,800 298,713 --
Principal payments on loans receivable held
for sale.................................. 9,526 418 --
Increase in warehouse and aggregation lines
of credit................................. 199,704 55,659 --
Net increase in other assets and
liabilities............................... 5,439 1,028 (5)
----------- --------- ------
Net cash provided by (used in) operating
activities.............................. (78,160) 520 (87)
----------- --------- ------
Cash flows used in investing activities--
purchase of office property and equipment..... (3,706) (1,834) (34)
----------- --------- ------
Cash flows from financing activities:
Net proceeds from residual financing......... 53,427 -- --
Net proceeds from notes payable.............. 1,896 1,326 --
Proceeds from issuance of stock.............. 36,203 -- 3,150
----------- --------- ------
Net cash provided by financing
activities.............................. 91,526 1,326 3,150
----------- --------- ------
Net increase in cash and cash
equivalents............................. 9,660 12 3,029
Cash and cash equivalents at beginning of
period........................................ 3,041 3,029 --
----------- --------- ------
Cash and cash equivalents at end of period..... $ 12,701 $ 3,041 $3,029
=========== ========= ======
Supplemental cash flow disclosure:
Interest paid................................ $ 19,135 $ 1,738 $ --
Income taxes................................. 3,990 3 1
=========== ========= ======
Supplemental non-cash financing activities:
Restricted stock issued to founding managers. $ 2,775 $ -- $ --
Warrants issued to Comerica.................. 1,500 -- --
Conversion of preferred stock................ 58 -- --
=========== ========= ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1996
(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 and second 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.
Gain on Sales of Loans
Gains or losses resulting from sales or securitizations of mortgage loans
are recognized at the date of settlement and are based on the difference
between the selling price of the sales or securitizations 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.
On January 1, 1997, the Company adopted Financial Accounting Standards Board
(FASB) Statement of Financial Accounting Standards No. 125 (SFAS 125),
"Accounting for Transfers and Servicing of Financial Assets and Extinguishment
of Liabilities." Under SFAS 125, a transfer of financial assets in which
control is surrendered is accounted for as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in the exchange. Liabilities and derivatives incurred or obtained by
the transfer of financial assets are required to be measured at fair value, if
practicable. Also, servicing assets and other retained interests in the
transferred assets must be measured by allocating the previous carrying value
between the asset sold and the interest retained, if any, based on their
relative fair values at the date of transfer.
SFAS 125 also requires an assessment of interest-only strips, loans, other
receivables and retained interests in securitizations (residuals). If these
assets can be contractually prepaid or otherwise settled such that the holder
F-7
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
would not recover substantially all of its recorded investment, the asset will
be measured like trading securities. The Company adopted SFAS 125 on January
1, 1997, and there was no material impact on the Company's consolidated
financial statements.
Hedging
The Company uses various hedging strategies to provide protection against
interest rate risk on its fixed-rate mortgage loans. These strategies include
selling short and selling forward U.S. Treasury securities, 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
recognizes the gain or loss on hedge positions in the same period as the
related asset hedged is sold. The Company had no open hedge positions or
unrecognized gains or losses at December 31, 1997.
Allowance for Losses
The allowance for losses on loans sold relates to expenses incurred due to
the potential repurchase of loans or indemnification of losses based on
alleged violations of representations and warranties which are customary to
the mortgage banking industry. The allowance represents the Company's estimate
of the total losses expected to occur and is considered to be adequate.
Provisions for losses are charged to gain on sales of loans 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 over the life of the associated loans sold.
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, whichever is shorter. 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, 1997 and 1996,
accumulated amortization was $25,000 and $12,000, 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 presentation would have aggregated current assets,
current liabilities and net working capital as of December 31, 1997 as follows
(dollars in thousands):
<TABLE>
<S> <C>
Current assets................................................. $310,489
Current liabilities............................................ 327,329
--------
Net working capital............................................ $(16,840)
========
</TABLE>
Current assets include the portion of the residual interests in
securitizations expected to be collected within one year, while current
liabilities include the entire balance of residual financing.
Errors and Omissions Policy
In connection with the Company's lending activities, the Company has
Fidelity Bond and Errors and Omissions insurance coverage of $1.5 million each
at December 31, 1997.
F-8
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
The Company files 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 (Residuals) of mortgage loans are
recorded as a result of the sale of mortgage loans through securitizations.
The securitizations are generally structured as follows: First, the Company
sells a portfolio of mortgage loans to a special purpose entity (SPS) which
has been established for the limited purpose of buying and reselling the
Company's mortgage loans. The SPS then transfers the same mortgage loans to a
Real Estate Mortgage Investment Conduit or owners trust (the REMIC or Trust),
and the Trust in turn issues interest-bearing asset-backed securities (the
Certificates) generally in an amount equal to the aggregate principal balance
of the mortgage loans. The Company typically sells these certificates at face
value and without recourse except that representations and warranties
customary to the mortgage banking industry are provided by the Company to the
Trust. One or more investors purchase these Certificates and the proceeds from
the sale of the certificates are used as consideration to purchase the
mortgage loans from the Company. In addition, the Company may provide a credit
enhancement for the benefit of the investors in the form of additional
collateral (over-collateralization account or OC Account) held by the Trust.
The OC Account is required by the servicing agreement (the Company's servicing
agreements are collectively referred to as the Servicing Agreements) to be
maintained at specified levels.
At the closing of each securitization, the Company removes from its
consolidated balance sheet the loans held for sale and adds to its
consolidated balance sheet (i) the cash received and (ii) the estimated fair
value of the portion of the mortgage loans retained from the securitizations
(Residuals), which consist of (a) the OC Account and (b) the net interest
receivables (NIRs). NIRs represent the discounted estimated cash flows to be
received by the Trust in the future. The excess of the cash received and the
assets retained by the Company over the carrying value of the mortgage loans
sold, less transaction costs, equals the net gain on sale of mortgage loans
recorded by the Company.
The Company allocates its basis in the mortgage loans between the portion of
the mortgage loans sold through the Certificates and the portion retained (the
Residuals) 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
changes in the fair value of the Residuals, 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 Residuals, and
accordingly, the Company determines the estimated fair value of the Residuals
by discounting the expected cash flows released from the OC Account (the cash
out method) using a discount rate which the Company believes is commensurate
with the risks involved. The Company has utilized an effective discount rate
of approximately 12% on the estimated cash flows released from the OC Account
to value the Residuals.
The Company receives periodic servicing fees for the servicing and
collection of the mortgage loans as master servicer of the securitized loans.
In addition, the Company is entitled to the cash flows from the Residuals that
represent collections on the mortgage loans in excess of the amounts required
to pay the Certificate principal and interest, the servicing fees and certain
other fees such as trustee and custodial fees. At the end of each
F-9
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
collection period, the aggregate cash collections from the mortgage loans are
allocated first to the base servicing fees and certain other fees such as
trustee and custodial fees for the period, then to the Certificateholders for
interest at the pass-through rate on the certificates plus principal as
defined in the Servicing Agreements. If the amount of cash required for the
above allocations exceeds the amount collected during the collection period,
the shortfall is drawn from the OC Account. If the cash collected during the
period exceeds the amount necessary for the above allocations, and there is no
shortfall in the related OC Account, the excess is released to the Company. If
the OC Account balance is not at the required credit enhancement level, the
excess cash collected is retained in the OC Account until the specified level
is achieved. The cash and collateral in the OC Account is restricted from use
by the Company. Pursuant to certain Servicing Agreements, cash held in the OC
Accounts may be used to make accelerated principal paydowns on the
certificates to create additional excess collateral in the OC Account which is
held by the Trusts on behalf of the Company as the Residual holder. The
specified credit enhancement levels are defined in the Servicing Agreements as
the OC Account balance expressed generally as a percentage of the current
collateral principal balance.
The Annual Percentage Rate (APR) on the mortgage loans is relatively high in
comparison to the pass-through rate on the certificates; accordingly, the
Residuals described above are a significant asset of the Company. In
determining the value of the Residuals described above, the Company must
estimate the future rates of prepayments, prepayment penalties to be received
by the Company, delinquencies, defaults and default loss severity as they
impact the amount and timing of the estimated cash flows. The Company uses a
0.45% to 0.65% default rate estimate. The Company's default loss estimates
result in cumulative loss estimates as a percentage of the original principal
balance of the mortgage loans of 1.91% to 2.08%. These estimates are based on
historical loss data for comparable loans and the specific characteristics of
the loans originated by the Company. The Company estimates prepayments by
evaluating historical prepayment performance of comparable mortgage loans and
the impact of trends in the industry. The Company has used a prepayment curve
to estimate the prepayment characteristics of the mortgage loans. The rate of
increase, duration, severity and decrease of the curve depends on the age and
nature of the mortgage loans, primarily, whether the mortgage loans are fixed
or adjustable and the interest rate adjustment characteristics of the mortgage
loans (6 month, 1 year, 2 year or 3 year adjustment periods). The Company's
prepayment curve and default estimates have resulted in weighted average lives
of between 3.15 and 4.28 years.
In addition, due to the uncertainty associated with these estimates of
future cash flows caused by the lack of historical performance data on the
collateral and the absence of an active market for the purchase or sale of
Residuals, the Company has established a general valuation allowance of $3
million for the Residuals. The general valuation allowance is based on the
Company's periodic evaluation of the Residuals which takes into consideration
trends in actual cash flow performance, industry and economic developments as
well as other relevant factors.
In future periods, the Company will recognize additional revenue from the
Residuals if the actual performance of the mortgage loans is higher than the
original estimate or the Company may increase the estimated fair value of the
Residuals. If the actual performance of the mortgage loans is lower than the
original estimate, then an adjustment to the carrying value of the Residuals
may be required if the estimated fair value of the Residuals is less than its
carrying value.
Mortgage Servicing Fees
The Company is designated as the master servicer for its securitizations and
receives a monthly fee based on the outstanding principal balance of the
mortgage loans. The Company has contracted with a subservicer to perform the
servicing and investor reporting of the mortgage loans in the Company's first
five securitizations, pursuant to a pooling and servicing agreement. The
subservicer charges a monthly fee based on the outstanding
F-10
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
principal balance of the mortgage loans. For the Company's remaining
securitizations, the Company services the loans through its joint servicing
platform with a financial institution. The Company pays a monthly servicing
fee to the financial institution based on the number of loans serviced.
The Company does not recognize a servicing asset as the fees received for
the servicing and collection of the mortgage loans as master servicer of the
securitized loans is comparable to the subservicer fees and servicing fees
paid to the financial institution and the costs incurred by the Company in
performing the servicing functions.
Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and related
interpretations. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123), which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS 123 also allows entities to continue to apply the
provisions of APB 25 and provide pro forma net earnings and pro forma net
earnings per share disclosures for employee stock options grants made in 1995
and future years as if the fair-value-based method defined in SFAS 123 had
been applied. The Company has elected to continue to apply the provisions of
APB 25 and provide the pro forma disclosure provisions of SFAS 123.
Earnings Per Share
The Company adopted, effective December 31, 1997, Statement of Accounting
Standards No. 128, "Earnings per Share" (SFAS 128). SFAS 128 simplifies the
standards for computing and presenting earnings per share (EPS) as previously
prescribed by Accounting Principles Board Opinion No. 15, "Earnings per
Share." SFAS 128 replaces primary EPS with basic EPS and fully diluted EPS
with diluted EPS. Basic 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 issuance of
common stock that then shared in earnings.
Use of Estimates
Management of the Company has made certain estimates and assumptions
relating to the reporting of assets, liabilities, results of operations 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 prior periods' presentation have been reclassified to
conform to the current year's presentation.
F-11
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Year 2000
In January 1997, the Company developed a plan to deal with the Year 2000
problem and began converting its computer systems to be Year 2000 compliant.
The plan provides for the conversion efforts to be completed by the end of
1999. The Year 2000 problem is the result of computer programs being written
using two digits rather than four to define the applicable year. The total
cost of the project is estimated to be nominal and is being funded through
operating cash flows. The Company is expensing all costs associated with these
systems changes as the costs are incurred. As of December 31, 1997, no expense
has been incurred for Year 2000 system conversion.
Recent Accounting Developments
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive
Income" (SFAS No. 130) and "Disclosures about Segments of an Enterprise and
Related Information" (SFAS No. 131), respectively (collectively, the
Statements). The Statements are effective for fiscal years beginning after
December 15, 1997. SFAS No. 130 established standards for reporting of
comprehensive income and its components in annual financial statements. SFAS
No. 131 establishes standards for reporting financial and descriptive
information about an enterprise's operating segments in its annual financial
statements and selected segment information in interim financial reports.
Reclassification or restatement of comparative financial statements or
financial information for earlier periods is required upon adoption of SFAS
No. 130 and SFAS No. 131, respectively. Application of the Statements'
requirements is not expected to have a material impact on the Company's
disclosure.
(2) LOANS RECEIVABLE HELD FOR SALE
A summary of loans receivable held for sale, at the lower of cost or market
at December 31 follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Mortgage loans receivable:
First trust deeds..................................... $261,819 $54,506
Second trust deeds.................................... 13,995 3,195
Net deferred origination costs........................ 692 289
-------- -------
$276,506 $57,990
======== =======
</TABLE>
At December 31, 1997 and 1996, the Company had loans receivable held for
sale of approximately $21.7 million and $1.1 million, respectively, on which
the accrual of interest had been discontinued. If these loans receivable had
been current throughout their terms, interest income would have increased by
approximately $1.1 million and $26,000 in the years ended December 31, 1997
and 1996, respectively.
Interest Income
The following table presents the components of interest income for the years
ended December 31, 1997 and 1996 and for the period from November 17, 1995
(inception) through December 31, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ----
<S> <C> <C> <C>
Interest on loans receivable held for sale.......... $24,546 $2,801 $--
Interest on cash and cash equivalents............... 525 45 14
------- ------ ----
$25,071 $2,846 $ 14
======= ====== ====
</TABLE>
F-12
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Gain on Sales of Loans
Gain on sales of loans for the years ended December 31 was comprised of the
following components (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Gain from whole loan sale transactions................ $ 27,707 $15,335
Non-cash gain from securitizations.................... 89,770 --
Cash gain from securitizations........................ 6,105 --
Securitization expenses............................... (5,624) --
Accrued interest...................................... (7,188) --
Write down of NIR..................................... (5,175) --
General valuation allowance for NIR................... (3,000) --
Provision for losses.................................. (3,986) (706)
Nonrefundable fees.................................... 24,514 3,548
Premiums, net......................................... (24,739) (1,973)
Origination costs..................................... (28,716) (4,291)
Hedging gains (losses)................................ (1,729) (283)
-------- -------
$ 67,939 $11,630
======== =======
</TABLE>
Originations and Purchases
During the year ended December 31, 1997, approximately 40.9% and 13.2% of
the Company's total loan originations and purchases were in the states of
California and Illinois, respectively. During the year ended December 31,
1996, approximately 62.4% and 15.7% of 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 total loan sales. During
the year ended December 31, 1997, the Company sold in whole loan sale
transactions a total of approximately 14.4% and 13.3% of the loans sold to
these two customers and recognized gross whole loan gains on sales of
approximately 12.0% and 8.7%, respectively, of the total gross gains. During
the year ended December 31, 1996, the Company sold in whole loan sale
transactions a total of approximately 51.4% and 32.2% of the loans sold to two
customers and recognized gross whole loan gains on sales of approximately
50.9% and 39.3%, respectively, of the total gross gains.
(3) RESIDUAL INTEREST IN SECURITIZATIONS
Residual interests in securitizations consist of the following components at
December 31, 1997 (dollars in thousands):
<TABLE>
<S> <C>
Over-collateralization amount................................... $21,224
Net interest receivable (NIR)................................... 76,036
-------
$97,260
=======
</TABLE>
F-13
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes activity in NIR interests at December 31,
1997 (dollars in thousands):
<TABLE>
<S> <C>
Balance, beginning of period.................................... $ --
NIR gains....................................................... 89,770
NIR amortization................................................ (5,559)
Write down of NIR............................................... (5,175)
General valuation allowance for NIR............................. (3,000)
-------
$76,036
=======
</TABLE>
Servicing Income
The following table presents the components of servicing income for the
years ended December 31, 1997 and 1996 and for the period from November 17,
1995 (inception) through December 31, 1995 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ---- ----
<S> <C> <C> <C>
Servicing fees collected............................. $ 427 $19 $--
Residual interest income............................. 10,597 -- --
NIR amortization..................................... (5,559) -- --
Prepayment penalties collected....................... 158 10 --
------- --- ----
$ 5,623 $29 $--
======= === ====
</TABLE>
(4) OFFICE PROPERTY AND EQUIPMENT
Office property and equipment consist of the following at December 31
(dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
------- ------
<S> <C> <C>
Leasehold improvements.................................. $ 298 $ 93
Furniture and office equipment.......................... 1,355 547
Computer hardware and software.......................... 3,921 1,228
------- ------
5,574 1,868
Less accumulated depreciation and amortization.......... (1,285) (248)
------- ------
$ 4,289 $1,620
======= ======
</TABLE>
F-14
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) WAREHOUSE AND AGGREGATION LINES OF CREDIT AND RESIDUAL FINANCING PAYABLE
Warehouse and aggregation lines of credit consist of the following at
December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
A $260 million line of credit expiring in May 1998 secured
by loans receivable held for sale, bearing interest based
on one month LIBOR (5.72% at December 31, 1997).......... $182,280 $41,702
A $4 million unsecured working capital line of credit
expiring in May 1998, bearing interest based on the
bank's prime rate. This working capital line of credit
agreement is subject to the same debt covenants as the
$260 million line of credit agreement.................... 2,146 --
A $335 million master repurchase agreement bearing
interest based on one month LIBOR (5.72% at December 31,
1997). The agreement may be terminated by the lender
after giving 28 days written notice...................... 55,064 13,957
A $250 million master repurchase agreement expiring in
March 1998 bearing interest based on one month LIBOR
(5.72% at December 31, 1997)............................. 15,873 --
-------- -------
$255,363 $55,659
======== =======
Residual financing payable:
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
$49 million in residual financing lines renewable monthly,
secured by residual interests in securitization bearing
interest based on one month LIBOR (5.72% at December 31,
1997).................................................... $ 48,627 $ --
$5 million in residual financing lines renewable monthly,
secured by residual interests in securitizations bearing
interest based on one month LIBOR (5.72% at December 31,
1997).................................................... 4,800 --
-------- -------
$ 53,427 $ --
======== =======
</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 December 31, 1997,
the Company was in compliance with these financial and other covenants.
Advances under the residual financing lines are made at the sole discretion
of the lender and are based on a percentage of the amount of loans
securitized. These advances are repayable on demand by the lender and are
subject to renewal on a monthly basis.
(6) NOTES PAYABLE
Notes payable consists of a financing line of credit of $5.0 million,
collateralized by office property and equipment, bears interest at rates
varying from 8.82% to 9.58% and expires in May 1998. The borrowings are
payable in blended monthly payments of principal and interest and mature
commencing from May 1999 to December 2000.
The maturities of notes payable at December 31 for the years ended are as
follows (dollars in thousands):
<TABLE>
<S> <C>
Due in 1998....................................................... $1,296
Due in 1999....................................................... 1,272
Due in 2000....................................................... 654
------
$3,222
======
</TABLE>
F-15
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) COMMITMENTS AND CONTINGENCIES
Servicing
The Company's portfolio of mortgage loans serviced for others is comprised
of approximately $1.3 billion at December 31, 1997, $1.1 billion of which
represents loans securitized by the Company. The remainder represents loans
sold to whole loan sale investors on a servicing retained basis which are
serviced by the Company. The Company has a subservicing contract with a
subservicer to service $706.3 million of its securitized portfolio. The
remaining $609.4 million of loans, including $344.6 million of its securitized
portfolio, are serviced under the Company's joint servicing platform with a
financial institution which commenced in September 1997.
Related Party
The Company has entered into employment agreements with four executive
officers (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. For 1997, the Founding Managers initially
received a salary of $180,000. On May 30, 1997, the Board of Directors revised
the Founding Managers' salary to $256,000 for 1997, plus a $500 per month
automobile allowance.
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 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.
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.
Awards under the Incentive Compensation Plan are payable in either cash or
restricted stock if agreed by the Committee and respective Founding Manager.
In the absence of such an agreement, incentive compensation to each Founding
Manager will be paid in cash up to 100% of the respective Founding Manager's
base salary in fiscal 1997 and thereafter up to 200% of such base salary. If
the Incentive Pool exceeds the cash portion of incentive compensation and
there is no agreement between the Committee and respective Founding Manager
regarding the distribution of excess, such excess shall be paid to the
respective Founding Manager in the form of restricted stock. The restricted
stock will vest in equal annual installments over a three-year period. In the
event that a Founding
F-16
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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. Included in personnel expense for the years ended December
31, 1997 and 1996, and for the period from November 17, 1995 (inception)
through December 31, 1995, respectively, are $1.0 million, $318,000 and $0
related to the plan.
Operating Leases
The Company and its subsidiary lease certain facilities under noncancelable
operating leases, which expire at various dates through 2002. Total rental
expenditures under these leases were approximately $2.6 million and $389,000
for the years ended December 31, 1997 and 1996, respectively. The Company and
its subsidiary lease office property and equipment from GE Capital under an
operating lease agreement facility. The lease commitment available under this
facility is $5.25 million. As of December 31, 1997, the Company leased office
property and equipment under this facility totaling $1.8 million which expires
from September 2000 to November 2000. In addition, the Company and its
subsidiary lease certain office property and equipment under other
noncancelable operating leases, which expire at various dates through 2000.
Total rental expenditures under these office property and equipment leases
were approximately $502,000 and $0 for the years ended December 31, 1997 and
1996, respectively.
Minimum rental commitments for these leases are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31:
<S> <C>
1998.......................................................... $ 5,291
1999.......................................................... 4,949
2000.......................................................... 3,965
2001.......................................................... 2,454
2002.......................................................... 903
-------
$17,562
=======
</TABLE>
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 $423.2 million at
December 31, 1997.
The Company had commitments to sell loans of $8.0 million at December 31,
1997.
As of December 31, 1997, the Company was committed to provide an investment
banking firm with a right to lead underwrite loans sold through securitization
by the Company in an aggregate amount of $750.0 million, of which $571.7
million was not yet fulfilled at December 31, 1997.
Contingencies
The Company has entered into loan sale agreements with investors in the
normal course of business which include representations and warranties
customary to the mortgage banking industry. Violations of these
F-17
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 is adequately provided for in the allowance for losses.
The Company sold $221.2 million in loans in December 1997 and $96.2 million
in loans in December 1996 under agreements to repurchase those loans which
were delinquent at specific dates in March 1998 and January 1997,
respectively. In accordance with these loan sale agreements, the Company
repurchased loans with an outstanding principal balance of approximately $3.5
million and $1.7 million for the years ended December 31, 1997 and 1996,
respectively.
At December 31, 1997 and 1996, included in accounts payable and accrued
liabilities are approximately $1.6 million and $100,000, respectively, in
allowances for 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 years ended December 31 is summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -----
<S> <C> <C>
Balance, beginning of year............................... $ 100 $ --
Provision for losses..................................... 3,986 706
Charge-offs, net......................................... (2,489) (606)
------- -----
Balance, end of year..................................... $ 1,597 $ 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.
(8) INCOME TAXES
Components of the Company's provision for income taxes for the years ended
December 31, 1997 and 1996 and for the period from November 17, 1995
(inception) through December 31, 1995 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ---- ----
<S> <C> <C> <C>
Current:
Federal.............................................. $ 3,739 $650 $ 1
State................................................ 1,201 192 --
------- ---- ---
4,940 842 1
------- ---- ---
Deferred:
Federal.............................................. 5,789 66 --
State................................................ 2,120 62 --
------- ---- ---
7,909 128 --
------- ---- ---
$12,849 $970 $ 1
======= ==== ===
</TABLE>
F-18
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Actual income taxes differ from the amount determined by applying the
statutory Federal rate of 35% for the year ended December 31, 1997 and 34% for
the year ended December 31, 1996 and for the period from November 17, 1995
(inception) through December 31, 1995 to earnings (loss) before income taxes
as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ---- ----
<S> <C> <C> <C>
Computed "expected" income taxes................... $10,707 $784 $(27)
State tax, net of federal benefit.................. 2,157 174 --
Valuation allowance................................ -- (28) 28
Other.............................................. (15) 40 --
------- ---- ----
$12,849 $970 $ 1
======= ==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ----
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses................................. $1,111 $229
Accruals for tax purposes not deductible.................. -- 40
State taxes............................................... 1,126 86
Office property and equipment............................. 250 --
------ ----
2,487 355
Valuation allowance..................................... -- --
------ ----
2,487 355
------ ----
Deferred tax liabilities:
Non-cash gain from securitization......................... 9,401 --
Deferred loan fees........................................ 1,098 448
Office property and equipment............................. -- 35
Other..................................................... 25 --
------ ----
10,524 483
------ ----
Net deferred income tax liability....................... $8,037 $128
====== ====
</TABLE>
There was no valuation allowance for deferred tax assets at December 31,
1997 and 1996, respectively.
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 of an appropriate character 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.
Based upon the level of historical taxable income and projections for future
taxable income over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not that the Company
will realize deferred tax assets existing at December 31, 1997 and 1996.
F-19
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(9) EMPLOYEE BENEFIT PLANS
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, 1997 were $194,000.
In October 1997, the Company established the New Century Financial
Corporation Employee Stock Purchase Plan (the Plan) for the benefit of
eligible employees. This plan is a compensatory plan as defined in accordance
with APB 25. The plan allows employees to contribute, through payroll
deductions, to the Plan. Plan periods are six months, with the exception of
the first plan period, which was October 13, 1997 to December 31, 1997. At the
end of each plan period, the employees purchase stock at a price equal to 90%
of the lesser of the market price at the beginning and end of the plan period.
At the end of the first plan period, 19,386 shares of common stock were
issued.
(10) STOCKHOLDERS' EQUITY
Convertible Preferred Stock
On November 22, 1995, the Company issued 5,000,000 shares of Series A
preferred stock. In December 1995, the Company issued an additional 500,000
shares of Series A preferred stock. The Company received $2.75 million from
the issuances. The holders of the Series A preferred stock are entitled to
convert each share of Series A preferred stock into one share of common stock.
Upon liquidation, the Series A preferred stock is entitled to receive, in
preference to any payment on Series B preferred stock and common stock, an
amount equal to $0.50 per share and a 12% annual return.
On November 22, 1995, the Company issued 320,000 shares of Series B
preferred stock. The Company received $160,000 from this issue. The holders of
the Series B preferred stock are entitled to convert each share of Series B
preferred stock into one share of common stock. Upon liquidation, after the
payments to Series A preferred stock as described above, 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.
In May 1997, all shares of Series A and B preferred stock were converted to
common stock.
In June 1997, the Company, subsequent to completing its Initial Public
Offering, increased its authorized preferred stock to 7,500,000 shares.
Common Stock
On November 22, 1995, the Company issued 528,618 shares of common stock. The
Company received $240,000 from this issue.
In May 1997, the Company issued 304,501 shares of common stock upon the
exercise by such stockholders of certain warrants to purchase common stock of
the Company. The Company received approximately $1.1 million from this issue.
The Company also issued 3,424,255 shares of common stock under cashless
exercises of warrants at exercise prices of $1.00 to $3.50 per share.
In May 1997, the Company issued to Comerica Incorporated (Comerica) 545,000
shares of common stock for $4,087,500.
F-20
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In May 1997, pursuant to the Company's 1995 Stock Option Plan and certain
Restricted Stock Award Agreements, the Company issued 92,500 shares of
restricted stock to each of the four Founding Managers. The Company recorded
$2.8 million in deferred compensation expense and additional paid in capital
at the grant date. The deferred compensation expense is being amortized over
the vesting period of the restricted stock, which is in equal installments in
May 1998, 1999 and 2000. Included in personnel expenses for the year ended
December 31, 1997 is $987,000 related to the amortization of deferred
compensation.
In June 1997, the Company completed its Initial Public Offering, issuing
3,132,500 new shares of common stock, and raising approximately $31.0 million
in proceeds, net of offering expenses of approximately $1 million. The Company
also increased its authorized shares of common stock to 45,000,000 shares.
Stock Split
On September 19, 1996, the Company authorized a 2-for-1 stock split of all
classes of stock. 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 entitled the holder to purchase 2.78 shares of common stock of
the Company at $1.00, $2.00 and $3.00 per share. All of these warrants were
exercised in May 1997.
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 at that time. Such warrants were granted to
stockholders on a pro rata basis in satisfaction of the stockholders'
respective preemptive rights. These warrants were exercised in May 1997.
In May 1997, the Company issued to Comerica warrants to purchase 100,000
shares of common stock and agreed to issue to Comerica an additional 233,000
warrants based on completion of certain services by Comerica with respect to
servicing the Company's loans and developing leads for the Company. The
warrants are exercisable over five years at $11.00 per share, subject to
vesting in equal installments on December 31, 1997, 1998 and 1999. The Company
believes that the warrant price approximates fair market value of the
Company's stock at the time of grant. In accordance with FASB No. 123, $1.5
million has been determined to be the value of the stock warrants issued and
to be issued on the measurement date. Included in other assets is prepaid
commitment costs of $702,000 at December 31, 1997 and included in general and
administrative expense is stock warrant expense of $798,000 for the year ended
December 31, 1997 related to the stock warrants issued and to be issued.
(11) 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 2.0 million 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
2002. In addition to the Plan, in December 1996, the Company authorized
127,500 nonqualified stock options of which 120,000 was granted to certain
executive officers of the Company that vest over a three year period and
expire ten years from the grant date and an additional 7,500 shares were
granted in May 1997 for a former director of the Company, which vest over five
years and expire ten years from the date of grant. All stock options are
granted with an exercise price equal to the stock's fair market value at the
date of grant.
F-21
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1997, there were 148,330 shares available for grant under
the Plan. Of the options outstanding at December 31, 1997 and 1996, 683,280
and 14,600, respectively, were exercisable with weighted-average exercise
prices of $6.41 and $3.17, respectively. The per share weighted-average fair
value of stock options granted during the year ended December 31, 1997 and
1996 was $5.20 and $1.05, respectively, at the date of grant using the Black-
Scholes option-pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Expected life (years)......................................... 4.5 9.1
Risk-free interest rate....................................... 6.0% 6.0%
Volatility.................................................... 60.0% 45.0%
Expected dividend yield....................................... -- --
==== ====
</TABLE>
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 would have been reduced to the
pro forma amounts indicated below (dollars in thousands, except per share
amounts):
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED YEAR ENDED NOVEMBER 17, 1995
DECEMBER 31, DECEMBER 31, (INCEPTION) THROUGH
1997 1996 DECEMBER 31, 1995
------------ ------------ -------------------
<S> <C> <C> <C>
Net earnings (loss):
As reported................... $17,743 $1,335 $ (82)
Pro forma..................... 16,108 1,329 (82)
Basic earnings (loss) per share:
As reported................... $ 2.18 $ 2.53 $(0.16)
======= ====== ======
Pro forma..................... $ 1.98 $ 2.51 $(0.16)
======= ====== ======
Diluted earnings (loss) per
share:
As reported................... $ 1.40 $ .20 $(0.16)
======= ====== ======
Pro forma..................... $ 1.27 $ .20 $(0.16)
======= ====== ======
</TABLE>
Stock options activity during the year ended December 31, 1997 and 1996 and
the period from November 17, 1995 (inception) to December 31, 1995 is as
follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance at November 17, 1995 (inception)......... -- --
Granted........................................ 73,000 $0.50
--------- -----
Balance at December 31, 1995..................... 73,000 0.50
Granted........................................ 595,600 1.92
Canceled....................................... (4,000) 0.50
--------- -----
Balance at December 31, 1996..................... 664,600 1.77
Granted........................................ 1,399,120 9.56
Exercised...................................... (41,100) 1.02
Canceled....................................... (84,550) 3.00
--------- -----
Balance at December 31, 1997..................... 1,938,070 $7.36
========= =====
</TABLE>
F-22
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1997, 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>
RANGE OF
EXERCISE NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
PRICES OUTSTANDING REMAINING TERM EXERCISE PRICE EXERCISABLE EXERCISE PRICE
-------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.50- 0.50 233,850 8.67 $ 0.50 58,700 $0.50
1.75- 1.75 140,800 8.75 1.75 22,300 1.75
3.50- 3.50 175,300 9.00 3.50 51,060 3.50
7.50- 7.50 723,120 9.40 7.50 551,220 7.50
11.00-11.00 526,500 9.50 11.00 -- --
12.50-12.50 64,100 10.00 12.50 -- --
17.00-17.00 74,400 9.75 17.00 -- --
============ ======= ===== ====== ======= =====
</TABLE>
(12) GENERAL AND ADMINISTRATIVE EXPENSES
A summary of general and administrative expenses for the year ended December
31, 1997 and 1996 and the period from November 17, 1995 (inception) through
December 31, 1995 follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ ----
<S> <C> <C> <C>
Other administrative expenses........................... $ 3,259 $ 568 $ 3
Occupancy............................................... 2,555 389 --
Depreciation and amortization........................... 1,848 260 --
Telephone............................................... 1,577 336 --
Postage and courier..................................... 1,443 204 --
Travel and entertainment................................ 1,374 277 6
Equipment rental........................................ 1,371 184 --
Office supplies......................................... 1,074 238 2
------- ------ ----
$14,501 $2,456 $ 11
======= ====== ====
</TABLE>
(13) 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.
F-23
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The estimated fair values of the Company's financial instruments as of
December 31, 1997 and 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997
-------------------
CARRYING
VALUE FAIR VALUE
-------- ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents.............................. $ 12,701 $ 12,701
Loans receivable held for sale, net.................... 276,506 280,310
Residual interests in securitizations.................. 97,260 97,260
Financial liabilities:
Warehouse and aggregation lines of credit.............. 255,363 255,363
Residual financing payable............................. 53,427 53,427
Notes payable.......................................... 3,222 3,222
======== ========
<CAPTION>
1996
-------------------
CARRYING
VALUE FAIR 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 and aggregation 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.
Residual interests in securitizations: The fair value of residual interests
in securitizations is determined by calculating the net present value of
estimated future cash flows using a discount rate commensurate with the risks
involved.
Warehouse lines of credit and residual financing payable: The carrying value
reported in the balance sheet approximates fair value as the warehouse lines
of credit and residual financing payable 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-24
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(14) 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.
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
--------------
1997 1996
------- ------
<S> <C> <C>
ASSETS
Cash and cash equivalents....................................... $ -- $ 4
Investment in and receivable from subsidiary.................... 59,161 4,273
Other assets.................................................... 1,734 136
------- ------
$60,895 $4,413
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities............................................... $ 59 $ 10
Stockholders' equity............................................ 60,836 4,403
------- ------
$60,895 $4,413
======= ======
</TABLE>
F-25
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 17,
1995
(INCEPTION)
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Interest income......................... $ 230 $ 17 $ 5
Equity in undistributed earnings (loss)
of subsidiary.......................... 18,991 1,419 (87)
------- ------ ----
19,221 1,436 (82)
------- ------ ----
Personnel............................... 1,149 104 --
General and administrative.............. 1,106 46 --
Professional services................... 126 10 --
------- ------ ----
2,381 160 --
------- ------ ----
Earnings (loss) before income tax
benefit.............................. 16,840 1,276 (82)
Income tax benefit...................... (903) (59) --
------- ------ ----
Net earnings (loss)................... $17,743 $1,335 $(82)
======= ====== ====
</TABLE>
F-26
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
NOVEMBER 17,
1995
(INCEPTION)
YEAR ENDED YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss).................... $17,743 $1,335 $ (82)
Adjustments to reconcile net earnings
(loss) to net cash provided by (used
in) operating activities:
Depreciation and amortization........ 1,797 11 --
Increase in other assets............. (908) (94) (53)
Increase (decrease) in other
liabilities......................... 49 (39) 49
Equity in undistributed (earnings)
loss of subsidiary.................. (18,991) (1,419) 87
------- ------ ------
Net cash provided by (used in)
operating activities.............. (310) (206) 1
Cash flows from investing activity--
increase in investment in and
receivables from subsidiary............. (35,897) (941) (2,000)
Cash flows from financing activity--
proceeds from issuance of common stock.. 36,203 -- 3,150
------- ------ ------
Net increase (decrease) in cash and
cash equivalents.................. (4) (1,147) 1,151
Cash and cash equivalents, beginning of
period.................................. 4 1,151 --
------- ------ ------
Cash and cash equivalents, end of period. $ -- $ 4 $1,151
======= ====== ======
</TABLE>
F-27
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(15) EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted
earnings per share (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED YEAR ENDED NOVEMBER 17, 1995
DECEMBER 31, DECEMBER 31, (INCEPTION) THROUGH
1997 1996 DECEMBER 31, 1995
------------ ------------ -------------------
<S> <C> <C> <C>
Numerator:
Income (loss) available to
common stockholders........... $ 17,743 $ 1,335 $ (82)
=========== ========== ========
Denominator:
Denominator for basic earnings
per share--weighted-average
common shares outstanding..... 8,139,052 528,618 528,618
Effect of dilutive securities:
Convertible preferred stock.... 2,375,834 5,820,000 --
Restricted stock award......... 197,926 -- --
Warrants....................... 1,226,463 244,987 --
Stock options.................. 766,459 139,491 --
----------- ---------- --------
Denominator for diluted earnings
per share....................... 12,705,734 6,733,096 528,618
=========== ========== ========
Basic earnings (loss) per share.. $ 2.18 $ 2.53 $ (0.16)
=========== ========== ========
Diluted earnings (loss) per
share........................... $ 1.40 $ 0.20 $ (0.16)
=========== ========== ========
</TABLE>
For 1997, 138,500 stock options, for 1996, 3,452,224 warrants and 382,600
stock options and for 1995, 73,000 stock options whose exercise price exceeds
the average market price of the common shares are excluded from dilutive
shares. For 1995, convertible preferred stock is excluded from the calculation
of diluted earnings (loss) per share because the effect is anti-dilutive.
(16) SUBSEQUENT EVENT (UNAUDITED)
Subsequent to year-end, the Company entered into an agreement to acquire
Primewest Funding Corporation, a correspondent lender of the Company. The
acquisition was completed on January 12, 1998. The Company paid a cash
purchase price of $1.5 million and issued 188,150 shares of the Company's
common stock in connection with the acquisition. This business combination was
accounted for under the Purchase Method. Goodwill in the amount of $3.5
million was recorded in January 1998. In addition, there is contingent
consideration based on Prime West Funding Corporation achieving certain
earnings targets in the three years following the acquisition.
F-28
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(17) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data are presented below by quarter for the
years ended December 31, 1997 and 1996 (dollars in thousands, except per share
amounts):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1997 1997 1997 1997
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Gain on sale of loans............ $16,435 $24,394 $17,098 $10,012
Interest income.................. 11,414 6,313 5,073 2,271
Servicing income................. 2,666 1,793 862 302
------- ------- ------- -------
Total revenues................. 30,515 32,500 23,033 12,585
------- ------- ------- -------
Operating expenses............... 24,854 20,362 14,286 8,539
------- ------- ------- -------
Earnings before income taxes..... 5,661 12,138 8,747 4,046
Income taxes..................... 2,378 5,098 3,674 1,699
------- ------- ------- -------
Net earnings................... $ 3,283 $ 7,040 $ 5,073 $ 2,347
======= ======= ======= =======
Basic earnings per share......... $ 0.29 $ 0.50 $ 1.15 $ 4.44
======= ======= ======= =======
Diluted earnings per share....... $ 0.22 $ 0.46 $ 0.46 $ 0.25
======= ======= ======= =======
<CAPTION>
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1996 1996 1996 1996
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Gain on sale of loans............ $ 8,142 $ 2,658 $ 830 $ --
Interest income.................. 1,999 560 248 39
Servicing income................. 19 10 -- --
------- ------- ------- -------
Total revenues................. 10,160 3,228 1,078 39
------- ------- ------- -------
Operating expenses............... 6,960 2,721 1,620 899
------- ------- ------- -------
Earnings (loss) before income
taxes........................... 3,200 507 (542) (860)
Income taxes (benefits).......... 1,344 213 (225) (362)
------- ------- ------- -------
Net earnings (loss).............. $ 1,856 $ 294 $ (317) $ (498)
======= ======= ======= =======
Basic earnings (loss) per share.. $ 3.51 $ 0.56 $ (0.60) $ (0.94)
======= ======= ======= =======
Diluted earnings (loss) per
share........................... $ 0.23 $ 0.05 $ (0.60) $ (0.94)
======= ======= ======= =======
</TABLE>
F-29
<PAGE>
EXHIBIT 10.19
FIRST AMENDMENT TO
-------------------
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
--------------------------------------------
THIS FIRST AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT (the
"Amendment") dated as of November 26, 1997 by and among NEW CENTURY MORTGAGE
CORPORATION, a California corporation (the "Company"), FIRST BANK NATIONAL
ASSOCIATION, a national banking association ("First Bank"), GUARANTY FEDERAL
BANK, FSB, a federal savings bank ("GFB"), FIRST UNION NATIONAL BANK, a national
banking association ("First Union"), RESIDENTIAL FUNDING CORPORATION, a Delaware
corporation ("RFC"), BANK ONE, TEXAS, N.A., a national banking association
("Bank One"), (First Bank, GFB, First Union, RFC, Bank One and any other
financial institutions which may hereafter become parties hereto being
hereinafter referred to collectively as the "Banks" and individually as a
"Bank"), and FIRST BANK NATIONAL ASSOCIATION, a national banking association, in
its capacity as agent for the Banks (in such capacity, together with any
successor agents appointed hereunder, the "Agent").
WITNESSETH THAT:
WHEREAS, the Company, the Banks and the Agent are parties to a Second
Amended and Restated Credit Agreement dated as of July 31, 1997 (the "Credit
Agreement"), pursuant to which the Banks provided the Company with revolving
mortgage warehousing and working capital credit facilities; and
WHEREAS, the Company and the Banks have agreed to amend the Credit
Agreement upon the terms and conditions herein set forth.
NOW THEREFORE, for value received, the receipt and sufficiency of which are
hereby acknowledged, the Company and the Banks agree as follows:
1. Certain Defined Terms. Each capitalized term used herein without
---------------------
being defined herein that is defined in the Credit Agreement shall have the
meaning given to it therein.
2. Amendment to Credit Agreement. The Credit Agreement is hereby
-----------------------------
amended as follows:
(a) Section 4.08 of the Credit Agreement is hereby amended (i) to
delete $1,000,000 where it appears in subsection (c) thereof and substitute
-1-
<PAGE>
"$5,000,000" therefor, and (ii) to add the following subsection (f) after
subsection (e) thereof:
(f) obligations under gestation repurchase agreements or similar
arrangements of the type described in Section 4.09(f);
(b) Section 4.11 of the Credit Agreement is hereby amended in its
entirety to read as follows:
4.11 Guarantees. The Company and NCFC will not, directly or
----------
indirectly, create or become or be liable with respect to any
Guarantee, other than the Guaranty, Guarantees by NCFC of Indebtedness
of the Company secured by liens described in Section 4.09(e), in an
amount not to exceed $5,000,000, and Guarantees by NCFC of the
Company's obligations under gestation repurchase agreements or similar
arrangements of the type described in Section 4.09(f).
(c) Section 8.06(b) is hereby amended by deleting "$250,000,000"
where it appears therein and substituting "$350,000,000" therefor.
3. Conditions to Effectiveness of this Amendment. This Amendment shall
---------------------------------------------
become effective when the Agent shall have received at least four (4)
counterparts of this Amendment, duly executed by the Company and each Bank and
acknowledged by NCFC, provided the following conditions are satisfied:
(a) Before and after giving effect to this Amendment, the
representations and warranties of the Company in Section 3 of the Credit
Agreement and Section 5 of the Pledge and Security Agreement shall be true
and correct as though made on the date hereof, except for changes that are
permitted by the terms of the Credit Agreement.
(b) Before and after giving effect to this Amendment, no Event of
Default and no Unmatured Event of Default shall have occurred and be
continuing under the Credit Agreement.
(c) No material adverse change in the business, assets, financial
condition or prospects of the Company shall have occurred since the
Effective Date.
(d) The following shall have been delivered to the Agent, each duly
executed or certified, as the case may be, and dated as of the date of
delivery thereof:
-2-
<PAGE>
(i) certified copies of resolutions of the Board of Directors
of the Company authorizing or ratifying the execution, delivery and
performance of this Amendment;
(ii) a certified copy of any amendment or restatement of the
Articles of Incorporation or the By-laws of the Company made or
entered following the date of the most recent certified copies thereof
furnished to the Banks;
(iii) certified copies of all documents evidencing any necessary
corporate action, consent or governmental or regulatory approval (if
any) with respect to this Amendment;
(iv) a favorable opinion of Brad A. Morrice, counsel to the
Company and NCFC, addressed to the Banks, as to the matters and to the
effect set forth on Exhibit II hereto; and
(v) such other documents, instruments, opinions and approvals
as the Banks may reasonably request.
4. Acknowledgments. The Company and the Banks each acknowledges that, as
---------------
amended hereby, the Credit Agreement remains in full force and effect with
respect to the Company and the Banks, and that each reference to the Credit
Agreement in the Loan Documents shall refer to the Credit Agreement, as amended
hereby. The Company confirms and acknowledges that it will continue to comply
with the covenants set out in the Credit Agreement and the other Loan Documents,
as amended hereby, and that its representations and warranties set out in the
Credit Agreement and the other Loan Documents, as amended hereby, are true and
correct as of the date of this Amendment. The Company further represents and
warrants that (i) the execution, delivery and performance of this Amendment is
within its corporate powers and have been duly authorized by all necessary
corporate action; (ii) this Amendment has been duly executed and delivered by
the Company and constitutes the legal, valid and binding obligation of the
Company enforceable against the Company in accordance with its terms (subject to
limitations as to enforceability which might result from bankruptcy, insolvency,
or other similar laws affecting creditors' rights generally and general
principles of equity) and (iii) no Events of Default or Unmatured Events of
Default exist.
5. General.
-------
(a) The Company agrees to reimburse the Agent upon demand for all
reasonable expenses (including reasonable attorneys fees and legal
expenses) incurred by the Agent in the preparation, negotiation and
execution of this
-3-
<PAGE>
Amendment and any other document required to be furnished herewith, and to
pay and save the Banks harmless from all liability for any stamp or other
taxes which may be payable with respect to the execution or delivery of
this Amendment, which obligations of the Company shall survive any
termination of the Credit Agreement.
(b) This Amendment may be executed in as many counterparts as may be
deemed necessary or convenient, and by the different parties hereto on
separate counterparts, each of which, when so executed, shall be deemed an
original but all such counterparts shall constitute but one and the same
instrument.
(c) Any provision of this Amendment which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining portions hereof or affecting the validity or
enforceability of such provisions in any other jurisdiction.
(d) This Amendment shall be governed by, and construed in accordance
with, the internal law, and not the law of conflicts, of the State of
Minnesota, but giving effect to federal laws applicable to national banks.
(e) This Amendment shall be binding upon the Company, the Banks, the
Agent and their respective successors and assigns, and shall inure to the
benefit of the Company, the Banks, the Agent and the successors and assigns
of the Banks and the Agent.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed as of the day and year first above written.
NEW CENTURY MORTGAGE CORPORATION
By
------------------------------
Its
-----------------------------
FIRST BANK NATIONAL ASSOCIATION
By
------------------------------
Its
-----------------------------
GUARANTY FEDERAL BANK, FSB
By
------------------------------
Its
-----------------------------
FIRST UNION NATIONAL BANK
By
------------------------------
Its
-----------------------------
[Signature Page for First Amendment to
Second Amended and Restated Credit Agreement]
-5-
<PAGE>
RESIDENTIAL FUNDING CORPORATION
By
-------------------------------
Its
------------------------------
BANK ONE, TEXAS, N.A.
By
-------------------------------
Its
------------------------------
COMERICA BANK CALIFORNIA, INC.
By
-------------------------------
Its
------------------------------
[Signature Page for First Amendment to
Second Amended and Restated Credit Agreement]
-6-
<PAGE>
EXHIBIT 10.20
SECOND AMENDMENT TO
-------------------
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
--------------------------------------------
AND AGREEMENT TO ADD BANKS
--------------------------
THIS SECOND AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT AND
AGREEMENT TO ADD BANKS (the "Amendment") dated as of December 22, 1997 by and
among NEW CENTURY MORTGAGE CORPORATION, a California corporation (the
"Company"), FIRST BANK NATIONAL ASSOCIATION, a national banking association
("First Bank"), GUARANTY FEDERAL BANK, FSB, a federal savings bank ("GFB"),
FIRST UNION NATIONAL BANK, a national banking association ("First Union"),
RESIDENTIAL FUNDING CORPORATION, a Delaware corporation ("RFC"), BANK ONE,
TEXAS, N.A., a national banking association ("Bank One"), (First Bank, GFB,
First Union, RFC and Bank One being hereinafter referred to collectively as the
"Existing Banks" and individually as an "Existing Bank"), THE BANK OF NEW YORK,
a New York banking corporation ("BNY") and THE FIRST NATIONAL BANK OF CHICAGO, a
national banking association ("First Chicago"; BNY and First Chicago being
herein referred to collectively as the "New Banks" and individually as a "New
Bank"), and FIRST BANK NATIONAL ASSOCIATION, a national banking association, in
its capacity as agent for the Lenders (in such capacity, together with any
successor agents appointed hereunder, the "Agent").
WITNESSETH THAT:
WHEREAS, the Company, the Existing Banks and the Agent are parties to a
Second Amended and Restated Credit Agreement dated as of July 31, 1997, as
amended by a First Amendment dated as of November 26, 1997 (as so amended, the
"Credit Agreement"), pursuant to which the Existing Banks provide the Company
with revolving mortgage warehousing and working capital credit facilities; and
WHEREAS, the Company and the Existing Banks have agreed to amend the Credit
Agreement to add the New Banks as parties thereto, to reallocate the Warehousing
Commitments and to add certain covenants thereto, upon the terms and conditions
herein set forth;
NOW THEREFORE, for value received, the receipt and sufficiency of which are
hereby acknowledged, the Company and the Lenders agree as follows:
-1-
<PAGE>
1. Certain Defined Terms. Each capitalized term used herein without
---------------------
being defined herein that is defined in the Credit Agreement shall have the
meaning given to it therein.
2. Warehousing Commitment Amount Increase. Effective as of the date of
--------------------------------------
this Amendment, the total Warehousing Commitment Amount is increased to
$260,000,000 pursuant to Section 8.06(b) of the Credit Agreement.
3. Additional Lenders. Effective as of the date of this Amendment, BNY
------------------
and First Chicago shall be and are each a "Lender" under the Credit Agreement
and shall and do have all of the rights, privileges and benefits of a Lender
under the Credit Agreement and the Loan Documents, and all of the duties of a
Lender thereunder, in each case as if these New Banks had each been a Lender
initially a party to the Credit Agreement.
4. Reallocation of Commitments. As of the effective date of this
---------------------------
Amendment, the Warehousing Commitment Amount of First Bank shall be reduced to
Sixty Million Dollars ($60,000,000), the Warehousing Commitment Amount of BNY
shall be Twenty-five Million Dollars ($25,000,000), and the Warehousing
Commitment Amount of First Chicago shall be Thirty Million Dollars
($30,000,000).
5. Amendment to Credit Agreement. The Credit Agreement is hereby amended
-----------------------------
as follows:
(a) The definitions of "Tangible Net Worth," "Total Indebtedness" and
"Total Liabilities" in Section 1.01 are hereby amended in their entirety to
read as follows:
"Tangible Net Worth": as of any date of determination, the
------------------
consolidated Net Worth of the Company or NCFC, as applicable, and its
respective Subsidiaries, less the consolidated book value of all
----
assets of the Company or NCFC, as applicable, and its respective
Subsidiaries (to the extent reflected as an asset in the balance sheet
of the Company or NCFC, as applicable, or any such Subsidiary at such
date) which are treated as intangibles under GAAP, including, without
limitation, such terms as deferred financing expenses, net leasehold
improvements, good will, trademarks, trade names, service marks,
copyrights, patents, licenses and unamortized debt discount and
expense; provided, that interest-only or residual interests in
--------
Mortgage-backed Securities issued by the Company shall not be treated
as intangibles for purposes of this definition.
-2-
<PAGE>
"Total Indebtedness": at any time of determination, the amount,
------------------
on a consolidated basis, of the liabilities of the Company or NCFC, as
applicable, and its respective Subsidiaries, determined in accordance
with GAAP, minus obligations under gestation repurchase agreements or
-----
similar arrangements under which the Company or its Subsidiaries are
required to repurchase Mortgage-backed Securities or Mortgage Loans
from any Lender or other counterparty reasonably satisfactory to the
Agent, whether or not such obligations are reflected on the Company's
balance sheet; provided, that such gestation repurchase agreements are
--------
entered into in the ordinary course of business in contemplation of
the subsequent non-recourse sale of such Mortgage-backed Securities or
Mortgage Loans.
"Total Liabilities": at any time of determination, the amount,
-----------------
on a consolidated basis, of the liabilities of the Company or NCFC, as
applicable, and its respective Subsidiaries, determined in accordance
with GAAP.
(b) Section 1.01 is hereby further amended to add the following
definitions in the appropriate alphabetical order:
"Daily Leverage Ratio": as of any date of determination, the
--------------------
ratio of (a)Total Liabilities of NCFC and its Subsidiaries on such
date to (b)Tangible Net Worth of NCFC and its Subsidiaries as of the
last day of the most recently completed month.
"Quarterly Average Leverage Ratio": for each three-month period
--------------------------------
ending on March31, June30, September30 or December31 of any year,
beginning December31, 1997, the ratio of (a) the average daily amount
of Total Liabilities of NCFC and its Subsidiaries outstanding during
such three-month period to (b)the average of the Tangible Net Worth of
NCFC and its Subsidiaries at the end of each month during such three-
month period.
(c) Section 4.08 is hereby amended to delete the proviso at the end
thereof and substitute the following therefor:
-3-
<PAGE>
provided, that in no event shall (i)the Leverage Ratio of the Company
--------
be greater than 8 to 1 as of the last day of each fiscal quarter of
the Company, (ii)the Quarterly Average Leverage Ratio for any period
of measurement be greater than 9 to 1, or (iii)the Daily Leverage
Ratio on any date be greater than 12 to 1.
(d) Section 4.12 is hereby amended to add the following at the end
thereof:
NCFC will at all times maintain Tangible Net Worth of not less than
the greater of (i)$50,000,000 or (ii)eighty-five percent (85%) of the
Tangible Net Worth at the end of its most recently completed fiscal
year (or, in the case of the Tangible Net Worth at the end of any
fiscal year, its prior fiscal year) plus ninety percent (90%) of
----
capital contributions made during such fiscal year plus fifty percent
----
(50%) of positive year-to-date net income.
Schedule 1.01(b) is hereby amended in its entirety to read as set
forth on Schedule 1.01(b) hereto.
6. Conditions to Effectiveness of this Amendment. This Amendment shall
---------------------------------------------
become effective when the Agent shall have received at least four (4)
counterparts of this Amendment, duly executed by the Company and each Lender and
acknowledged by NCFC, provided the following conditions are satisfied:
(a) Before and after giving effect to this Amendment, the
representations and warranties of the Company in Section 3 of the Credit
Agreement and Section 5 of the Pledge and Security Agreement shall be true
and correct as though made on the date hereof, except for changes that are
permitted by the terms of the Credit Agreement.
(b) Before and after giving effect to this Amendment, no Event of
Default and no Unmatured Event of Default shall have occurred and be
continuing.
(c) No material adverse change in the business, assets, financial
condition or prospects of the Company shall have occurred since the
Effective Date.
-4-
<PAGE>
(d) The following shall have been delivered to the Agent, each duly
executed or certified, as the case may be, and dated as of the date of
delivery thereof:
(i) executed copies of new Warehousing Promissory Notes in
favor of BNY and First Chicago (the new Warehousing Promissory Notes
herein referred to collectively as "New Bank Notes" and individually
as a "New Bank Note");
(ii) certified copies of resolutions of the Board of Directors
of the Company authorizing or ratifying the execution, delivery and
performance of this Amendment and the New Bank Notes;
(iii) a certified copy of any amendment or restatement of the
Articles of Incorporation or the By-laws of the Company made or
entered following the date of the most recent certified copies thereof
furnished to the Lenders;
(iv) certified copies of all documents evidencing any necessary
corporate action, consent or governmental or regulatory approval (if
any) with respect to this Amendment and the New Bank Notes;
(v) a favorable opinion of Brad A. Morrice, counsel to the
Company and NCFC, addressed to the Lenders, as to the matters and to
the effect set forth on Exhibit I hereto; and
(vi) such other documents, instruments, opinions and approvals
as the Agent may reasonably request.
7. Acknowledgments. The Company and each Lender acknowledges that, as
---------------
amended hereby, the Credit Agreement remains in full force and effect with
respect to the Company and the Lenders, that each reference to the Credit
Agreement in the Loan Documents shall refer to the Credit Agreement, as amended
hereby, and that each reference to the Warehousing Notes or the Notes in the
Loan Documents shall include the New Bank Notes. The Company confirms and
acknowledges that it will continue to comply with the covenants set out in the
Credit Agreement and the other Loan Documents, as amended hereby, and that its
representations and warranties set out in the Credit Agreement and the other
Loan Documents, as amended hereby, are true and correct as of the date of this
Amendment. The Company further represents and warrants that (i) the execution,
delivery and performance of this Amendment and the New Bank Notes are within its
corporate powers and have been duly authorized by all necessary corporate
action; (ii) this Amendment and the New Bank Notes have been duly executed and
delivered by the Company and constitute the legal, valid and
-5-
<PAGE>
binding obligations of the Company enforceable against the Company in accordance
with their respective terms (subject to limitations as to enforceability which
might result from bankruptcy, insolvency, or other similar laws affecting
creditors' rights generally and general principles of equity) and (iii) no
Events of Default or Unmatured Events of Default exist.
8. General.
-------
(a) The Company agrees to reimburse the Agent upon demand for all
reasonable expenses (including reasonable attorneys fees and legal
expenses) incurred by the Agent in the preparation, negotiation and
execution of this Amendment and any other document required to be furnished
herewith, and to pay and save the Lenders harmless from all liability for
any stamp or other taxes which may be payable with respect to the execution
or delivery of this Amendment or the New Bank Notes, which obligations of
the Company shall survive any termination of the Credit Agreement.
(b) This Amendment may be executed in as many counterparts as may be
deemed necessary or convenient, and by the different parties hereto on
separate counterparts, each of which, when so executed, shall be deemed an
original but all such counterparts shall constitute but one and the same
instrument.
(c) Any provision of this Amendment which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining portions hereof or affecting the validity or
enforceability of such provisions in any other jurisdiction.
(d) This Amendment shall be governed by, and construed in accordance
with, the internal law, and not the law of conflicts, of the State of
Minnesota, but giving effect to federal laws applicable to national banks.
(e) This Amendment shall be binding upon the Company, the Lenders,
the Agent and their respective successors and assigns, and shall inure to
the benefit of the Company, the Lenders, the Agent and the successors and
assigns of the Lenders and the Agent.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
-6-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed as of the day and year first above written.
NEW CENTURY MORTGAGE CORPORATION
By
-------------------------------
Its
------------------------------
FIRST BANK NATIONAL ASSOCIATION
By
-------------------------------
Its
------------------------------
GUARANTY FEDERAL BANK, FSB
By
-------------------------------
Its
------------------------------
FIRST UNION NATIONAL BANK
By
-------------------------------
Its
------------------------------
[Signature Page for Second Amendment to
Second Amended and Restated Credit Agreement]
-7-
<PAGE>
RESIDENTIAL FUNDING CORPORATION
By
----------------------------------
Its
---------------------------------
BANK ONE, TEXAS, N.A.
By
----------------------------------
Its
---------------------------------
COMERICA BANK CALIFORNIA, INC.
By
----------------------------------
Its
---------------------------------
THE BANK OF NEW YORK
By
----------------------------------
Its
---------------------------------
THE FIRST NATIONAL BANK
OF CHICAGO
By
----------------------------------
Its
---------------------------------
[Signature Page for Second Amendment to
Second Amended and Restated Credit Agreement]
-8-
<PAGE>
THE UNDERSIGNED, NEW CENTURY FINANCIAL CORPORATION, HEREBY (1) AGREES
THAT EACH REFERENCE TO THE CREDIT AGREEMENT, OR WORDS OF SIMILAR IMPORT,
CONTAINED IN THE SECOND AMENDED AND RESTATED GUARANTY DATED AS OF JULY31, 1997
(THE "GUARANTY") BY THE UNDERSIGNED TO THE LENDERS AND THE AGENT, SHALL BE A
REFERENCE TO THE CREDIT AGREEMENT AS AMENDED BY THE FIRST AMENDMENT TO THE
CREDIT AGREEMENT AND THE FOREGOING AMENDMENT, (2) CONFIRMS THAT THE GUARANTY
SHALL REMAIN IN FULL FORCE AND EFFECT AFTER GIVING EFFECT TO THE FIRST AMENDMENT
TO THE CREDIT AGREEMENT AND THE FOREGOING AMENDMENT, AND (3) CONFIRMS AND
ACKNOWLEDGES THAT ITS REPRESENTATIONS AND WARRANTIES SET FORTH IN SECTION 15 OF
THE GUARANTY ARE TRUE AND CORRECT AS OF THE DATE OF THE FOREGOING AMENDMENT.
NEW CENTURY FINANCIAL CORPORATION
By
-------------------------------
Its
------------------------------
<PAGE>
SCHEDULE 1.01(b)
BANK COMMITMENTS
----------------
<TABLE>
<CAPTION>
Working
Warehousing Capital
Banks Commitment Commitment
- - ----- ----------- ----------
<S> <C> <C>
First Bank National Association $60,000,000 $4,000,000
Guaranty Federal Bank, F.S.B. $50,000,000 0
Comerica Bank California, Inc. $15,000,000 0
First Union National Bank $25,000,000 0
Residential Funding Corporation $25,000,000 0
Bank One, Texas, N.A. $30,000,000 0
The Bank of New York $25,000,000 0
The First National Bank of Chicago $30,000,000 0
</TABLE>
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
<PAGE>
EXHIBIT 10.21
THIRD AMENDMENT TO
-------------------
SECOND AMENDED AND RESTATED CREDIT AGREEMENT
--------------------------------------------
AND AMENDMENT TO PLEDGE AND SECURITY AGREEMENT
----------------------------------------------
THIS THIRD AMENDMENT TO SECOND AMENDED AND RESTATED CREDIT AGREEMENT AND
AMENDMENT TO PLEDGE AND SECURITY AGREEMENT (the "Amendment") dated as of
December 31, 1997 by and among NEW CENTURY MORTGAGE CORPORATION, a California
corporation (the "Company"), FIRST BANK NATIONAL ASSOCIATION, a national
banking association ("First Bank"), GUARANTY FEDERAL BANK, FSB, a federal
savings bank ("GFB"), FIRST UNION NATIONAL BANK, a national banking association
("First Union"), RESIDENTIAL FUNDING CORPORATION, a Delaware corporation
("RFC"), BANK ONE, TEXAS, N.A., a national banking association ("Bank One"), THE
BANK OF NEW YORK, a New York banking corporation ("BNY"), THE FIRST NATIONAL
BANK OF CHICAGO, a national banking association ("First Chicago") (First Bank,
GFB, First Union, RFC, Bank One, BNY, First Chicago being hereinafter referred
to collectively as the "Banks" and individually as a "Bank"), and FIRST BANK
NATIONAL ASSOCIATION, a national banking association, in its capacity as agent
for the Banks (in such capacity, together with any successor agents appointed
hereunder, the "Agent").
WITNESSETH THAT:
WHEREAS, the Company, the Banks and the Agent are parties to a Second
Amended and Restated Credit Agreement dated as of July 31, 1997, as amended by a
First Amendment dated as of November 26, 1997 and by a Second Amendment dated as
of December 22, 1997 (as so amended, the "Credit Agreement"), pursuant to which
the Banks provide the Company with revolving mortgage warehousing and working
capital credit facilities; and
WHEREAS, the Company and the Banks have agreed to amend the Credit
Agreement upon the terms and conditions herein set forth;
NOW, THEREFORE, for value received, the receipt and sufficiency of which
are hereby acknowledged, the Company and the Banks agree as follows:
1. Certain Defined Terms. Each capitalized term used herein without
---------------------
being defined herein that is defined in the Credit Agreement shall have the
meaning given to it therein.
2. Amendments to Credit Agreement. The Credit Agreement is hereby
------------------------------
amended as follows:
-1-
<PAGE>
(a) All references to the terms "Bank" or "Banks" are hereby replaced
by the terms "Lender" or "Lenders", respectively.
(b) All references to the term "Revolving Loan" are hereby replaced
by the term "Warehousing Loan".
(c) The definition of "Holding Account" in Section 1.01 is hereby
amended by deleting the last two words thereof and inserting therefor the
words "the Agent and the Lenders".
(d) The definition of "Loan Documents" in Section 1.01 is hereby
amended by inserting after "Pledge and Security Agreement," the words
"Working Capital Security Agreement,".
(e) Section 1.01 is hereby amended by adding the following new
definitions in the correct alphabetical order:
"GEFP": Greenwich Capital Financial Products, Inc., a Delaware
----
corporation.
"Hedging Arrangements" means any agreements or other arrangements
--------------------
(including, without limitation, interest rate swap agreements,
interest rate cap agreements and forward sale agreements) entered into
to protect the Company against changes in interest rates or in the
value of any assets of the Company.
"Junior Securitization Interest": as defined in the Working
------------------------------
Capital Security Agreement.
"Junior Securitization Interest Income Value": with respect to
-------------------------------------------
any Junior Securitization Interest, the present value of the expected
payments under such Junior Securitization Interest, based on
assumptions concerning discount rates, default frequency, severity of
loss, prepayment speeds and other relevant factors determined by the
Agent in its sole discretion.
"SBRC": Salomon Brothers Realty Corp., a Delaware corporation.
----
"Working Capital Collateral": property in which the Agent takes
--------------------------
a security interest, for the benefit of the Lenders, pursuant to the
Working Capital Security Agreement.
-2-
<PAGE>
"Working Capital Collateral Value": as of the date of
--------------------------------
determination with respect to the Junior Securitization Interests
included in the Working Capital Collateral, (a) the lesser of (i)
sixty percent (60%) of the value of such Junior Securitization
Interests determined in accordance with GAAP and (ii) seventy-five
percent (75%) of the aggregate Junior Securitization Interest Income
Value of such Junior Securitization Interests, minus (b) the aggregate
-----
amount of Indebtedness of the type described in Section 4.08(d)
secured by Liens on such Junior Securitization Interests.
"Working Capital Increase Date": the date, if any, on which the
-----------------------------
conditions precedent set forth in Section 5.03 are satisfied.
"Working Capital Security Agreement": a Security Agreement by
----------------------------------
and between the Company and the Agent, in form and substance
satisfactory to First Bank and reasonably satisfactory to the other
Lenders, as the same may be amended, supplemented, restated or
otherwise modified and in effect from time to time, and any other
agreement under which the Agent takes a security interest in the
property of NCFC, the Company or any Affiliate of NCFC, other than the
Warehousing Collateral, to secure the Obligations.
(f) Section 2.01(b) is hereby amended by deleting the words
"Warehousing Advance" where they appear therein and inserting therefor the
words "Warehousing Loan".
(g) Section 2.01(c) is hereby amended by deleting the second
reference to "2:30 P.M." therein and inserting therefor "3:30 P.M."
(h) Section 2.01(c) is hereby further amended by inserting the words
"in the Working Capital Security Agreement" after the words "Pledge and
Security Agreement," where they appear in the last sentence thereof.
(i) The second sentence Section 2.01(d)(iii) is hereby amended by
deleting the words "to the extent amounts received from the other Lenders
are not sufficient to repay in full the principal of the outstanding
Swingline Loans requested or required to be refinanced" and inserting the
following therefor:
to the extent Advances made by the Lenders are not sufficient to repay
in full the principal of the outstanding Swingline Loans requested or
required to be refinanced
-3-
<PAGE>
(j) The fourth sentence of Section 2.01(d)(iii) is hereby amended in
its entirety to read as follows:
If any portion of any Warehousing Loan made by the Lenders pursuant to
this Section 2.01(d)(iii) should be recovered by or on behalf of the
Company from First Bank in bankruptcy or otherwise, the loss of the
amount so recovered shall be ratably shared among all the Lenders in
the manner contemplated by Section 7.11.
(k) The first sentence of Section 2.01(g)(i) is hereby amended by
inserting after "provided," the words "(i) that the amount by which the
---------
Warehousing Commitment Amounts are reduced be shared ratably among all the
Lenders on the basis of each Lender's Pro Rata Share, and (ii)".
(l) The first sentence of Section 2.02(a) is hereby amended by
deleting the words after "provided," and inserting the following therefor:
--------
that no Lender shall be obligated to make any Working Capital Loan
under the Working Capital Commitment if (i) the sum of the aggregate
principal amount of such Lender's Working Capital Loans which would be
outstanding as a result of making such Working Capital Loan plus such
----
Lender's Pro Rata Share of the Letter of Credit Obligations would
exceed such Lender's Working Capital Commitment Amount, or (ii) the
sum of the aggregate principal amount of all Working Capital Loans
which would be outstanding as a result of making such Working Capital
Loan and any other Working Capital Loans to be made on such day plus
----
the Letter of Credit Obligations would exceed (A) the sum of the
Working Capital Commitment Amounts of all the Lenders, or (B) from and
after the Working Capital Increase Date, if less, the Working Capital
Collateral Value of all Junior Securitization Interests included in
the Working Capital Collateral.
(m) Section 2.02(b) is hereby amended by inserting the words "in the
Working Capital Security Agreement" after the words "Pledge and Security
Agreement," where they appear in the last sentence thereof.
(n) Section 2.02(d) is hereby amended by renumbering subsections (ii)
and (iii) to be subsections (iii) and (iv), respectively, and by adding a
new subsection (ii) which reads as follows:
(ii) Mandatory Prepayments. If, at any time from and after the
---------------------
Working Capital Increase Date, the aggregate principal amount of all
Working Capital Loans outstanding plus the Letter of Credit
----
Obligations
-4-
<PAGE>
exceeds the aggregate Working Capital Collateral Value of the Junior
Securitization Interests included in the Working Capital Collateral,
the Company shall immediately make principal prepayments on the
Working Capital Notes in an aggregate amount equal to the amount of
such excess, which aggregate amount shall be paid to the Agent and
distributed to each Lender ratably on the basis of its Pro Rata Share
thereof.
(o) The first sentence of Section 2.02(e)(i) is hereby amended by
inserting after "provided," the words "(i) that the amount by which the
---------
Working Capital Commitment Amounts are reduced be shared ratably among all
the Lenders on the basis of each Lender's Pro Rata Share, and (ii)".
(p) Section 2.08(b) is hereby amended in its entirety to read as
follows:
(b) Increased Cost. If, after the date hereof, any Regulatory
--------------
Change or compliance with any request or directive (whether or not
having the force of law) of any governmental authority, central bank
or comparable agency:
(i) shall subject any Lender to any tax, duty or other
charge with respect to Eurodollar Advances or Fixed Rate
Advances, its Warehousing Note, its Working Capital Note or its
obligation to make Eurodollar Advances or Fixed Rate Advances, or
shall change the basis of taxation of payment to such Lender of
the principal of or interest on Eurodollar Advances or Fixed Rate
Advances or any other amounts due under this Agreement in respect
of Eurodollar Advances or Fixed Rate Advances or its obligation
to make Eurodollar Advances or Fixed Rate Advances (except for
changes in the rate of tax on the overall net income of such
Lender imposed by the laws of the United States or any
jurisdiction in which such Lender's principal office is located);
or
(ii) shall impose, modify or deem applicable any reserve,
special deposit, capital requirement or similar requirement
(including, without limitation, any such requirement imposed by
the Board of Governors of the Federal Reserve System, but
excluding any such requirement to the extent included in
calculating the applicable Adjusted Eurodollar Rate) against
assets of, deposits with or for the account of, or credit
extended by, any Lender or shall impose on any Lender or on the
interbank Eurodollar market any other condition affecting
Eurodollar Advances or Fixed Rate Advances, such Lender's
Warehousing
-5-
<PAGE>
Note, its Working Capital Note or its obligation to make
Eurodollar Advances or Fixed Rate Advances;
and the result of any of the foregoing is to increase the cost to such
Lender of making or maintaining any Eurodollar Advance or Fixed Rate
Advance, or to reduce the amount of any sum received or receivable by
such Lender under this Agreement or under its Warehousing Note or its
Working Capital Note, then, within 30 days after written demand by
such Lender, the Company shall pay to such Lender such additional
amount or amounts as will compensate such Lender for such increased
cost or reduction; provided, that the Company shall not be obligated
--------
to pay any such additional amount (i) unless such Lender shall first
have notified the Company in writing that it intends to seek such
compensation pursuant to this Section, or (ii) to the extent such
additional amount is attributable to the period ending 91 days prior
to the date of the first such notice with respect to such Regulatory
Change (the "Excluded Period"), except to the extent any amount is
attributable to the Excluded Period as a result of the retroactive
application of the applicable Regulatory Change. A certificate of any
Lender claiming compensation under this Section 2.08, setting forth
the additional amount or amounts to be paid to it hereunder and
stating in reasonable detail the basis for the charge and the method
of computation, shall be conclusive in the absence of manifest error.
In determining such amount, such Lender may use any reasonable
averaging and attribution methods. Failure on the part of any Lender
to demand compensation for any increased costs or reduction in amounts
received or receivable with respect to any period shall not constitute
a waiver of such Lender's rights to demand compensation for any
increased costs or reduction in amounts received or receivable in any
subsequent period.
(q) Section 2.08(d) is hereby amended in its entirety to read as
follows:
(d) Discretion of Lenders as to Manner of Funding. Each Lender
---------------------------------------------
shall be entitled to fund and maintain its funding of Eurodollar
Advances in any manner it may elect, it being understood, however,
that for the purposes of this Agreement all determinations hereunder
(excluding determinations of the Eurodollar Rate that the Agent elects
to make from the Reuters screen) shall be made as if such Lender had
actually funded and maintained each Eurodollar Advance through the
purchase of deposits having an interest rate equal to the Eurodollar
Rate.
(r) Section 2.09(a) is hereby amended in its entirety to read as
follows:
-6-
<PAGE>
(a) Letters of Credit. Upon the terms and subject to the
-----------------
conditions of this Agreement, First Bank agrees to issue Letters of
Credit for the account of the Company; provided that First Bank shall
--------
be under no obligation to issue any Letter of Credit if, after giving
effect to such issuance, (i) the Company's Letter of Credit
Obligations would exceed $1,250,000 or (ii) the sum of the aggregate
principal amount of Working Capital Loans outstanding plus the
Company's Letter of Credit Obligations would exceed the lesser of (A)
the sum of the Working Capital Commitment Amounts or (B) the aggregate
Working Capital Collateral Value of the Junior Securitization
Interests included in the Working Capital Collateral.
(s) Section 2.09(b) is hereby amended by inserting the words "in the
Working Capital Security Agreement" after the words "Pledge and Security
Agreement," where they appear in the last sentence thereof.
(t) Section 3.04 is hereby amended by adding the following at the end
thereof:
The grant of a security interest pursuant to the Working Capital
Security Agreement creates a valid security interest in the Working
Capital Collateral, and the Lien on the Working Capital Collateral
created by the Working Capital Security Agreement will be a second
priority Lien thereon, free and clear of any other Liens except the
interests of the Person providing financing for any Junior
Securitization Interests included in the Working Capital Collateral on
such Junior Securitization Interests.
(u) Section 4.01(e) is hereby amended by deleting the word "and" at
the end of clause (iii) thereof, adding the word "and" at the end of clause
(iv) thereof, and adding the following after such clause (iv):
(v) any event that would reduce the aggregate Working Capital
Collateral Value of the Junior Subordination Interests included in the
Working Capital Collateral;
(v) Section 4.01 is hereby further amended by deleting the word "and"
at the end of subsection (h) thereof, relettering subsection (i) thereof as
subsection (j), and adding the following as a new subsection (i):
(i) simultaneously with any request to the Agent to approve a
new Investor, notice of the identity of such Investor, and promptly
upon the request of any Lender, additional information concerning any
such proposed Investor; and
-7-
<PAGE>
(w) Section 4.08 is hereby amended in its entirety to read as
follows:
4.08 Indebtedness. The Company and NCFC will not, directly or
------------
indirectly, (i) create, incur, assume, guarantee, or otherwise become
or remain directly or indirectly liable with respect to, any
Indebtedness, except:
(a) the Obligations and the Letter of Credit Obligations;
(b) current liabilities not more than 90 days overdue,
unless contested in good faith by appropriate proceedings and any
reserves required by GAAP have been established, incurred by NCFC
or the Company in the ordinary course of business otherwise than
for money borrowed; and
(c) Indebtedness incurred to finance the purchase of
equipment and secured solely by Liens on such equipment, in an
aggregate amount not to exceed $5,000,000;
(d) Indebtedness incurred to finance interest-only or
residual interests in Mortgage-backed Securities issued by the
Company and which Indebtedness is secured only by such residual
interests, provided, such Indebtedness is (i) either (A) secured
--------
by interests in Mortgage-backed Securities that do not constitute
Working Capital Collateral, or (B) owed exclusively to SBRC or
another Person that has entered into an intercreditor agreement
with the Agent on terms satisfactory to the Agent, and (ii) does
not exceed 75% of the value of such interestonly or residual
interests determined in accordance with GAAP;
(e) intercompany Indebtedness of NCFC to the Company in an
aggregate amount not to exceed $1,000,000; and
(f) obligations under gestation repurchase agreements or
similar arrangements of the type described in Section 4.09(f);
or (ii) permit (A)the Leverage Ratio of the Company be greater than 8
to 1 as of the last day of each fiscal quarter of the Company, (B)the
Quarterly Average Leverage Ratio for any period of measurement be
greater than 9 to 1, or (C)the Daily Leverage Ratio on any date be
greater than 12 to 1.
(x) A new Section 4.09(h) is hereby added, which reads as follows:
-8-
<PAGE>
(h) Liens arising under Hedging Arrangements.
(y) Section 4.10 is hereby amended by deleting the "and" at the end
of subsection (g) thereof, by replacing the period at the end of subsection
(h) thereof with "; and" and by adding the following new clause (i): "(i)
investments arising under the Hedging Arrangements".
(z) Section 4.13(b) is hereby amended by deleting the words "other
than Mortgage Loans" at the end thereof.
(aa) Section 4.16 is hereby amended in its entirety to read as
follows:
4.16 Subsidiaries. (a) The Company will not create or acquire
------------
any Subsidiaries, and (b) NCFC will not create or acquire any
Subsidiaries other than (i) the Company and (ii) Subsidiaries engaged
solely in any business involving the origination, acquisition,
servicing and sale of consumer obligations.
(bb) A new Section 5.03 is hereby added, which reads as follows:
5.03 Conditions Precedent to Working Capital Commitment Amount
---------------------------------------------------------
Increase. The Working Capital Increase Date shall occur on the date
--------
on which each and every of the following conditions is satisfied:
(a) the following shall have been delivered to the Agent,
each duly executed or certified, as the case may be, and dated as
of the date of delivery thereof:
(i) ten (10) counterparts of the Working Capital
Security Agreement, duly executed by the Company and the
Agent, together with such financing statements and other
instruments as the Agent may request to create and perfect
the security interests granted under the Working Capital
Security Agreement;
(ii) a copy of any notifications to or agreements with
SBRC, GEFP or any other Person that has a Lien on or
possession of any Junior Securitization Interest that the
Agent may request, duly executed or acknowledged by the
appropriate Persons;
-9-
<PAGE>
(iii) a new Working Capital Note payable to each
Lender holding a Working Capital Commitment, in the amount
of such Lender's respective Working Capital Commitment
Amount after giving effect to any increase thereof (the "New
Note"), duly executed by the Company;
(iv) completed responses to requests for information
or other evidence satisfactory to the Agent that the
financing statements and other instruments delivered to the
Agent pursuant to Section 5.03(a)(i) above have been filed
in all appropriate filing offices and that such filed
financing statements perfect a security interest in favor of
the Agent for the benefit of the Lenders in the Working
Capital Collateral;
(v) a favorable opinion of Karen Dreyfus, General
Counsel to NCFC and Senior Legal Counsel to the Company,
addressed to the Banks, as to such matters as the Agent may
reasonably request.
(b) The Company shall have paid to each Lender a Working
Capital Commitment fee in respect of the increase in such
Lender's Working Capital Commitment Amount as of the Working
Capital Increase Date, as separately agreed between the Company
and such Lender.
(cc) Section 6.01(c) is hereby amended by inserting after the words
"Pledge and Security Agreement" a comma and the words "in the Working
Capital Security Agreement".
(dd) Section 6.01(d) is hereby amended by deleting "Section
4.01(f)(ii)" and inserting "Section 4.01(e)(ii)" therefor.
(ee) Section 6.01(k) is hereby amended in its entirety to read as
follows:
(k) The Pledge and Security Agreement, the Working Capital
Security Agreement or the Guaranty shall, at any time, cease to be in
full force and effect or shall be judicially declared null and void,
or the validity or enforceability thereof shall be contested by the
Company or NCFC, or the Agent shall cease to have, for the benefit of
the Lenders, a valid and perfected security interest having the
priority contemplated under the Pledge and Security Agreement or the
Working Capital Security Agreement in any part of the collateral
described therein, other than by
-10-
<PAGE>
action or inaction of the Agent, unless the Company shall, within two
Business Days after the earlier of the date it receives notice thereof
from the Agent or the date an officer of the Company has knowledge
thereof, repay the outstanding Swingline Loans and Warehousing Loans
in an amount sufficient to reduce the aggregate outstanding principal
balance of the Swingline Loans and Warehousing Loans to the aggregate
Warehousing Collateral Value of the Warehousing Collateral, and repay
the outstanding Working Capital Loans in an amount sufficient to
reduce the aggregate outstanding principal balance thereof to the
aggregate Working Capital Collateral Value of the Junior
Securitization Interests included in the Working Capital Collateral;
or
(ff) Section 7.09 is hereby amended by deleting "clause (e)" in the
third line thereof and inserting therefor "clause (i)".
(gg) Section 7.10 is hereby amended by deleting the last sentence
thereof and inserting the following therefor:
Notwithstanding any of the foregoing or any other provision of this
Agreement, upon and after the occurrence of an Event of Default or
Unmatured Event of Default, (a) all proceeds received by the Agent
from the sale or other disposition of the Warehousing Collateral shall
be applied in accordance with Section 17 of the Pledge and Security
Agreement, (b) all proceeds received by the Agent from the sale or
other disposition of the Working Capital Collateral shall be applied
in accordance with the Working Capital Security Agreement, and (c) all
payments made by the Guarantor to the Agent under the Guaranty shall
be applied in the same order of priority as is set forth in Section 17
of the Pledge and Security Agreement with respect to application of
the proceeds of Warehousing Collateral.
(hh) Section 7.12 is hereby amended by deleting the words "reasonably
acceptable to the Company" in the third sentence thereof and inserting the
following after the fourth sentence thereof:
Upon any determination by the Lenders under the second preceding
sentence to appoint a custodian, the Lenders making such determination
shall have the right to appoint a custodian, which custodian shall
(unless an Event of Default has then occurred and is continuing) be
reasonably acceptable to the Company.
(ii) A new Section 7.14 is added after Section 7.13, which reads as
follows:
-11-
<PAGE>
7.14 Notice of New Investors. The Agent shall use reasonable
-----------------------
efforts to provide prompt notice to each Lender (which notice may be
telephonic) of its approval of any new Investor after December 31,
1997; provided, however, that the Agent shall have no liability to any
-------- -------
Lender or other Person for its failure to provide the notice described
in this Section 7.14.
(jj) Section 8.04(d) is hereby amended by deleting the words "Agent's
counsel" and inserting therefor the words "any Lender's counsel".
(kk) Section 8.05 is hereby amended in its entirety to read as
follows:
8.05 Releases, Amendments, Waivers, Consents and Exercise of
-------------------------------------------------------
Remedies. Except as otherwise provided in this Section 8.05, any
--------
provision of this Agreement or any other Loan Document may be amended
or modified only by an instrument or instruments in writing signed by
the Required Lenders and the Company. Any amendment, waiver or
consent reducing any principal of, or the amount of or rate of
interest on or fees with respect to, the Loans or the Commitments,
postponing any date fixed for the payment of any principal of,
interest on or fees with respect to the Loans or Commitments,
extending the Warehousing Termination Date or the Working Capital
Termination Date, releasing or subordinating any of the Warehousing
Collateral (except as provided in the Pledge and Security Agreement)
or the Working Capital Collateral (except as provided in the Working
Capital Security Agreement), releasing the Guaranty, amending the
definition of "Delivered Mortgage Loans," "Pro Rata Share," "Required
Lenders," "Warehousing Borrowing Base" or "Warehousing Collateral
Value," or amending Section 2.01, this Section 8.05 or any other
provision hereof specifically requiring the consent or approval of all
of the Lenders for any modification or waiver, as applicable, may only
be made by an instrument or instruments in writing signed by all of
the Lenders and the Company. Any amendment, waiver or consent
amending the definition of "Working Capital Collateral Value,"
amending Section 2.02 or affecting the Working Capital Security
Agreement shall only be made by an instrument in writing signed by all
of the Lenders that have Working Capital Loans or Working Capital
Commitments outstanding. In addition to the foregoing requirements,
(A) no amendment, waiver or consent shall, unless in writing and
signed by the Agent in addition to the requisite Lenders indicated
above to take such action, affect the rights or duties of the Agent
under this Agreement or any Loan Document, and (B) no amendment may
increase any Lender's Commitment or Commitments unless it is in
-12-
<PAGE>
writing and signed by such Lender. No waiver of any provision of this
Agreement or any other Loan Document or consent to any departure by
the Company therefrom shall in any event be effective unless the same
shall be in writing and signed or consented to in writing by the
requisite Lenders indicated above and then such waiver or consent
shall be effective only in the specific instance and for the purpose
for which given.
(ll) Section 8.06(a) is hereby amended by deleting the words "the
Required Lenders" in the first sentence thereof and inserting therefor the
words "all of the Lenders".
(mm) Exhibit A is hereby amended in its entirety to read as set forth
on Exhibit A hereto.
(nn) Schedule 1.01(b) is hereby amended in its entirety to read as set
forth on Schedule 1.01(b) hereto.
3. Amendments to Pledge and Security Agreement. The Pledge and Security
-------------------------------------------
Agreement is hereby amended as follows:
(a) Section 2 is hereby amended to delete "and" at the end of
subsection (k), reletter subsection (l) as subsection (m) and add the
following new subsection (l):
(l) All right, title and interest of the Company in and to any
Hedging Arrangements entered into to protect the Company against
changes in the value of any of the Pledged Mortgage Loans or changes
in the interest rate applicable to the Advances, including, without
limitation, all rights to payment arising under such Hedging
Arrangements; and
(b) Section 18 of the Pledge and Security Agreement is hereby amended
by inserting the words "ANY LENDER OR THE LESSOR," after the clause
"WHETHER OR NOT THE SAME ARE CAUSED BY THE SIMPLE NEGLIGENCE OF THE
AGENT,".
(c) Attachment 1 to the Pledge and Security Agreement is hereby
amended in its entirety to read as set forth on Attachment 1 hereto.
4. Amendment to Guaranty; Working Capital Security Agreement. The
---------------------------------------------------------
Lenders hereby authorize the Agent to execute and deliver the Amendment to the
Guaranty in the form of Exhibit C hereto, the Working Capital Security Agreement
and all documents and instruments that the Agent, in its discretion, determines
to be appropriate to perfect or protect its security interest, for the benefit
of the Lenders, in
-13-
<PAGE>
the Working Capital Collateral. Each provision of the Working Capital Security
Agreement and such documents and instruments which is contemplated to be binding
upon the Lenders shall be binding upon the Lenders and each of them. The Agent
shall not waive, amend or otherwise modify any provision of the Working Capital
Security Agreement without the written consent of the Lenders that have Working
Capital Loans or Working Capital Commitments outstanding.
5. Conditions to Effectiveness of this Amendment. This Amendment shall
---------------------------------------------
become effective when the Agent shall have received at least eight (8)
counterparts of this Amendment, duly executed by the Company and each Bank and
acknowledged by NCFC, provided the following conditions are satisfied:
(a) Before and after giving effect to this Amendment, the
representations and warranties of the Company in Section 3 of the Credit
Agreement and Section 5 of the Pledge and Security Agreement, and of NCFC
in Section 15 of the Guaranty, shall be true and correct as though made on
the date hereof, except for changes that are permitted by the terms of the
Credit Agreement.
(b) Before and after giving effect to this Amendment, no Event of
Default and no Unmatured Event of Default shall have occurred and be
continuing under the Credit Agreement.
(c) No material adverse change in the business, assets, financial
condition or prospects of the Company or NCFC shall have occurred since the
Effective Date.
(d) The following shall have been delivered to the Agent, each duly
executed or certified, as the case may be, and dated as of the date of
delivery thereof:
(i) an amendment to the Guaranty, in the form of Exhibit C
hereto, duly executed by the Guarantor;
(ii) certified copies of resolutions of the Board of Directors
of the Company authorizing or ratifying the execution, delivery and
performance of this Amendment, the Working Capital Security Agreement,
the New Note(s) and the amendment to the Guaranty described in clause
(i) above;
(iii) a certified copy of any amendment or restatement of the
Articles of Incorporation or the By-laws of the Company made or
entered
-14-
<PAGE>
following the date of the most recent certified copies thereof
furnished to the Banks;
(iv) certified copies of all documents evidencing any necessary
corporate action, consent or governmental or regulatory approval (if
any) with respect to this Amendment, the Working Capital Security
Agreement, the New Note(s) and the amendment to the Guaranty described
in clause (i) above;
(v) a favorable opinion of Karen Dreyfus, General Counsel to
NCFC and senior legal counsel to the Company, addressed to the Banks,
as to the matters and to the effect set forth on Exhibit B hereto; and
(vi) such other documents, instruments, opinions and approvals
as the Agent may reasonably request.
6. Acknowledgments. The Company and each Bank acknowledge that, as
---------------
amended hereby, the Credit Agreement and the Pledge and Security Agreement
remain in full force and effect with respect to the Company and the Banks, that
each reference to the Credit Agreement or the Pledge and Security Agreement in
the Loan Documents shall refer to the Credit Agreement or the Pledge and
Security Agreement, respectively, as amended hereby, and that each reference to
the Guaranty in the Loan Documents shall refer to the Guaranty, as amended in
connection with this Amendment. The Company confirms and acknowledges that it
will continue to comply with the covenants set out in the Credit Agreement and
the other Loan Documents, as amended hereby, and that its representations and
warranties set out in the Credit Agreement and the other Loan Documents, as
amended hereby, are true and correct as of the date of this Amendment. The
Company further represents and warrants that (i) the execution, delivery and
performance of this Amendment is within its corporate powers and has been duly
authorized by all necessary corporate action; (ii) this Amendment has been duly
executed and delivered by the Company and constitutes the legal, valid and
binding obligation of the Company enforceable against the Company in accordance
with its respective terms (subject to limitations as to enforceability which
might result from bankruptcy, insolvency, or other similar laws affecting
creditors' rights generally and general principles of equity) and (iii) no
Events of Default or Unmatured Events of Default exist.
7. General.
-------
(a) The Company agrees to reimburse the Agent upon demand for all
reasonable expenses (including reasonable attorneys fees and legal
expenses) incurred by the Agent in the preparation, negotiation and
execution of this Amendment and any other document required to be furnished
herewith, and to
-15-
<PAGE>
pay and save the Banks harmless from all liability for any stamp or other
taxes which may be payable with respect to the execution or delivery of
this Amendment, which obligations of the Company shall survive any
termination of the Credit Agreement.
(b) This Amendment may be executed in as many counterparts as may be
deemed necessary or convenient, and by the different parties hereto on
separate counterparts, each of which, when so executed, shall be deemed an
original but all such counterparts shall constitute but one and the same
instrument.
(c) Any provision of this Amendment which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining portions hereof or affecting the validity or
enforceability of such provisions in any other jurisdiction.
(d) This Amendment shall be governed by, and construed in accordance
with, the internal law, and not the law of conflicts, of the State of
Minnesota, but giving effect to federal laws applicable to national banks.
(e) This Amendment shall be binding upon the Company, the Banks, the
Agent and their respective successors and assigns, and shall inure to the
benefit of the Company, the Banks, the Agent and the successors and assigns
of the Banks and the Agent.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK]
-16-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed as of the day and year first above written.
NEW CENTURY MORTGAGE CORPORATION
By
----------------------------------
Its
---------------------------------
FIRST BANK NATIONAL ASSOCIATION
By
----------------------------------
Its
---------------------------------
GUARANTY FEDERAL BANK, FSB
By
----------------------------------
Its
---------------------------------
FIRST UNION NATIONAL BANK
By
----------------------------------
Its
---------------------------------
[Signature Page for Third Amendment to
Second Amended and Restated Credit Agreement]
-17-
<PAGE>
RESIDENTIAL FUNDING CORPORATION
By
--------------------------------
Its
-------------------------------
BANK ONE, TEXAS, N.A.
By
--------------------------------
Its
-------------------------------
COMERICA BANK CALIFORNIA, INC.
By
--------------------------------
Its
-------------------------------
THE BANK OF NEW YORK
By
--------------------------------
Its
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THE FIRST NATIONAL BANK OF CHICAGO
By
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Its
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[Signature Page for Third Amendment to
Second Amended and Restated Credit Agreement]
<PAGE>
THE UNDERSIGNED, NEW CENTURY FINANCIAL CORPORATION, HEREBY (1) AGREES
THAT EACH REFERENCE TO THE CREDIT AGREEMENT, OR WORDS OF SIMILAR IMPORT,
CONTAINED IN THE SECOND AMENDED AND RESTATED GUARANTY DATED AS OF JULY 31, 1997
(THE "GUARANTY") BY THE UNDERSIGNED TO THE BANKS AND THE AGENT, SHALL BE A
REFERENCE TO THE CREDIT AGREEMENT AS AMENDED BY THE FOREGOING AMENDMENT, (2)
CONFIRMS THAT THE GUARANTY SHALL REMAIN IN FULL FORCE AND EFFECT AFTER GIVING
EFFECT TO THE FOREGOING AMENDMENT, AND (3) CONFIRMS AND ACKNOWLEDGES THAT ITS
REPRESENTATIONS AND WARRANTIES SET FORTH IN SECTION 15 OF THE GUARANTY ARE TRUE
AND CORRECT AS OF THE DATE OF THE FOREGOING AMENDMENT.
NEW CENTURY FINANCIAL CORPORATION
By
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Its
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<PAGE>
SCHEDULE 1.01(b)
BANK COMMITMENTS
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<TABLE>
<CAPTION>
Working
Warehousing Capital
Banks Commitment Commitment
- - ----- ----------- -----------
<S> <C> <C>
First Bank National Association $60,000,000 $4,000,000*
Guaranty Federal Bank, F.S.B. $50,000,000 0
Comerica Bank California, Inc. $15,000,000 0
First Union National Bank $25,000,000 0
Residential Funding Corporation $25,000,000 0
Bank One, Texas, N.A. $30,000,000 0
The Bank of New York $25,000,000 0
The First National Bank of Chicago $30,000,000 0
</TABLE>
* Increased as of the Working Capital Increase Date to $11,500,000
<PAGE>
Attachment 1 to
Pledge and Security Agreement
AGREEMENT TO PLEDGE
(Security Agreement as provided for
by the Uniform Commercial Code of Minnesota)
For new value this day received, and as collateral security for the
payment of any and all indebtedness and liability of the undersigned under that
certain Second Amended and Restated Credit Agreement dated as of July 31, 1997
(as the same may be amended, restated, modified or supplemented and in effect
from time to time, the "Credit Agreement") between New Century Mortgage
Corporation, a California corporation (the "Company"), the lenders party thereto
(the "Lenders") and First Bank National Association, a national banking
association ("First Bank"), as agent for the Lenders, and that certain Pledge
and Security Agreement dated as of July 31, 1997 (as the same may be amended,
restated, modified or supplemented and in effect from time to time (the "Pledge
and Security Agreement") between the Company and First Bank, as collateral agent
(in such capacity, the "Collateral Agent") for itself, the Agent, the Lenders
and FBS Business Finance Corporation (the "Lessor") (together with any successor
collateral agent under the Pledge and Security Agreement, the "Collateral
Agent"), and consistent with the terms of the Pledge and Security Agreement, the
Company hereby creates and grants in favor of the Collateral Agent, for the
benefit of the Collateral Agent, the Agent, the Lenders and the Lessor, a
security interest in and to the documents described in each Collateral
Identification Letter and Loan Detail Listing attached to this Agreement to
Pledge and all proceeds thereof.
Capitalized terms used herein which are defined in the Credit
Agreement or the Pledge and Security Agreement and not otherwise defined herein
shall have the meanings ascribed to such terms in the Credit Agreement or the
Pledge and Security Agreement.
The Company agrees to deliver the instruments and documents described
in Section 4.02 of the Pledge and Security Agreement to the Collateral Agent
within seven Business Days following the date hereof, as provided in said
Section 4.02. The Company further agrees to deliver the instruments and
documents described in Section 4.03 of the Pledge and Security Agreement to the
Collateral Agent within five Business Days after the Company's receipt of the
Collateral Agent's written request therefor.
The Company further agrees that the Collateral Agent does not assume
any duty or responsibility in respect of any of the documents described in each
attached Collateral Identification Letter, and that the Collateral Agent does
not waive any right
<PAGE>
of possession to any of such documents for the failure to demand or receive such
possession.
The Company further agrees that this Agreement to Pledge shall be
binding upon and inure to the benefit of the legal representatives, successors
or assigns of the Company.
The Company further agrees that all rights, interests, duties and
liabilities arising hereunder shall be determined according to the laws of the
State of Minnesota, without giving effect to conflict of laws principles
thereof.
Dated as of ___________________________, 199_.
NEW CENTURY MORTGAGE CORPORATION
By
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<PAGE>
EXHIBIT 10.22
STANDARD INDUSTRIAL/COMMERCIAL
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MULTI-TENANT LEASE-MODIFIED GROSS
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1. Basic Provisions ("Basic Provisions").
1.1 Parties: This Lease ("Lease"), dated for reference purposes
only, November 6, 1997, is made by and between AGBRI Cowan, LLC, a Delaware
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limited liability company ("Lessor") and New Century Financial Corporation, a
Delaware corporation ("Lessee"), (collectively the "Parties," or individually a
"Party").
1.2(a) Premises: That certain portion of the Building, comprising
approximately 66,310 square feet of rentable area, as defined in Paragraph 2,
including all improvements therein or to be provided by Lessor under the terms
of this Lease, commonly known by the street address of 17701 Cowan, located in
the City of Irvine, County of Orange, State of California, as outlined on
Exhibit A attached hereto ("Premises"). The Premises are comprised of two
portions. The first portion, referred to herein from time to time as the Initial
Premises, consists of 45,017 square feet of rentable area and shall be deemed to
be delivered to and accepted by Tenant as of the Commencement Date. The second
portion of the Premises consists of 21,293 square feet of rentable area, shall
be referred to herein from time to time as the "Expansion Premises," and shall
be automatically be considered to be a part of the Premises upon the date that
is the earlier to occur of (i) the date Lessee first occupies the Expansion
Premises, or (ii) the first day of the seventh (7th) calendar month after the
month in which the Commencement Date occurs (the "Expansion Commencement Date").
The location of the Expansion Premises is depicted on Exhibit A. The "Building"
is that certain building containing the Premises. In addition to Lessee's rights
to use and occupy the Premises as hereinafter specified, Lessee shall have non-
exclusive rights to the Common Areas (as defined in Paragraph 2.7 below) as
hereinafter specified, but shall not have any rights to the roof, exterior walls
or utility raceways of the Building or to any other buildings in the Project.
The Premises, the Building, the Common Areas, the land upon which they are
located, along with all other buildings and improvements thereon, are herein
collectively referred to as the "Project." (Also see Paragraph 2.)
1.2(b) Parking: Lessee's prorata share of unreserved vehicle parking
spaces, on a non-exclusive basis, ("Unreserved Parking Spaces"). (Also see
Paragraph 2.6)
1.3 Term: Five years ("Original Term" commencing upon the earlier
to occur of the substantial completion of the Tenant Improvements for the
Initial Premises, as such terms are described in the Tenant Work Letter attached
hereto as Exhibit B, or January 1, 1998, (unless extended due to Unavoidable
Delays as provided in the Tenant Work Letter) (the "Commencement Date") and
ending December 31, 2002 ("Expiration Date"). (Also see Paragraph 3.)
1.4 Early Possession: Not Applicable ("Early Possession Date").
(Also see Paragraphs 3.2 and 3.3).
1.5 Base Rent: (i) $1.24 per square foot of Rentable Area, as
hereinafter defined, per month, or any pro rata portion thereof for months one
(1) through thirty (30) of the Lease Term, increasing to (ii) $1.32 per square
foot for months thirty-one (31) through sixty (60) of the Lease Term ("Base
Rent"), payable on the Commencement Date, and thereafter on the first day of
each month during the Lease Term. The Base Rent for the Expansion Premises shall
be due and payable on the Expansion Commencement Date and thereafter on the
first day of each month during the Lease Term.(Also see Paragraph 4.)
1.6(a) Base Rent Paid Upon Execution: $55,821.08 as Base Rent for the
first month of the Lease Term.
1.6(b) Lessee's Share of Common Area Operating Expenses: Seventy six
and sixty-six one hundredths percent (76.66%) ("Lessee's Share") as determined
by prorata rentable square footage of the Premises as compared to the total
rentable square footage of the Building.
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1.7 Security Deposit: Equal to 110% of the first months Base
Rent ("Security Deposit").
1.8 Permitted Use: General Office, storage, sales and
administrative use ("Permitted Use") (Also see Paragraph 6.)
1.9 Insuring Party. Lessor is the "Insuring Party." (Also see
Paragraph 8.)
1.10(a) Real Estate Brokers. The following real estate broker(s)
(collectively, the "Brokers") and brokerage relationships exist in this
transaction and are consented to by the Parties (check applicable boxes):
[XXX] CB Commercial represents Lessor exclusively ("Lessor's Broker")
[XXX] Lee and Associates represents Lessee exclusively ("Lessee's Broker");
or
1.11 Guarantor. Not Applicable.
1.12 Addenda and Exhibits. Attached hereto are Exhibit A and B, and
the Extension Option Rider, all of which constitute a part of this Lease.
2. Premises, Parking and Common Areas.
2.1 Letting. Lessor hereby leases to Lessee, and Lessee hereby
leases from Lessor, the Premises, for the term, at the rental, and upon all of
the terms, covenants and conditions set forth in this Lease. The term "Rentable
Area" or "square foot(age)", or any derivation thereof, as used in this Lease,
shall mean the number of square feet in the Premises, as determined by Lessor.
Unless otherwise provided herein, any statement of square footage set forth in
this Lease, or that may be used in calculating rental and/or Common Area
Operating Expenses or other sums to be paid by Lessee, is an approximation which
Lessor and Lessee agree is reasonable and the rental and Lessee's Share (as
defined herein) based thereon is not subject to revision whether or not the
actual square footage of the Building or the Premises, or any portion thereof,
is more or less.
2.2 Condition. On the Commencement Date, Lessor shall provide the
Initial Premises to Lessee with the tenant improvements to the Building and the
Initial Premises as the same are described in the Tenant Work Letter attached
hereto as Exhibit B (the "Lessee Improvements") being substantially completed.
Additionally, Lessor shall deliver the Initial Premises to Lessee clean and free
of debris on the Commencement Date and warrants to Lessee that the existing
plumbing, electrical systems, fire sprinkler system, lighting, air conditioning
and heating systems and loading doors, if any, in the Initial Premises, other
than those constructed by Lessee, shall be in good operating condition on the
Commencement Date and the skylights therein shall be in watertight condition and
repairs to concrete sub-floor shall be completed in a good and workmanlike
manner. If a non-compliance with said warranty exists as of the Commencement
Date, Lessor shall, except as otherwise provided in this Lease, promptly after
receipt of written notice from Lessee setting forth with specificity the nature
and extent of such non-compliance, rectify same at Lessor's expense. If Lessee
does not give Lessor written notice of a non-compliance with this warranty
within thirty (30) days after the Commencement Date, correction of that non-
compliance shall be the obligation of Lessee at Lessee's sole cost and expense.
2.3 Compliance with Covenants, Restrictions and Building Code.
Lessor warrants that, unless specified to the contrary herein or in the Tenant
Work Letter, it shall be Lessor's responsibility to insure that any improvements
(other than those constructed by Lessee or at Lessee's direction) on or in the
Premises and the Common Areas of the Building and which have been constructed or
installed by Lessor or at Lessor's instigation shall comply or shall be made to
comply with all applicable covenants or restrictions of record and applicable
building codes, regulations and ordinances in effect on the Commencement Date.
Lessor further warrants to Lessee that Lessor has no knowledge of any claim
having been made by any governmental agency that a violation or violations of
applicable building codes, regulations, or ordinances exist with regard to the
Premises as of the Commencement Date. Said warranties shall not apply to
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any Alterations or Utility Installations (defined in Paragraph 7.3(a)) made or
to be made by Lessee. If the Premises do not comply with said warranties, Lessor
shall, except as otherwise provided in this Lease, promptly after receipt of
written notice from Lessee given within six (6) months following the
Commencement Date and setting forth with specificity the nature and extent of
such non-compliance, take such action, at Lessor's expense, as may be reasonable
or appropriate to rectify the non-compliance. Lessor makes no warranty that the
Permitted Use in Paragraph 1.8 is permitted for the Premises under Applicable
Laws (as defined in Paragraph 2.4).
Lessee warrants that any improvements (other than those
constructed by Lessor or at Lessor's direction) on or in the Premises which are
constructed or installed by Lessee shall comply with all applicable covenants or
restrictions of record and applicable building codes, regulations and ordinances
in effect on the Commencement Date and throughout the Term of this Lease. Said
warranties shall specifically apply to any Alterations or Utility Installations
(defined in Paragraph 7.3(a)) made or to be made by Lessee. If the Premises do
not comply with said warranties, Lessee shall, except as otherwise provided in
this Lease, promptly after receipt of written notice from Lessor or any
governmental authority, take such action, at Lessee's expense, as may be deemed
reasonable or appropriate by Lessor to rectify the non-compliance.
2.4 Acceptance of Premises. Lessee hereby acknowledges: (a) that
it has been advised by the Broker(s) to satisfy itself with respect to the
condition of the Premises (including but not limited to the electrical and fire
sprinkler systems, security, environmental aspects, seismic and earthquake
requirements, and compliance with the Americans with Disabilities Act and
applicable zoning, municipal, county, state and federal laws, ordinances and
regulations and any covenants or restrictions of record (collectively,
"Applicable Laws") and the present and future suitability of the Premises for
Lessee's intended use; (b) that Lessee has made such investigation as it deems
necessary with reference to such matters, is satisfied with reference thereto,
and assumes all responsibility therefore as the same relate to the occupancy of
the Premises by Lessee and/or the terms of this Lease; and (c) that neither
Lessor, nor any of Lessor's agents, has made any oral or written representations
or warranties or is responsible for any additional investigation with respect to
said matters other than as set forth in this Lease. Accordingly, except as may
be otherwise specifically provided in this Lease, Lessee hereby accepts the
Premises and the Project in their condition existing as of the Lease
Commencement Date or the date that Lessee takes possession of the Premises,
whichever is earlier, subject to all applicable zoning, municipal, county and
state laws, ordinances and regulations governing and regulating the use or
initial build out of the Premises, and any easements, covenants or restrictions
of record, and accepts this Lease subject thereto and to all matters disclosed
thereby and by any exhibits attached hereto.
2.5 Intentionally Omitted.
2.6 Vehicle Parking. Lessee shall be entitled to use the number of
Unreserved Parking Spaces specified in Paragraph 1.2(b) on those portions of the
Common Areas designated from time to time by Lessor for parking. Lessee shall
not use more parking spaces than said number. Said parking spaces shall be used
for parking by vehicles no larger than full-size passenger automobiles or pick-
up trucks, herein called "Permitted Size Vehicles." Vehicles other than
Permitted Size Vehicles shall be parked and loaded or unloaded as directed by
Lessor in the Rules and Regulations (as defined in Paragraph 40) issued by
Lessor. (Also see Paragraph 2.9.)
(a) Lessee shall not permit or allow any vehicles that belong
to or are controlled by Lessee or Lessee's employees, suppliers, shippers,
customers, contractors or invitees to be loaded, unloaded, or parked in areas
other than those designated by Lessor for such activities or depicted on the
Site Plan.
(b) If Lessee permits or allows any of the prohibited
activities described in this Paragraph 2.6, then Lessor shall have the right,
without notice, in addition to such other rights and remedies that it may have,
to remove or tow away the vehicle involved and charge the cost to Lessee, which
cost shall be immediately payable upon demand by Lessor.
2.7 Common Areas--Definition. The term "Common Areas" is defined
as all areas and facilities outside the Premises and within the exterior
boundary line of the Project
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and interior utility raceways within the Premises that are provided and
designated by the Lessor from time to time for the general nonexclusive use of
Lessor, Lessee and other lessees of the Project and their respective employees,
suppliers, shippers, customers, contractors and invitees, including but not
limited to common entrances, lobbies, corridors, stairways and stairwells,
public restrooms, elevators, parking areas, loading and unloading areas, trash
areas, roadways, sidewalks, walkways, parkways, driveways and landscaped areas.
2.8 Common Areas--Lessee's Rights. Lessor hereby grants to Lessee,
for the benefit of Lessee and its employees, suppliers, shippers, contractors,
customers and invitees, during the term of this Lease, the nonexclusive right to
use, in common with others entitled to such use, the Common Areas as they exist
from time to time, subject to any rights, powers, and privileges reserved by
Lessor under the terms hereof or under the terms of any rules and regulations or
restrictions governing the use of the Project. Under no circumstances shall the
right herein granted to use the Common Areas be deemed to include the right to
store any property, temporarily or permanently, in the Common Areas. Any such
storage shall be permitted only by the prior written consent of Lessor or
Lessor's designated agent, which consent may be revoked at any time. In the
event that any unauthorized storage shall occur then Lessor shall have the
right, without notice, in addition to such other rights and remedies that it may
have, to remove the property and charge the cost to Lessee, which cost shall be
immediately payable upon demand by Lessor.
2.9 Common Areas--Rules and Regulations. Lessor or such other
person(s) as Lessor may appoint shall have the exclusive control and management
of the Common Areas and shall have the right, from time to time, to establish,
modify, amend and enforce reasonable Rules and Regulations with respect thereto
in accordance with Paragraph 40. Lessee agrees to abide by and conform to all
such Rules and Regulations, and to cause its employees, suppliers, shippers,
customers, contractors and invitees to so abide and conform. Lessor shall not be
responsible to Lessee for the non-compliance with said rules and regulations by
other lessees of the Project.
2.10 Common Areas--Changes. Lessor shall have the right, in
Lessor's sole discretion, from time to time:
(a) To make reasonable changes to the Common Areas, including,
without limitation, changes in the location, size, shape and number of lobbies,
windows, stairways, air shafts, elevators, escalators, restrooms, driveways,
entrances, ingress, egress, direction of traffic, decorative walls, driveways,
entrances, parking spaces, parking areas, loading and unloading areas, ingress,
egress, direction of traffic, landscaped areas, walkways and utility raceways,;
(b) To close temporarily any of the Common Areas for
maintenance purposes so long as reasonable access to the Premises remains
available;
(c) To designate other land outside the boundaries of (but
contiguous to) the Project to be a part of the Common Areas;
(d) To add additional buildings and improvements to the Common
Areas so, long as the same are contiguous to the Project;
(e) To use the Common Areas while engaged in making additional
improvements, repairs or alterations to the Project, or any portion thereof; and
(f) To do and perform such other acts and make such other
changes in, to or with respect to the Common Areas and Project as Lessor may,
in the exercise of sound business judgment, deem to be appropriate.
3. Term.
3.1 Term. The Commencement Date, Expiration Date and Original Term
of this Lease are as specified in Paragraph 1.3. Options to extend the Original
Term of the Lease are described in the Extension Option Rider attached hereto.
For purposes of this Lease, the
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Term of this Lease shall refer to the Original Term, as it may be extended by
any properly exercised options granted hereunder.
3.2 Intentionally Omitted.
3.3 Delay in Possession. If for any reason Lessor cannot deliver
possession of the Premises to Lessee by the Early Possession Date, if one is
specified in Paragraph 1.4, or if no Early Possession Date is specified, by the
Commencement Date, Lessor shall not be subject to any liability therefor, nor
shall such failure affect the validity of this Lease, or the obligations of
Lessee hereunder, or extend the term hereof, but in such case, Lessee shall not,
except as otherwise provided herein, be obligated to pay rent or perform any
other obligation of Lessee under the terms of this Lease until Lessor delivers
possession of the Premises to Lessee.
4. Rent.
4.1 Base Rent, Utilities and Janitorial Services. Lessee shall pay
Base Rent and other rent or charges, as the same may be adjusted from time to
time, to Lessor in lawful money of the United States, without offset or
deduction, on or before the day on which it is due under the terms of this
Lease. For purposes of this Lease, Base Rent and all other sums or charges due
Lessor from Lessee hereunder may be collectively referred to from time to time
as "Rent." Base Rent and all other rent and charges for any period during the
term hereof which is for less than one full month shall be prorated based upon
the actual number of days of the month involved. Payment of Base Rent and other
charges shall be made to Lessor at its address stated herein or to such other
persons or act such other addresses as Lessor may from time to time designate in
writing to Lessee. Lessee shall also pay directly for all utilities and
janitorial services supplied to the Premises except for water, including but not
limited to electricity, telephone, security systems in the Premises, if any, gas
and cleaning of the Premises, together with any taxes thereon. If any such
utilities or services are not separately metered to the Premises or separately
billed to the Premises, Lessee shall pay to Lessor a reasonable approximation,
to be determined by Lessor, of all such charges jointly metered or billed with
other premises in the Building, in the manner and within the time periods set
forth in Paragraph 4.2.
4.2 Common Area Operating Expenses Increase. Lessee shall pay to
Lessor during the term hereof, in addition to the Base Rent, Lessee's Share (as
specified in Paragraph 1.6(b) of the amount by which all Operating Expenses, as
hereinafter defined, for each Comparison Year exceeds the amount of all
Operating Expenses for the Base Year, such excess being hereinafter referred to
as the "Operating Expense Increase", in accordance with the following
provisions:
(a) "Lessee's Share" is defined, for purposes of this Lease,
as the percentage set forth in paragraph 1.6(b) of the Basic Lease Provisions,
which percentage has been determined by dividing the approximate square footage
of rentable area of the Premises by the total approximate square footage of the
rentable area contained in the Project.
(b) "Base Year" is defined as the calendar year 1998.
(c) "Comparison Year" is defined as each calendar year during
the term of this Lease subsequent to the Base Year. Lessee's Share of the
Operating Expense Increase for the first and last Comparison Years of the Lease
Term shall be prorated according to that portion of such Comparison Year as to
which Lessee is responsible for a share of such increase.
(d) "Common Area Operating Expenses" or "Operating Expenses"
are defined, for purposes of this Lease, as all costs, expenses and amounts, of
every kind and nature incurred by Lessor relating to the management, ownership,
repair, restoration or operation of the Project, including, but not limited to,
the following:
(i) The operation, repair and maintenance of the
Project, in neat, clean, safe, good order and condition, including but not
limited to the following:
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(aa) The Common Areas, including their surfaces,
coverings, decorative items carpets, drapes and window coverings, and including
parking areas, loading and unloading areas, trash areas, roadways, sidewalks,
walkways, parkways, driveways, landscaped areas, striping, bumpers, irrigation
systems, Common Area lighting facilities, fences and gates, elevators and roof.
(bb) Exterior signs and any tenant directories.
(cc) All heating, air conditioning, plumbing,
electrical systems, life safety equipment, telecommunication and other equipment
used in common by, or for the benefit of, lessees or occupants of the Project,
including elevators and escalators, tenant directories, fire detection systems
including sprinkler system maintenance and repair.
(ii) The cost of water, gas, electricity and telephone to
service the Common Areas and the Project.
(iii) Trash disposal, property management and security
services and the costs of any environmental inspections.
(iv) Reserves set aside for maintenance and repair of Common
Areas.
(v) Any increase above the Base Real Property Taxes (as
defined in Paragraph 10.2(b)) for the Building and the Common Areas.
(vi) Any "Insurance Cost Increase" (as defined in Paragraph
8.1).
(vii) The cost of the liability and property insurance
policies maintained by Lessor pursuant to the terms hereof with respect to the
Common Areas.
(viii) Any deductible portion of an insured loss concerning
the Building or the Common Areas.
(ix) Labor, salaries and applicable, reasonable fringe
benefits and costs, materials, supplies and tools, used in maintaining and/or
cleaning the Project and accounting and a management fee attributable to the
operation of the Project;
(x) Replacements of equipment or improvements to the extent
the same are either (a) reasonable or necessary, or (b) reasonably anticipated
to reduce the costs of operating the Project.
(xi) Replacing and/or adding improvements mandated by any
governmental agency and any repairs or removals necessitated thereby amortized
over its useful life according to Federal income tax regulations or guidelines
for depreciation thereof (including interest on the unamortized balance as is
then reasonable in the judgment of Lessor's accountants);
(xii) any equipment rental agreements or management
agreements (including the cost of any management fee) and costs of operation and
maintenance of a room for delivery and distribution of mail (if such a room is
provided) including the fair rental value of such mail room
(xiii) Any other services to be provided by Lessor that are
stated elsewhere in this Lease to be a Common Area Operating Expense.
(e) Any Common Area Operating Expenses and Real Property Taxes
that are specifically attributable to the Building or to the operation, repair
and maintenance thereof, may be allocated entirely to the Building.
(f) The inclusion of the improvements, facilities and services set
forth in Subparagraph 4.2(a) shall not be deemed to impose an obligation upon
Lessor to either have
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said improvements or facilities or to provide those services unless the Project
already has the same, Lessor already provides the services, or Lessor has agreed
elsewhere in this Lease to provide the same or some of them.
(g) If Lessor is not furnishing any particular work or service
(the cost of which, if performed by Lessor, would be included in Operating
Expenses) to a tenant who has undertaken to perform such work or service in lieu
of the performance thereof by Lessor, Operating Expenses shall be deemed to be
increased by an amount equal to the additional Operating Expenses which would
reasonably have been incurred during such period by Lessor if it had at its own
expense furnished such work or service to such tenant. If the Building is not
fully occupied during all or a portion of any Expense Year, Lessor shall make an
appropriate adjustment to the variable components of Operating Expenses for such
year or applicable portion thereof, employing sound accounting and management
principles, to determine the amount of Operating Expenses that would have been
paid had the Building been ninety-five percent (95%) occupied and fully
assessed.
(h) Lessee's Share of Operating Expense Increase shall be payable
by Lessee within ten (10) days after a reasonably detailed statement of actual
expenses is presented to Lessee by Lessor. At Lessor's option, however, an
amount may be estimated by Lessor from time to time in advance of Lessee's Share
of the Operating Expense Increase for any Comparison Year, and the same shall be
payable monthly or quarterly, as Lessor shall designate, during each Comparison
Year of the Lease term, on the same day as the Base Rent is due hereunder. In
the event that Lessee pays Lessor's estimate of Lessee's Share of Operating
Expense Increase as aforesaid, Lessor shall deliver to Lessee within sixty (60)
days after the expiration of each Comparison Year a reasonably detailed
statement showing Lessee s Share of the actual Operating Expense Increase
incurred during such year. If Lessee's payments under this paragraph 4.2(h)
during said Comparison Year exceed Lessee's Share as indicated on said
statement, Lessee shall be entitled to credit the amount of such overpayment
against Lessee s Share of Operating Expense Increase next falling due. If
Lessee's payments under this paragraph during said Comparison Year were less
than Lessee's Share as indicated on said statement, Lessee shall pay to Lessor
the amount of the deficiency within ten (10) days after delivery by Lessor to
Lessee of said statement. Lessor and Lessee shall forthwith adjust between them
by cash payment any balance determined to exist with respect to that portion of
the last Comparison Year for which Lessee is responsible as to Operating Expense
Increases, notwithstanding that the Lease term may have terminated before the
end of such Comparison Year.
5. Security Deposit. Lessee shall deposit with Lessor upon Lessee's
execution hereof the Security Deposit set forth in Paragraph 1.7 as security for
Lessee's faithful performance of Lessee's obligations under this Lease. If
Lessee fails to pay Base Rent or other rent or charges due hereunder, or
otherwise Defaults under this Lease (as defined in Paragraph 13.1), Lessor may
use, apply or retain all or any potion of said Security Deposit for the payment
of any amount due Lessor or to reimburse or compensate Lessor for any liability,
cost, expense, loss or damage (including attorneys' fees) which Lessor may
suffer or incur by reason thereof. If Lessor uses or applies all or any portion
of said Security Deposit, Lessee shall within ten (10) days after written
request therefore deposit monies with Lessor sufficient to restore said Security
Deposit to the full amount required by this Lease. Lessor shall not be required
to keep all or any part of the Security Deposit separate from its general
accounts. Lessor shall, at the expiration or earlier termination of the term
hereof and after Lessee has vacated the Premises, return to Lessee within thirty
(30) days (or, at Lessor's option, to the last assignee, if any, of Lessee's
interest herein), that portion of the Security Deposit not used or applied by
Lessor. Unless otherwise expressly agreed in writing by Lessor, no part of the
Security Deposit shall be considered to be held in trust, to bear interest or
other increment for its use, or to be prepayment for any monies to be paid by
Lessee under this Lease.
6. Use.
6.1 Permitted Use.
(a) Lessee shall use and occupy the Premises only for the
Permitted Use set forth in Paragraph 1.8, or any other legal use which is
reasonably comparable thereto, and for no other purpose. Lessee shall not use or
permit the use of the Premises in a manner that
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is unlawful, creates waste or a nuisance or that disturbs owners and/or
occupants of, or causes damage to the Premises or neighboring premises or
properties.
6.2 Hazardous Substances.
(a) Reportable Uses Require Consent. The term "Hazardous
Substance" as used in this Lease shall mean any product, substance, chemical,
material or waste whose presence, nature, quantity and/or intensity of
existence, use, manufacture, disposal, transportation, spill, release or effect,
either by itself or in combination with other materials expected to be on the
Premises, is either: (i) potentially injurious to the public health, safety or
welfare, the environment, or the Premises; (ii) regulated or monitored by any
governmental authority; or (iii) a basis for potential liability of Lessor to
any governmental agency or third party under any applicable statute or common
law theory. Hazardous Substance shall include, but not be limited to,
hydrocarbons, petroleum, gasoline, crude oil or any products or by-products
thereof. Lessee shall not engage in any activity in or about the Premises which
constitutes a Reportable Use (use hereinafter defined) of Hazardous Substances
without the express prior written consent of Lessor and compliance in a timely
manner (at Lessee's sole cost and expense) with all Applicable Requirements (as
defined in Paragraph 6.3). "Reportable Use" shall mean (i) the installation or
use of any above or below ground storage tank, (ii) the generation, possession,
storage, use, transportation, or disposal of a Hazardous Substance that requires
a permit from, or with respect to which a report, notice, registration or
business plan is required to be filed with, any governmental authority, and
(iii) the presence in, on or about the Premises of a Hazardous Substance with
respect to which any Applicable Laws require that a notice be given to persons
entering or occupying the Premises or neighboring properties. Notwithstanding
the foregoing, Lessee may, without Lessor's prior consent, but upon notice to
Lessor and in compliance with all Applicable Requirements, use any ordinary and
customary materials reasonably required to be used by Lessee in the normal
course of the Permitted Use, so long as such use is not a Reportable Use and
does not, in Lessor's good faith and reasonable business judgment, expose the
Premises, the Project, or neighboring properties to any risk of contamination or
damage or have the potential to expose Lessor to any liability therefor. In
addition, Lessor may (but without any obligation to do so) condition its consent
to any Reportable Use of any Hazardous Substance by Lessee upon Lessee's giving
Lessor such additional assurances as Lessor, in its reasonable discretion, deems
necessary to protect itself, the public, the Premises the Project and the
environment against damage, contamination or injury and/or liability therefor,
including but not limited to the installation (and, at Lessor's option, removal
on or before Lease expiration or earlier termination) of reasonably necessary
protective modifications to the Premises (such as concrete encasements) and/or
the deposit of an additional Security Deposit under Paragraph 5 hereof.
(b) Duty to Inform Lessor. If Lessee knows, or has reasonable
cause to believe, that a Hazardous Substance has come to be located in, on,
under or about the Premises or the Building, other than as previously consented
to by Lessor, Lessee shall immediately give Lessor written notice thereof,
together with a copy of any statement, report, notice, registration,
application, permit, business plan, license, claim, action, or proceeding given
to, or received from, any governmental authority or private party concerning the
presence, spill, release, discharge of, or exposure to, such Hazardous Substance
including but not limited to all such documents as may be involved in any
Reportable Use involving the Premises. Lease shall not cause or permit any
Hazardous Substance to be spilled or released in, on, under or about the
Premises (including, without limitation, through the plumbing or sanitary sewer
system).
(c) Indemnification. Lessee shall indemnify, protect, defend and hold
Lessor, its agents, employees, lenders and ground lessor, if any, and the
Premises, harmless from and against any and all damages, liabilities, judgments,
costs, claims, liens, expenses, penalties, loss of permits and attorneys' and
consultants' fees arising out of or involving any Hazardous Substance brought
onto the Premises by or for Lessee or by anyone under Lessee's control or with
Lessee's knowledge or consent. Lessee's obligations under this Paragraph 6.2(c)
shall include, but not be limited to, the effects of any contamination or injury
to person, property or the environment created or suffered by Lessee, and the
cost of investigation (including consultants' and attorneys' fees and testing),
removal, remediation, restoration and/or abatement thereof, or of any
contamination therein involved, and shall survive the expiration or earlier
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termination of this Lease. Neither the expiration of this Lease due to the
passage of time, nor any termination, cancellation or release agreement entered
into by Lessor and Lessee, shall release Lessee from its obligations under this
Lease with respect to Hazardous Substances, unless specifically so agreed by
Lessor in writing at the time of such agreement. Lessor shall indemnify,
protect, defend and hold Lessee harmless from and against any and all damages,
liabilities, judgments, costs, claims, liens, expenses, penalties, loss of
permits and attorneys' and consultants' fees necessitated by any Hazardous
Substance brought onto the Premises by or for Lessor. Lessor's obligations under
this Paragraph 6.2(c) shall include, but not be limited to, the effects of any
contamination or injury to person, property or the environment created or
suffered by Lessor, and the cost of investigation (including consultants' and
attorneys' fees and testing), removal, remediation, restoration and/or abatement
thereof, or of any contamination therein involved, and shall survive the
expiration or earlier termination of this Lease. Neither the expiration of this
Lease due to the passage of time, nor any termination, cancellation or release
agreement entered into by Lessor and Lessee, shall release Lessor from its
obligations under this Lease with respect to Hazardous Substances, unless
specifically so agreed by Lessee in writing at the time of such agreement.
(d) Exculpation of Lessor. Other lessees of the Project may use, handling
or store certain Hazardous Substances in connection with such lessees' use of
their premises. The failure of another lessee to comply with applicable laws and
procedures could result in a release of Hazardous Substances and contamination
to the Project, or any part thereof or the soil and ground water thereunder. In
the event of such release, the lessee responsible for the release, and not
Lessor, shall be solely responsible for any claim, damage or expense incurred by
Lessee by reason of such contamination. Lessee waives any rights it may have to
later assert that the foregoing release does not cover unknown claims. Lessee
and anyone claiming by, through or under Lessee hereby fully and irrevocably
releases Lessor, its partners and their respective employees, officers,
directors, representatives, agents, successors and assigns from any and all
claims that it may now have or hereafter acquire against such persons and
entities for any cost, loss, liability, damage, expense, demand, action or cause
of action arising from or related to any construction defects, errors, omissions
or other conditions, including, but not limited to, environmental matters,
affecting the Property, or any portion thereof. This release includes claims of
which Lessee is presently unaware or which Lessee does not presently suspect to
exist in its favor which, if known by Lessee, would materially affect Lessee's
release of Lessor. Lessee specifically waives the provision of California Civil
Code (S) 1542, which provides as follows:
"A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have materially
affected his settlement with the debtor."
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6.3 Lessee's Compliance with Requirements. Lessee shall, at
Lessee's sole cost and expense, fully, diligently and in a timely manner, comply
with all "Applicable Requirements," which term is used in this Lease to mean all
laws, rules, regulations, ordinances, directives, covenants, easements and
restrictions of record, permits, the requirements of any applicable fire
insurance underwriter or rating bureau, and the recommendations of Lessor's
engineers and/or consultants, now in effect or which may hereafter come into
effect whether or not they reflect a change in policy from that now existing,
during the term or any part of the term hereof and relating in any manner to
the Premises and Lessee's use thereof. Lessee shall conduct its business in a
lawful manner and shall not use or permit the use of the Premises or the Common
Areas in any manner that will tend to create waste or a nuisance or shall tend
to disturb other occupants of the Project.
6.4 Inspection; Compliance with Law. Lessor, Lessor's agents,
employees, contractors and designated representatives, and the holders of any
mortgages, deeds of trust or ground leases on the Premises ("Lenders") shall
have the right to enter the Premises at any time
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in the case of an emergency, and otherwise at reasonable times, for the purpose
of inspecting the condition of the Premises and for verifying compliance by
Lessee with this Lease and all Applicable Requirements (as defined in Paragraph
6.3), and Lessor shall be entitled to employ experts and/or consultants in
connection therewith to advise Lessor with respect to Lessee's activities,
including but not limited to Lessee's installation, operation, use, monitoring,
maintenance, or removal of any Hazardous Substance on or from the Premises. The
costs and expenses of any such inspections shall be paid by the party requesting
same, unless a Default or Breach of this Lease by Lessee or a violation of
Applicable Requirements or a contamination, caused or materially contributed to
by Lessee, is found to exist or to be imminent, or unless the inspection is
requested or ordered by a governmental authority as the result of any such
existing or imminent violation or contamination. In such case, Lessee shall upon
request reimburse Lessor or Lessor's Lender, as the case may be, for the costs
and expenses of such inspections.
7. Maintenance, Repairs, Utility Installations, Trade Fixtures and
Alterations.
7.1 Lessee's Obligations.
(a) Subject to the other terms and provisions hereof,
including the provisions of Paragraphs 2.2 (Condition), 2.3 (Compliance with
Covenants, Restrictions and Building Code), 7.2 (Lessor's Obligations), 9
(Damage or Destruction), and 14 (Condemnation), Lessee shall, at Lessee's sole
cost and expense and at all times, keep the Premises and every part thereof in
good order, condition and repair (whether or not such portion of the Premises
requiring repair, or the means of repairing the same, are reasonably or readily
accessible to Lessee, and whether or not the need for such repairs occurs as a
result of Lessee's use, any prior use, the elements or the age of such portion
of the Premises), including, without limiting the generality of the foregoing,
all equipment or facilities specifically serving the Premises, such as plumbing,
heating, air conditioning, ventilating, electrical, lighting facilities,
boilers, fired or unfired pressure vessels, fire hose connections if within the
Premises, fixtures, interior walls, interior surfaces of exterior walls,
ceilings, floors, windows, doors, plate glass, and skylights, but excluding any
items which are the responsibility of Lessor pursuant to Paragraph 7.2 below.
Lessee, in keeping the Premises in good order, condition and repair, shall
exercise and perform good maintenance practices. Lessee's obligations shall
include restorations, replacements or renewals when necessary to keep the
Premises and all improvements thereon or a part thereof in good order, condition
and state of repair.
(b) Intentionally Omitted.
(c) If Lessee fails to perform Lessee's obligations under this
Paragraph 7.1, Lessor may enter upon the Premises after ten (10) days' prior
written notice to Lessee (except in the case of an emergency, in which case no
notice shall be required), perform such obligations on Lessee's behalf, and put
the Premises in good order, condition and repair, in accordance with Paragraph
13.2 below.
7.2 Lessor's Obligations. Subject to the provisions of Paragraphs
2.2 (Condition), 2.3 (Compliance with Covenants, Restrictions and Building
Code), 4.2 (Common Area Operating Expenses), 6 (Use), 7.1 (Lessee's
Obligations), 9 (Damage or Destruction) and 14 (Condemnation), and subject to
the reimbursement requirements of Paragraph 4.2, Lessor, shall keep in good
order, condition and repair the foundations, exterior walls, structural
condition of interior bearing walls, exterior roof, fire sprinkler and/or
standpipe and hose (if located in the Common Areas) or other automatic fire
extinguishing system including fire alarm and/or smoke detection systems and
equipment, fire hydrants, parking lots, walkways, parkways, driveways,
landscaping, fences, signs and utility systems serving the Common Areas and all
parts thereof, as well as providing the services for which there is a Common
Area Operating Expense pursuant to Paragraph 4.2. Lessor shall not be obligated
to paint the exterior or interior surfaces of exterior walls nor shall Lessor be
obligated to maintain, repair or replace windows, doors or plate glass of the
Premises if broken by Lessee or its agents or invitees. There shall be no
abatement of rent or liability of Lessee on account of any injury or
interference with Lessee's business with respect to any improvements,
alterations or repairs made by Lessor to the Office Building Project or any part
thereof. Lessee expressly waives the benefit of any statute now or hereafter in
effect which would otherwise afford Lessee the right to make repairs at Lessor's
expense or to terminate this
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Lease because of Lessor's failure to keep the Building, Project or Common Areas
in good order, condition and repair.
7.3 Utility Installations, Trade Fixtures, Alterations.
(a) Definitions; Consent Required. The term "Utility
Installations" is used in this Lease to refer to all air lines, power panels,
electrical distribution, security, fire protection systems, communications
systems, lighting fixtures, heating, ventilating and air conditioning equipment,
plumbing, and fencing in, on or about the Premises. The term "Trade Fixtures"
shall mean Lessee's machinery and equipment which can be removed without doing
material damage to the Premises. The term "Alterations" shall mean any
modification of the improvements on the Premises which are provided by Lessor
under the terms of this Lease, other than Utility Installations or Trade
Fixtures. "Lessee-Owned Alterations and/or Utility Installations" are defined as
Alterations and/or Utility Installations made by Lessee that are not yet owned
by Lessor pursuant to Paragraph 7.4(a). Lessee shall not make nor cause to be
made any Alterations or Utility Installations in, on, under or about the
Premises without Lessor's prior written consent.
(b) Consent. Any Alterations or Utility Installations that
Lessee shall desire to make and which require the consent of the Lessor shall be
presented to Lessor in written form with detailed plans. All consents given by
Lessor, whether by virtue of Paragraph 7.3(a) or by subsequent specific consent,
shall be deemed conditioned upon: (i) Lessee's acquiring all applicable permits
required by governmental authorities; (ii) the furnishing of copies of such
permits together with a copy of the plans and specifications for the Alteration
or Utility Installation to Lessor prior to commencement of the work thereon; and
(iii) the compliance by Lessee with all conditions of said permits in a prompt
and expeditious manner. Any Alterations or Utility Installations by Lessee
during the term of this Lease shall be done in a good and workmanlike manner,
with good and sufficient materials, and be in compliance with all Applicable
Requirements. Lessee shall promptly upon completion thereof furnish Lessor with
as-built plans and specifications therefor. Lessor may (but without obligation
to do so) condition its consent to any requested Alteration or Utility
Installation that costs $2,500.00 or more upon Lessee's providing Lessor with a
lien and completion bond in an amount equal to one and one-half times the
estimated cost of such Alteration or Utility Installation. Lessee shall pay to
Lessor all of Lessor's actual costs incurred in conjunction with the review of
Lessee's proposed Alterations or Utility Installations within fifteen (15) days
of Lessee's receipt of an invoice therefore.
(c) Lien Protection. Lessee shall pay when due all claims for
labor or materials furnished or alleged to have been furnished to or for Lessee
at or for use on the Premises, which claims are or may be secured by any
mechanic's or materialmen's lien against the Premises or any interest therein.
Lessee shall give Lessor not less than ten (10) days' notice prior to the
commencement of any work in, on, or about the Premises, and Lessor shall have
the right to post notices of non-responsibility in or on the Premises as
provided by law. If Lessee shall, in good faith, contest the validity of any
such lien, claim or demand, then Lessee shall, at its sole expense, defend and
protect itself, Lessor and the Premises against the same and shall pay and
satisfy any such adverse judgment that may be rendered thereon before the
enforcement thereof against the Lessor or the Premises. If Lessor shall require,
Lessee shall furnish to Lessor a surety bond satisfactory to Lessor, in an
amount equal to one and one-half times the amount of such contested lien claim
or demand, indemnifying Lessor against liability for the same, as required by
law for the holding of the Premises free from the effect of such lien or claim.
In addition, Lessor may require Lessee to pay Lessor's attorneys' fees and costs
in participating in such action if Lessor shall decide it is to its best
interest to do so.
7.4 Ownership, Removal, Surrender, and Restoration.
(a) Ownership. Subject to Lessor's right to require their
removal and to cause Lessee to become the owner thereof as hereinafter provided
in this Paragraph 7.4, all Alterations and Utility Installations made to the
Premises by Lessee shall be the property of and owned by Lessee, but considered
a part of the Premises. Lessor may, at any time and at its option, elect in
writing to Lessee to be the owner of all or any specified part of the Lessee-
Owned Alterations and Utility Installations. Unless otherwise instructed per
Subparagraph 7.4(b) hereof,
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all Lessee-Owned Alterations and Utility Installations shall, at the expiration
or earlier termination of this Lease, automatically and without further action
on the part of Lessor, become the property of Lessor and remain upon the
Premises and be surrendered with the Premises by Lessee unless otherwise
specified to Lessee by Lessor at the time such Attention or Utility.
Installation is approved by Lessor.
(b) Removal. Unless otherwise agreed in writing, Lessor may
require that any or all Lessee-Owned Alterations or Utility Installations be
removed by the expiration or earlier termination of this Lease, notwithstanding
that their installation may have been consented to by Lessor. Lessor may require
the removal at any time of all or any part of any Alterations or Utility
Installations made without the required consent of Lessor.
(c) Surrender/Restoration. Lessee shall surrender the Premises
by the end of the last day of the Lease term or any earlier termination date,
clean and free of debris and in good operating order, condition and state of
repair, ordinary wear and tear excepted. Ordinary wear and tear shall not
include any damage or deterioration that would have been prevented by good
maintenance practice or by Lessee performing all of its obligations under this
Lease. Except as otherwise agreed or specified herein, the Premises, as
surrendered, shall include the Alterations and Utility Installations. The
obligation of Lessee shall include the repair of any damage occasioned by the
installation, maintenance or removal of Lessee's Trade Fixtures, furnishings,
equipment, and Lessee-Owned Alterations and Utility Installations, as well as
the removal of any storage tank installed by or for Lessee, and the removal,
replacement, or remediation of any soil, material or ground water contaminated
by Lessee, all as may then be required by Applicable Requirements and/or good
practice. Lessee's Trade Fixtures shall remain the property of Lessee and shall
be removed by Lessee subject to its obligation to repair and restore the
Premises per this Lease.
8. Insurance; Indemnity.
8.1 Payment of Premium Increases.
(a) As used herein, the term "Insurance Cost Increase" is
defined as any increase in the actual cost of the insurance applicable to the
Project and required to be carried by Lessor, pursuant to Paragraphs 8.2(b),
8.3(a) and 8.3(b), ("Required Insurance"), over and above the Base Premium, as
hereinafter defined, calculated on an annual basis. "Insurance Cost Increase"
shall include, but not be limited to, requirements of the holder of a mortgage
or deed of trust covering the Premises, increased valuation of the Premises,
and/or a general premium rate increase. The term "Insurance Cost Increase" shall
not, however, include any premium increases resulting from the nature of the
occupancy of any other lessee of the Building. If the parties insert a dollar
amount in Paragraph 1.9, such amount shall be considered the "Base Premium." If
a dollar amount has not been inserted in Paragraph 1.9 and if the Building has
been previously occupied during the twelve (12) month period immediately
preceding the Commencement Date, the "Base Premium" shall be the annual premium
applicable to the Base Year.
(b) Lessee shall pay any Insurance Cost Increase to Lessor
pursuant to Paragraph 4.2. Premiums for policy periods commencing prior to, or
extending beyond, the term of this Lease shall be prorated to coincide with the
corresponding Commencement Date or Expiration Date.
8.2 Liability Insurance.
(a) Carried by Lessee. Lessee shall obtain and keep in force
during the term of this Lease a Commercial General Liability policy of insurance
protecting Lessee, Lessor and any Lender(s) whose names have been provided to
Lessee in writing (as additional insureds) against claims for bodily injury,
personal injury and property damage based upon, involving or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than $2,000,000 per occurrence with
an "Additional Insured-Managers or Lessors of Premises" endorsement and contain
the "Amendment of the Pollution Exclusion" endorsement for damage caused by
heat, smoke fumes from a hostile fire. The
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policy shall not contain any intra-insured exclusions as between insured
persons or organizations, but shall include coverage for liability assumed under
this Lease as an "insured contract" for the performance of Lessee's indemnity
obligations under this Lease. The limits of said insurance required by this
Lease or as carried by Lessee shall not, however, limit the liability of Lessee
nor relieve Lessee of any obligation hereunder. All insurance to be carried by
Lessee shall be primary to and not contributory with any similar insurance
carried by Lessor, whose insurance shall be considered excess insurance only.
(b) Carried by Lessor. Lessor shall also maintain liability
insurance described in Paragraph 8.2(a) above, in addition to and not in lieu
of, the insurance required to be maintained by Lessee. Lessee shall not be named
as an additional insured therein.
8.3 Property Insurance-Building, Improvements and Rental Value.
(a) Building and Improvements. Lessor shall obtain and keep in
force during the term of this Lease a policy or policies in the name of Lessor,
with loss payable to Lessor and to any Lender(s), insuring against loss or
damage to the Premises. Such insurance shall be for full replacement cost, as
the same shall exist from time to time, or the amount required by any Lender(s),
but in no event more than the commercially reasonable and available insurable
value thereof if, by reason of the unique nature or age of the improvements
involved, such latter amount is less than full replacement cost. Lessee-Owned
Alterations and Utility Installations, Trade Fixtures and Lessee's personal
property shall be insured by Lessee pursuant to Paragraph 8.4. If the coverage
is available and commercially appropriate, Lessor's policy or policies shall
insure against all risks of direct physical loss or damage (including the perils
of flood and/or earthquake), including coverage for any additional costs
resulting from debris removal and reasonable amounts of coverage for the
enforcement of any ordinance or law regulating the reconstruction or replacement
of any undamaged sections of the Building required to be demolished or removed
by reason of the enforcement of any building, zoning, safety or land use laws as
the result of a covered loss, but not including plate glass insurance. Said
policy or policies shall also contain an agreed valuation provision in lieu of
any co-insurance clause, waiver of subrogation, and inflation guard protection
causing an increase in the annual property insurance coverage amount by a factor
of not less than the adjusted U.S. Department of Labor Consumer Price Index for
All Urban Consumers for the city nearest to where the Premises are located.
(b) Rental Value. Lessor shall also obtain and keep in force
during the term of this Lease a policy or policies in the name of Lessor, with
loss payable to Lessor and any Lender(s), insuring the loss of the full rental
and other charges payable by all lessees of the Building to Lessor for one year
(including all Real Property Taxes, insurance costs, all Common Area Operating
Expenses and any scheduled rental increases). Said insurance may provide that in
the event the Lease is terminated by reason of an insured loss, the period of
indemnity for such coverage shall be extended beyond the date of the completion
of repairs or replacement of the premises, to provide for one full year's loss
of rental revenues from the date of any such loss. Said insurance shall contain
an agreed valuation provision in lieu of any co-insurance clause, and the amount
of coverage shall be adjusted annually to reflect the projected rental income,
Real Property Taxes, insurance premium costs and other expenses, if any,
otherwise payable, for the next 12-month period. Common Area Operating Expenses
shall include any deductible amount in the event of such loss.
(c) Adjacent Premises. Lessee shall pay for any increase in
the premiums for the property insurance of the Building and for the Common Areas
or other buildings in the Project if said increase is caused by Lessee's acts,
omissions, use or occupancy of the Premises.
(d) Lessee's Improvements. Since Lessor is the Insuring Party,
Lessor shall not be required to insure Lessee-Owned Alterations and Utility
Installations unless the item in question has become the property of Lessor
under the terms of this Lease.
8.4 Lessee's Property Insurance. Subject to the requirements of
Paragraph 8.5, Lessee at its cost shall either by separate policy or, at
Lessor's option, by endorsement to a policy already carried, maintain insurance
coverage on all of Lessee's personal property, Trade
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Fixtures and Lessee-Owned Alterations and Utility Installations in, on, or about
the Premises similar in coverage to that carried by Lessor as the Insuring Party
under Paragraph 8.3(a). Such insurance shall be full replacement cost coverage
with a deductible not to exceed $1,000 per occurrence. The proceeds from any
such insurance shall be used by Lessee for the replacement of personal property
and the restoration of Trade Fixtures and Lessee-Owned Alterations and Utility
Installations. Upon request from Lessor, Lessee shall provide Lessor with
written evidence that such insurance is in force.
8.5 Insurance Policies. Insurance required hereunder shall be in
companies duly licensed to transact business in the state where the Premises are
located, and maintaining during the policy term a "General Policyholders Rating"
of at least B+, V, or such other rating as may be required by a Lender, as set
forth in the most current issue of "Best's Insurance Guide." Lessee shall not do
or permit to be done anything which shall invalidate the insurance policies
referred to in this Paragraph 8. Lessee shall cause to be delivered to Lessor,
within seven (7) days after the earlier of the Early Possession Date or the
Commencement Date, certified copies of, or certificates evidencing the existence
and amounts of, the insurance required under Paragraph 8.2(a) and 8.4. No such
policy shall be cancelable or subject to modification except after thirty (30)
days' prior written notice to Lessor. Lessee shall at least thirty (30) days
prior to the expiration of such policies, furnish Lessor with evidence of
renewals or "insurance binders" evidencing renewal thereof, or Lessor may order
such insurance and charge the cost thereof to Lessee, which amount shall be
payable by Lessee to Lessor upon demand.
8.6 Waiver of Subrogation. Without affecting any other rights or
remedies, Lessee and Lessor each hereby release and relieve the other, and waive
their entire right to recover damages (whether in contract or in tort) against
the other, for loss or damage to their property arising out of or incident to
the perils required to be insured against under Paragraph 8. The effect of such
releases and waivers of the right to recover damages shall not be limited by the
amount of insurance carried or required, or by any deductibles applicable
thereto. Lessor and Lessee agree to have their respective insurance companies
issuing property damage insurance waive any right to subrogation that such
companies may have against Lessor or Lessee, as the case may be, so long as the
insurance is not invalidated thereby.
8.7 Indemnity. Except for Lessor's negligence and/or breach of
express warranties, Lessee shall indemnify, protect, defend and hold harmless
the Premises, Lessor and its agents, employees, officers, independent
contractors, Lessor's master or ground lessor, partners and Lenders, from and
against any and all claims, loss of rents and/or damages, costs, liens,
judgments, penalties, loss of permits, attorneys' and consultants' fees,
expenses and/or liabilities arising out of, involving, or in connection with,
the occupancy of the Premises by Lessee, the conduct of Lessee's business, any
act, omission or neglect of Lessee, its agents, contractors, employees or
invitees, and out of any Default or Breach by Lessee in the performance in a
timely manner of any obligation on Lessee's part to be performed under this
Lease. The foregoing shall include, but not be limited to, the defense or
pursuit of any claim or any action or proceeding involved therein, and whether
or not (in the case of claims made against Lessor) litigated and/or reduced to
judgment. In case any action or proceeding be brought against Lessor by reason
of any of the foregoing matters, Lessee upon notice from Lessor shall defend the
same at Lessee's expense by counsel reasonably satisfactory to Lessor and Lessor
shall cooperate with Lessee in such defense. Lessor need not have first paid any
such claim in order to be so indemnified.
8.8 Exemption of Lessor from Liability. Lessor shall not be liable
for injury or damage to the person or goods, wares, merchandise or other
property of Lessee, Lessee's employees, contractors, invitees, customers, or any
other person in or about the Premises, whether such damage or injury is caused
by or results from fire, steam, electricity, gas, water or rain, or from the
breakage, leakage, obstruction or other defects of pipes, fire sprinklers,
wires, appliances, plumbing, air conditioning or lighting fixtures, or from any
other cause, whether said injury or damage results from conditions arising upon
the Premises or upon other portions of the Building of which the Premises are a
part, from other sources or places, and regardless of whether the cause of such
damage or injury or the means of repairing the same is accessible or not. Lessor
shall not be liable for any damages arising from any act or neglect of any other
lessee of Lessor nor from the failure by Lessor to enforce the provisions of any
other lease in the
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Project unless Lessor is negligent in such failure. Notwithstanding Lessor's
negligence or breach of this Lease, Lessor shall under no circumstances be
liable for injury to Lessee's business or for any loss of income or profit
therefrom.
8.9 No Representation or Adequate Coverage. Lessor makes no
representation that the limits or forms of coverage of insurance specified in
this paragraph 8 are adequate to cover Lessee's property or obligations under
this Lease.
9. Damage or Destruction.
9.1 Definitions.
(a) "Premises Partial Damage" shall mean damage or destruction
to the Premises, other than Lessee-Owned Alterations and Utility Installations,
the repair cost of which damage or destruction is less than fifty percent (50%)
of the then Replacement Cost (as defined in Paragraph 9.1(d)) of the Premises
(excluding Lessee-Owned Alterations and Utility Installations and Trade
Fixtures) immediately prior to such damage or destruction.
(b) "Premises Total Destruction" shall mean damage or
destruction to the Premises, other than Lessee-Owned Alterations and Utility
Installations, the repair cost of which damage or destruction is fifty percent
(50%) or more of the then Replacement Cost of the Premises (excluding Lessee-
Owned Alterations and Utility Installations and Trade Fixtures) immediately
prior to such damage or destruction. In addition, damage or destruction to the
Building, other than Lessee-Owned Alterations and Utility Installations and
Trade Fixtures of any lessees of the Building, the cost of which damage or
destruction is fifty percent (50%) or more of the then Replacement Cost
(excluding Lessee-Owned Alterations and Utility Installations and Trade Fixtures
of any lessees of the Building) of the Building shall, at the option of Lessor,
be deemed to be Premises Total Destruction.
(c) "Insured Loss" shall mean damage or destruction to the
Premises, other than Lessee-Owned Alterations and Utility Installations and
Trade Fixtures which was caused by an event required to be covered by the
insurance described in Paragraph 8.3(a) irrespective of any deductible amounts
or coverage limits involved and where the proceeds of such insurance are
available to Lessor for repair of the Premises.
(d) "Replacement Cost" shall mean the cost to repair or
rebuild the improvements owned by Lessor at the time of the occurence to
their condition existing immediately prior thereto, including demolition, debris
removal and upgrading required by the operation of applicable building codes,
ordinances or laws, and without deduction for depreciation.
(e) "Hazardous Substance Condition" shall mean the occurrence
or discovery of a condition involving the presence of, or a contamination by, a
Hazardous Substance as defined in Paragraph 6.2(a), in, on, or under the
Premises.
9.2 Premises Partial Damage - Insured Loss. If Premises Partial
Damage that is an Insured Loss occurs, then Lessor shall, at Lessor's expense,
repair such damage (but not Lessee's Trade Fixtures or Lessee-Owned Alterations
and Utility Installations) as soon as reasonably possible and this Lease shall
continue in full force and effect. In the event, however, that there is a
shortage of insurance proceeds, Lessor shall have no obligation to pay for the
shortage in insurance proceeds or to fully restore the unique aspects of the
Premises unless Lessee provides Lessor with the funds to cover same, or adequate
assurance thereof, within ten (10) days following receipt of written notice of
such shortage and request therefor. If Lessor receives said funds or adequate
assurance thereof within said ten (10) day period, Lessor shall complete them as
soon as reasonably possible and this Lease shall remain in full force and
effect. If Lessor does not receive such funds or assurance within said period,
Lessor may nevertheless elect by written notice to Lessee within ten (10) days
thereafter to make such restoration and repair as is commercially reasonable
with Lessor paying any shortage in proceeds, in which ease this Lease shall
remain in full force and effect. If Lessor does not receive such funds or
assurance within such ten (10) day period, and if Lessor does not so elect to
restore and repair, then this Lease shall terminate sixty (60) days following
the occurrence of the damage or
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destruction. Unless otherwise agreed, Lessee shall in no event have any right to
reimbursement from Lessor for any funds contributed by Lessee to repair any
such damage or destruction. Premises Partial Damage due to flood or earthquake
shall be subject to Paragraph 9.3 rather than Paragraph 9.2, notwithstanding
that there may be some insurance coverage, but the net proceeds of any such
insurance shall be made available for the repairs if made by either Party.
9.3 Partial Damage - Uninsured Loss. If Premises Partial Damage
that is not an Insured Loss occurs, unless caused by a negligent or willful act
of Lessee (in which event Lessee shall make the repairs at Lessee's expense and
this Lease shall continue in full force and effect), Lessor may at Lessor's
option, either (i) repair such damage as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect, or
(ii) give written notice to Lessee within thirty (30) days after receipt by
Lessor of knowledge of the occurrence of such damage of Lessor's desire to
terminate this Lease as of the date sixty (60) days following the date of such
notice. In the event Lessor elects to give such notice of Lessor's intention to
terminate this Lease, Lessee shall have the right within ten (10) days after the
receipt of such notice to give written notice to Lessor of Lessee's commitment
to pay for the repair of such damage totally at Lessee's expense and without
reimbursement from Lessor. Lessee shall provide Lessor with the required funds
or satisfactory assurance thereof within thirty (30) days following such
commitment from Lessee. In such event this Lease shall continue in full force
and effect, and Lessor shall proceed to make such repairs as soon as reasonably
possible after the required funds are available. If Lessee does not give such
notice and provide the funds or assurance thereof within the times specified
above, this Lease shall terminate as of the date specified in Lessor's notice of
termination.
9.4 Total Destruction. Notwithstanding any other provision hereof,
if Premises Total Destruction occurs (including any destruction required by any
authorized public authority), this Lease shall terminate upon the date of such
Premises Total Destruction, whether or not the damage or destruction is an
Insured Loss or was caused by a negligent or willful act of Lessee. In the
event, however, that the damage or destruction was caused by Lessee, Lessor
shall have the right to recover Lessor's damages from Lessee except as released
and waived in Paragraph 9.7.
9.5 Damage Near End of Term. If at any time during the last six
(6) months of the term of this Lease there is damage for which the cost to
repair exceeds one month's Base Rent, whether or not an Insured Loss, Lessor
may, at Lessor's option, terminate this Lease effective sixty (60) days
following the date of occurrence of such damage by giving written notice to
Lessee of Lessor's election to do so within thirty (30) days after the date of
occurrence of such damage. Provided, however, if Lessee at that time has an
exercisable option to extend this Lease or to purchase the Premises, then Lessee
may preserve this Lease by (a) exercising such option, and (b) providing Lessor
with any shortage in insurance proceeds (or adequate assurance thereof) needed
to make the repairs on or before the earlier of (i) the date which is ten (10)
days after Lessee's receipt of Lessor's written notice purporting to terminate
this Lease, or (ii) the day prior to the date upon which such option expires. If
Lessee duly exercises such option during such period and provides Lessor with
funds (or adequate assurance thereof) to cover any shortage in insurance
proceeds, Lessor shall, at Lessor's expense repair such damage as soon as
reasonably possible and this Lease shall continue in full force and effect. If
Lessee fails to exercise such option and provide such funds or assurance during
such period, then this Lease shall terminate as of the date set forth in the
first sentence of this Paragraph 9.5.
9.6 Abatement of Rent; Lessee's Remedies.
(a) In the event of (i) Premises Partial Damage or (ii)
Hazardous Substance Condition for which Lessee is not legally responsible, the
Base Rent, Common Area Operating Expenses and other charges, if any, payable by
Lessee hereunder for the period during which such damage or condition, its
repairs, remediation or restoration continues, shall be abated in proportion to
the degree to which, in Lessor's good faith reasonable business judgment,
Lessee's use of the Premises is impaired, but not in excess of proceeds from
insurance required to be carried under Paragraph 8.3(b). Except for abatement of
Base Rent, Common Area Operating Expenses and other charges, if any, as
aforesaid, all other obligations of Lessee hereunder shall
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be performed by Lessee, and Lessee shall have no claim against Lessor for any
damage suffered by reason of any such damage, destruction, repair remediation or
restoration.
(b) If Lessor shall be obligated to repair or restore the
Premises under the provisions of this Paragraph 9 and shall not commence, the
repair or restoration of the Premises within ninety (90) days after either (i)
such obligation shall accrue, or (ii) receipt or all applicable insurance
proceeds, whichever time period is greater, then, Lessee may, at any time prior
to the commencement of such repair or restoration, give written notice to Lessor
and to any Lenders of which Lessee has actual notice of Lessee's election to
terminate this Lease on a date not less than sixty (60) days following the
giving of such notice. If Lessee gives such notice to Lessor and such Lenders
and such repair or restoration is not commenced within thirty (30) days after
receipt of such notice, this Lease shall terminate as of the date specified in
said notice. If Lessor or a Lender commences the repair or restoration of the
Premises within thirty (30) days after the receipt of such notice, this Lease
shall continue in full force and effect. "Commence" as used in this Paragraph
9.6 shall mean either the authorization of the preparation of the required
plans, or the beginning of the actual work on the Premises, whichever occurs
first.
9.7 Hazardous Substance Conditions. If a Hazardous Substance
Condition occurs, unless Lessee is legally responsible therefore (in which case
Lessee shall make the investigation and remediation thereof required by
Applicable Requirements and this Lease shall continue in full force and effect,
but subject to Lessor's rights under Paragraph 6.2(e) and Paragraph 13), Lessor
may at Lessor's option either (i) investigate and remediate such Hazardous
Substance Condition, if required, as soon as reasonably possible at Lessor's
expense, in which event this Lease shall continue in full force and effect, or
(ii) if the estimated cost to investigate and remediate such condition exceeds
twelve (12) times the then monthly Base Rent or $100,000 whichever is greater,
give written notice to Lessee within thirty (30) days after receipt by Lessor of
knowledge of the occurrence of such Hazardous Substance Condition of Lessor's
desire to terminate this Lease as of the date sixty (60) days following the date
of such notice. In the event Lessor elects to give such notice of Lessor's
intention to terminate this Lease, Lessee shall have the right within ten (10)
days after the receipt of such notice to give written notice to Lessor of
Lessee's commitment to pay for the excess costs of (a) investigation and
remediation of such Hazardous Substance Condition to the extent required by
Applicable Requirements, over (b) an amount equal to twelve (12) times the then
monthly Base Rent or $100,000, whichever is greater. Lessee shall provide Lessor
with the funds required of Lessee or satisfactory assurance thereof within
thirty (30) days following said commitment by Lessee. In such event this Lease
shall continue in full force and effect, and Lessor shall proceed to make such
investigation and remediation as soon as reasonably possible after the required
funds are available. If Lessee does not give such notice and provide the
required funds or assurance thereof within the time period specified above, this
Lease shall terminate as of the date specified in Lessor's notice of
termination.
9.8 Termination - Advance Payments. Upon termination of this Lease
pursuant to this Paragraph 9, Lessor shall return to Lessee any advance payment
made by Lessee to Lessor and so much of Lessee's Security Deposit as has not
been, or is not then required to be, used by Lessor under the terms of this
Lease.
9.9 Waiver of Statutes. Lessor and Lessee agree that the terms of
this Lease shall govern the effect of any damage to or destruction of the
Premises and the Building with respect to the termination of this Lease and
hereby waive the provisions of any present or future statute to the extent it is
inconsistent herewith.
10. Real Property Taxes.
10.1 Payment of Taxes. Lessor shall pay the Real Property Taxes, as
defined in Paragraph 10.2(a), applicable to the Project, and except as otherwise
provided in Paragraph 10.3, any increases in such amount over the Base Real
Property Taxes shall be included in the calculation of Common Area Operating
Expenses in accordance with the provisions of Paragraph 4.2.
10.2 Real Property Tax Definitions.
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(a) As used herein, the term "Real Property Taxes" shall
include any form of real estate tax or assessment, general, special, ordinary or
extraordinary, and any license fee, commercial rental tax, improvement bond or
bonds, levy or tax (other than inheritance, personal income or estate taxes)
imposed upon the Project by any authority having the direct or indirect power to
tax, including any city, state or federal government, or any school,
agricultural, sanitary, fire, street, drainage, or other improvement district
thereof, levied against any legal or equitable interest of Lessor in the Project
or any portion thereof, Lessor's right to rent or other income therefrom, and/or
Lessor's business of leasing the Premises. The term "Real Property Taxes" shall
also include any tax, fee, levy, assessment or charge, or any increase therein,
imposed by reason of events occurring, or changes in Applicable Law taking
effect, during the term of this Lease, including but not limited to a change in
the ownership of the Project or in the improvements thereon, the execution of
this Lease, or any modification, amendment or transfer thereof, and whether or
not contemplated by the Parties.
(b) As used herein, the term "Base Real Property Taxes" shall
be the amount of Real Property Taxes, which are assessed against the Premises,
Building or Common Areas in 1998. In calculating Real Property Taxes for any
calendar year, the Real Property Taxes for any real estate tax year shall be
included in the calculation of Real Property Taxes for such calendar year based
upon the number of days which such calendar year and tax year have in common.
10.3 Additional Improvements. Common Area Operating Expenses shall
not include Real Property Taxes specified in the tax assessor's records and work
sheets as being caused by additional improvements placed upon the Project by
other lessees or by Lessor for the exclusive enjoyment of such other lessees.
Notwithstanding Paragraph 10.1 hereof, Lessee shall, however, pay to Lessor at
the time Common Area Operating Expenses are payable under Paragraph 4.2, the
entirety of any increase in Real Property Taxes if assessed solely by reason of
Alterations, Trade Fixtures or Utility Installations placed upon the Premises by
Lessee or at Lessee's request.
10.4 Joint Assessment. If the Building is not separately assessed,
Real Property Taxes allocated to the Building shall be an equitable proportion
of the Real Property Taxes for all of the land and improvements included with
the tax parcel assessed, such proportion to be determined by Lessor from the
respective valuations assigned in the assessor's work sheets or such other
information as may be reasonably available. Lessor' reasonable determination
thereof, in good faith, shall be conclusive.
10.5 Lessee's Property Taxes. Lessee shall pay prior to delinquency
all taxes assessed against and levied upon Lessee-Owned Alterations and Utility
Installations, Trade Fixtures, furnishings, equipment and all personal property
of Lessee contained in the Premises or stored within the Project. When Possible,
Lessee shall cause its Lessee-Owned Alterations and Utility Installations, Trade
Fixtures, furnishings, equipment and all other personal property to be assessed
and billed separately from the real property of Lessor. If any of Lessee's said
property shall be assessed with Lessor's real property, Lessee shall pay Lessor
the taxes attributable to Lessee's property within ten (10) days after receipt
of a written statement setting forth the taxes applicable to Lessee's property.
11. Utilities. Lessee shall pay directly for all utilities and services
supplied to the Premises, including but not limited to electricity, telephone,
security, gas and cleaning of the Premises, together with any taxes thereon. If
any such utilities or services are not separately metered to the Premises or
separately billed to the Premises, Lessee shall pay to Lessor a reasonable
proportion to be determined by Lessor of all such charges jointly metered or
billed with other premises in the Building, in the manner and within the time
periods set forth in Paragraph 4.2(d). Lessee shall not make connection to the
utilities except by or through existing outlets, or suffer or permit any act
that causes extra burden upon the utilities or services, including but not
limited to security services, over standard office usage for the Project. Lessor
shall require Lessee to reimburse Lessor for any excess expenses or costs that
may arise out of a breach of this subparagraph by Lessee. Lessor may, in its
sole discretion, install at Lessee's expense supplemental equipment and/or
separate metering applicable to Lessee's excess usage or loading. There shall be
no abatement of rent and Lessor shall not be liable in any respect
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whatsoever for the inadequacy, stoppage, interruption or discontinuance of any
utility or service due to riot, strike, labor dispute, breakdown, accident,
repair or other cause beyond Lessor's reasonable control or in cooperation with
governmental request or directions.
12. Assignment and Subletting.
12.1 Lessor's Consent Required.
(a) Except as specifically, provided herein, Lessee shall not
voluntarily or by operation of law assign, transfer, mortgage or otherwise
transfer or encumber (collectively, "assign" or "assignment") or sublet all or
any part of Lessee's interest or obligations in or under this Lease or in the
Premises without Lessor's prior written consent given under the subject to the
terms of Paragraph 36, which Lessor shall not withhold unreasonably. The parties
agree, however, that in approving or disapproving of any proposed assignment or
subletting of the Premises or the Lease, Lessor shall be entitled to take into
consideration, by way of example and not limitation, any or all of the criteria
set forth below and that it shall not be unreasonable for Lessor to withhold its
consent if any of the following circumstances exist or may exist: (i) the
transferee's contemplated use of the Premises following the proposed assignment
or subletting is different from the permitted use specified herein; (ii) in
Lessor's reasonable business judgment, the transferee lacks sufficient business
reputation or experience to operate a successful business of the type and
quality permitted under the Lease; (iii) in Lessor's reasonable business
judgment, the present net worth of the transferee is less than the greater of
Lessee's net worth at the Effective Date or Lessee's net worth at the date of
Lessee's request for consent to the assignment or subletting; (iv) in Lessor's
reasonable business judgment, the Rent that Lessor reasonably anticipates
receiving from the transferee is less than that which Lessor has received from
Lessee; (v) the proposed assignment or subletting would breach any covenant of
Lessor in any other lease, financing agreement or other agreement relating to
the Project or otherwise; or (vi) the transferee requests an amendment to the
Lease other than the identity of Lessee. No assignment or subletting shall
release Lessee from its obligations and liabilities hereunder.
(b) A Change of Control of Lessee shall constitute an
assignment requiring Lessor's consent. Change of Control shall mean the transfer
by sale, assignment, death, incompetency, mortgage, deed of trust, trust,
operation of law, or otherwise, of any shares, voting rights or ownership
interest which will result in a change in the identity of the entity, entities,
person or persons exercising, or who may exercise, effective control of Lessee,
unless such change results from the trading of shares listed on a recognized
public stock exchange and such trading is not for the purpose of acquiring
effective control of Lessee. If Lessee is a private corporation whose stock
becomes publicly held, the transfers of such stock from private to public
ownership shall not be deemed a Change of Control. The transfer, on a cumulative
basis, of twenty-five percent (25%) or more of the voting control of Lessee
shall constitute a change in control for this purpose. Any provision of this
Paragraph 12.1 to the contrary notwithstanding, Lessor's approval shall deemed
given to an assignment or subletting to any person or entity who controls, is
controlled by or is under common control with Lessee, or to any corporation
resulting from the merger or consolidation with Lessee or to any person or legal
entity which acquires all the assets of Lessee as a going concern of the
business being conducted on the Premises (each of the foregoing is hereinafter
referred to as a "Lessee Affiliate"); provided that before such assignment shall
be effective, (a) said Lessee Affiliate shall assume, in full, the obligations
of Lessee under this Lease, (b) Lessor shall be given written notice of such
assignment and assumption, (c) the use of the Premises by the Lessee Affiliate
shall be as set forth in Section 1.8. and (d) the remaining portions of this
Lease, including but not limited to those pertaining to the assignment and/or
subletting of this Lease, and specifically including the terms and provisions of
Paragraph 12.2, shall continue to apply. For purposes of this paragraph, the
term "control" means possession, directly or indirectly, of more than fifty
percent (50%) of the ownership interests of such entity.
(c) The involvement of Lessee or its assets in any
transaction, or series of transactions (by way of merger, sale, acquisition,
financing, refinancing, transfer, leveraged buy-out or otherwise), whether or
not a formal assignment or hypothecation of this Lease or Lessee's assets
occurs, which results or may, in Lessor's good faith reasonable business
judgment, result in a reduction of the Net Worth of Lessee, as hereinafter
defined, by an amount
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equal to or greater than twenty-five percent (25%) of such Net Worth of Lessee
as it was represented to Lessor at the time of full execution and delivery of
this Lease or at the time of the most recent assignment to which Lessor has
consented, or as it exists immediately prior to said transaction or
transactions constituting such reduction, at whichever time said Net Worth of
Lessee was or is greater, shall be considered an assignment of this Lease by
Lessee to which Lessor may reasonably withhold its consent. "Net Worth of
Lessee" for purposes of this Lease shall be the net worth of Lessee (excluding
any Guarantors) established under generally accepted accounting principles
consistently applied.
(d) An assignment or subletting of Lessee's interest in this
Lease without Lessor's specific prior written consent shall, at Lessor's option,
be a Default curable after notice per Paragraph 13.1, or a non-curable Breach
without the necessity of any notice and grace period. If Lessor elects to treat
such unconsented to assignment or subletting as a non-curable Breach, Lessor
shall have the right to exercise any of its rights at law, or equity or
otherwise including but not limited to either: (i) terminate this Lease, or (ii)
upon thirty (30) days' written notice ("Lessor's Notice"), increase the monthly
Base Rent for the Premises to the greater of the then fair market rental value
of the Premises, as reasonably determined by Lessor, or one hundred ten percent
(110%) of the Base Rent then in effect. Pending determination of the new fair
market rental value, if disputed by Lessee, Lessee shall pay the amount set
forth in Lessor's Notice, with any overpayment credited against the next
installment(s) of Base Rent coming due, and any underpayment for the period
retroactively to the effective date of the adjustment being due and payable
immediately upon the determination thereof. Further, in the event of such Breach
and rental adjustment, any fixed rental adjustments scheduled during the
remainder of the Lease term shall be increased in the same ratio as the new
rental bears to the Base Rent in effect immediately prior the adjustment
specified in Lessor's Notice.
(e) Lessee's remedy for any breach of this Paragraph 12.1 by
Lessor shall be limited to compensatory damages and/or injunctive relief.
12.2 Terms and Conditions Applicable to Assignment and Subletting.
(a) Regardless of whether Lessor's consent is given or deemed
given, any assignment or subletting shall not (i) be effective without the
express written assumption by such assignee or sublessee of the obligations of
Lessee under this Lease, (ii) release Lessee of any obligations hereunder, nor
(iii) alter the primary liability of Lessee for the payment of Base Rent and
other sums due Lessor hereunder or for the performance of any other obligations
to be performed by Lessee under this Lease.
(b) Lessor may accept any rent or performance of Lessee's
obligations from any person other than Lessee pending approval or disapproval of
an assignment. Neither a delay in the approval or disapproval of such assignment
nor the acceptance of any rent for performance shall constitute a waiver or
estoppel of Lessor's right to exercise its remedies for the Default or Breach by
Lessee of any of the terms, covenants or conditions of this Lease.
(c) The consent of Lessor to any assignment or subletting
shall not constitute a consent to any subsequent assignment or subletting by
Lessee or to any subsequent or successive assignment or subletting by the
assignee or sublessee. However, Lessor may consent to subsequent sublettings and
assignments of the sublease or any amendments or modifications thereto without
notifying Lessee or anyone else liable under this Lease or the sublease and
without obtaining their consent, and such action shall not relieve such persons
from liability under this Lease or the sublease.
(d) In the event of any Default of Lessee's obligation under
this Lease, Lessor may proceed directly against Lessee, any Guarantors or anyone
else responsible for the performance of the Lessee's obligations under this
Lease, including any sublessee, without first exhausting Lessor's remedies
against any other person or entity responsible therefor to Lessor, or any
security held by Lessor.
(e) Should Lessee desire to enter into an assignment or
subletting transaction, Lessee shall give notice thereof to Lessor by
requesting in writing Lessor's consent to such assignment or subletting at
least thirty (30) days before the proposed effective date of any
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such assignment or subletting and shall provide Lessor with the following: (i)
the full particulars of the proposed assignment or subletting transaction,
including its nature, effective date, terms and conditions, and copies of any
documents pertaining to such proposed transaction; (ii) a description of the
identity, net worth and previous business experience of the transferee,
including, without limitation, copies of transferee's latest income, balance
sheet and change-of-financial-position statements (with accompanying notes and
disclosures of all material changes thereto) in audited form, if available, and
certified as accurate by the transferee; and (iii) any further information
relevant to the transaction which Lessor shall have requested within thirty (30)
days after receipt of Lessee's request for consent and all information specified
above in Subsections (i), (ii) and (iii).
Each assignment or subletting shall be evidenced by an
instrument made in such written form as is satisfactory to Lessor and executed
by Lessee and transferee. By such instrument, transferee shall assume all the
terms, covenants and conditions of this Lease which are obligations of Lessee.
Lessee shall remain fully liable to perform its duties under the Lease following
the assignment or subletting. Lessee shall, on demand of Lessor, reimburse
Lessor for Lessor's reasonable costs, including legal fees, incurred in
obtaining advice and preparing documentation for each assignment or subletting
to which Lessor has consented.
(f) Any assignment of, or sublessee under, this Lease shall,
by reason of accepting such assignment or entering into such sublease, be
deemed, for the benefit of Lessor, to have assumed and agreed to conform and
comply with each and every term, covenant, condition and obligation herein to be
observed or performed by Lessee during the term of said assignment or sublease,
other than such obligations as are contrary to or inconsistent with provisions
of an assignment or sublease to which Lessor has specifically consented in
writing.
(g) Lessor, as a condition to giving its consent to any
assignment or subletting, may require that the amount and adjustment schedule of
the rent payable under this Lease be adjusted to what is then the market value
and/or adjustment schedule for property similar to the Premises as then
constituted, as determined by Lessor. In the event of such a rental adjustment
and whether or not the assignee or sublessee is a Lessee Affiliate as provided
above in subparagraph 12.1 (b), then Lessor and Lessee shall each be entitled to
fifty percent (50%) of any such increased rental amount less the amount of any
reasonable and necessary marketing costs or leasing commissions paid to
unaffiliated third parties.
12.3 Additional Terms and Conditions Applicable to Subletting. The
following terms and conditions shall apply to any subletting by Lessee of all
or any part of the Premises and shall be deemed included in all subleases under
this Lease whether or not expressly incorporated therein:
(a) Lessee hereby assigns and transfers to Lessor all of
Lessee's interest in all rentals and income arising from any sublease of all or
a portion of the Premises heretofore or hereafter made by Lessee, and Lessor may
collect such rent and income and apply same toward Lessee's obligations under
this Lease; provided, however, that until a Breach (as defined in Paragraph
13.1) shall occur in the performance of Lessee's obligations under this Lease,
Lessee may, except as otherwise provided in this Lease, receive, collect and
enjoy the rents accruing under this sublease. Lessor shall not, by reason of the
foregoing provision or any other assignment of such sublease to Lessor, nor by
reason of the collection of the rents from a sublessee, be deemed liable to the
sublessee for any failure of Lessee to perform and comply with any of Lessee's
obligations to such sublessee under such Sublease. Lessee hereby irrevocably
authorizes and directs any such sublessee, upon receipt of a written notice
from Lessor stating that a Breach exists in the Performance of Lessee's
obligations under this Lease, to pay to Lessor the rents and other charges due
and to become due under the sublease. Sublessee shall rely upon any such
statement and request from Lessor and shall pay such rents and other charges to
Lessor without any obligation or right to inquire as to whether such Breach
exists and notwithstanding any notice from or claim from Lessee to the contrary.
Lessee shall have no right or claim against such sublessee, or, until the Breach
has been cured, against Lessor, for any such rents and other charges so paid by
said sublessee to Lessor.
(b) In the event of a Breach by Lessee in the performance of
its obligations under this Lease, Lessor, at its option and without any
obligation to do so, may
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require any sublessee to attorn to Lessor, in which event Lessor shall undertake
the obligations of the sublessor under such sublease from the time of the
exercise of said option to the expiration of such sublease; provided, however,
Lessor shall not be liable for any prepaid rents or security deposit paid by
such sublessee to such sublessor or for any other prior defaults or breaches of
such sublessor under such sublease.
(c) Any matter or thing requiring the consent of the sublessor
under a sublease shall also require the consent of Lessor herein.
(d) No sublessee under a sublease approved by Lessor shall
further assign or sublet all or any part of the Premises without Lessor's prior
written consent.
(e) Lessor shall deliver a copy of any notice of Default or
Breach by Lessee to the sublessee, who shall have the right to cure the Default
of Lessee within the grace period, if any, specified in such notice. The
sublessee shall have a right of reimbursement and offset from and against Lessee
for any such Defaults cured by the sublessee.
13. Default; Breach; Remedies.
13.1 Default; Breach. Lessee's obligations to Lessor hereunder
shall include any and all costs or expenses incurred by Lessor in conjunction
with enforcing Lessor's rights and remedies hereunder, which shall include, but
shall not be limited to, any attorneys' fees or other legal expenses or costs
associated therewith Lessor and Lessee agree that if an attorney is consulted by
Lessor in connection with a Lessee Default or Breach (as hereinafter defined),
and that Lessor may include the cost of legal services in said notice as rent
due and payable to cure said default. A "Default" by Lessee is defined as a
failure by Lessee to observe, comply with or perform any of the terms,
covenants, conditions or rules applicable to Lessee under this Lease. A "Breach"
by Lessee is defined as the occurrence of a Default, including but not limited
those listed below, and, where a grace period for cure after notice is specified
herein, the failure by Lessee to cure such Default prior to the expiration of
the applicable grace period, and shall entitle Lessor to pursue the remedies set
forth in Paragraphs 13.2 and/or 13.3:
(a) The vacating of the Premises without the intention to
reoccupy same, or the abandonment of the Premises.
(b) Except as expressly otherwise provided in this Lease, the
failure by Lessee to make any payment of Rent, Lessee's Share of Common Area
Operating Expenses, or any other monetary payment required to be made by Lessee
hereunder as and when due, the failure by Lessee to provide Lessor with
reasonable evidence of insurance or surety bond required under this Lease, or
the failure of Lessee to fulfill any obligation under this Lease which endangers
or threatens life or property, where such failure continues for a period of
three (3) days following written notice thereof by or on behalf of Lessor to
Lessee.
(c) Except as expressly otherwise provided in this Lease, the
failure by Lessee to provide Lessor with reasonable written evidence (in duly
executed original form, if applicable) of (i) compliance with Applicable
Requirements per Paragraph 6.3, (ii) the inspection, maintenance and service
contracts required under Paragraph 7.1(b), (iii) the rescission of an
unauthorized assignment or subletting per Paragraph 12.1, (iv) a Tenancy
Statement per Paragraphs 16 or 37, (v) the subordination or non-subordination of
this Lease per Paragraph 30, (vi) the guaranty of the performance of Lessee's
obligations under this Lease if required under Paragraphs 1.11 and 37, (vii) the
execution of any document requested under Paragraph 42 (easements), or (viii)
any other documentation or information which Lessor may reasonably require of
Lessee under the terms of this Lease, where any such failure continues for a
period of ten (10) days following written notice by or on behalf of Lessor to
Lessee.
(d) A Default by Lessee as to the terms, covenants, conditions
or provisions of this Lease, or of the rules adopted under Paragraph 40 hereof
that are to be observed, complied with or performed by Lessee, other than those
described in Subparagraphs 13.1(a), (b) or (c), above, where such Default
continues for a period of thirty (30) days after written notice thereof by or on
behalf of Lessor to Lessee; provided, however, that if the nature of Lessee's
Default is such that more than thirty (30) days are reasonably required for its
cure,
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then it shall not be deemed to be a Breach of this Lease by Lessee if Lessee
commences such cure within said thirty (30) day period and thereafter diligently
prosecutes such cure to completion.
(e) The occurrence of any of the following events: (i) the
making by Lessee of any general arrangement or assignment for the benefit of
creditors; (ii) Lessee's becoming a "debtor" as defined in 11 U.S. Code Section
101 or any successor statute thereto (unless, in the case of a petition filed
against Lessee, the same is dismissed within sixty (60) days); (iii) the
appointment of a trustee or receiver to take possession of substantially all of
Lessee's assets located at the Premises or of Lessee's interest in this Lease,
where possession is not restored to Lessee within thirty (30) days; or (iv) the
attachment, execution or other judicial seizure of substantially all of Lessee's
assets located at the Premises or of Lessee's interest in this Lease, where such
seizure is not discharged within thirty (30) days; provided, however, in the
event that any provision of this Subparagraph 13.1(e) is contrary to any
applicable law, such provision shall be of no force or effect, and shall not
affect the validity of the remaining provisions.
(f) The discovery by Lessor that any financial statement of
Lessee or of any Guarantor, given to Lessor by Lessee or any Guarantor, was
materially false.
(g) If the performance of Lessee's obligations under this
Lease is guaranteed: (i) the death of a Guarantor, (ii) the termination of a
Guarantor's liability with respect to this Lease other than in accordance with
the terms of such guaranty, (iii) a Guarantor's becoming insolvent or the
subject of a bankruptcy filing, (iv) a Guarantor's refusal to honor the
guaranty, or (v) a Guarantor's breach of its guaranty obligation on an
anticipatory breach basis, and Lessee's failure, within sixty (60) days
following written notice by or on behalf of Lessor to Lessee of any such event,
to provide Lessor with written alternative assurances of security, which, when
coupled with the then existing resources of Lessee, equals or exceeds the
combined financial resources of Lessee and the Guarantors that existed at the
time of execution of this Lease.
13.2 Remedies. If Lessee fails to perform any affirmative duty or
obligation of Lessee under this Lease, within ten (10) days after written notice
to Lessee (or in case of an emergency, without notice), Lessor may at its option
(but without obligation to do so), perform such duty or obligation on Lessee's
behalf, including but not limited to the obtaining of reasonably required bonds,
insurance policies, or governmental licenses, permits or approvals. The costs
and expenses of any such performance by Lessor shall be due and payable by
Lessee to Lessor upon invoice therefor. If any check given to Lessor by Lessee
shall not be honored by the bank upon which it is drawn, Lessor, at its own
option, may require all future payments to be made under this Lease by Lessee to
be made only by cashier's check. In the event of a Breach of this Lease by
Lessee (as defined in paragraph 13.1), with or without further notice or demand,
and without limiting Lessor in the exercise of any right or remedy which Lessor
may have by reason of such Breach, Lessor may:
(a) Terminate Lessee's right to possession of the Premises by
any lawful means, in which case this Lease and the term hereof shall terminate
and Lessee shall immediately surrender possession of the Premises to Lessor. In
such event Lessor shall be entitled to recover from Lessee: (i) the worth at the
time of the award of the unpaid rent which had been earned at the time of
termination; (ii) the worth at the time of award of the amount by which the
unpaid rent which would have been earned after termination until the time of
award exceeds the amount of such rental loss that the Lessee proves could have
been reasonably avoided; (iii) the worth at the time of award of the amount by
which the unpaid rent for the balance of the term after the time of award
exceeds the amount of such rental loss that the Lessee proves could be
reasonably avoided; and (iv) any other amount necessary to compensate Lessor for
all the detriment proximately caused by the Lessee's failure to perform its
obligations under this Lease or which in the ordinary course of things would be
likely to result therefrom, including but not limited to the cost of recovering
possession of the Premises, expenses of reletting, including necessary
renovation and alteration of the Premises, reasonable attorneys' fees, and that
portion of any leasing commission paid by Lessor in connection with this Lease
applicable to the unexpired term of this Lease. The worth at the time of award
of the amount referred to in
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provision (iii) of the immediately preceding sentence shall be computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco or the Federal Reserve Bank District in which the Premises are located
at the time of award plus one percent (1%). Efforts by Lessor to mitigate
damages caused by Lessee's Default or Breach of this Lease shall not waive
Lessor's right to recover damages under this Paragraph 13.2. If termination of
this Lease is obtained through the provisional remedy of unlawful detainer,
Lessor shall have the right to recover in such proceeding the unpaid rent and
damages as are recoverable therein, or Lessor may reserve the right to recover
all or any part thereof in a separate suit for such rent and/or damages. If a
notice and grace period required under Subparagraph 13.1 (b), (c) or (d) was not
previously given, a notice to pay rent or quit, or to perform or quit, as the
case may be, given to Lessee under any statute authorizing the forfeiture of
leases for unlawful detainer shall also constitute the applicable notice for
grace period purposes required by Subparagraph 13.1(b), (c) or (d). In such
case, the applicable grace period under the unlawful detainer statute shall run
concurrently after the one such statutory notice, and the failure of Lessee to
cure the Default within the greater of the two (2) such grace periods shall
constitute both an unlawful detainer and a Breach of this Lease entitling Lessor
to the remedies provided for in this Lease and/or by said statute.
(b) Continue the Lease and Lessee's right to possession in
effect (in California under California Civil Code Section 1951.4) after Lessee's
Breach and recover the rent as it becomes due, provided Lessee has the right to
sublet or assign, subject only to reasonable limitations. Lessor and Lessee
agree that the limitations on assignment and subletting in this Lease are
reasonable. Acts of maintenance or preservation, efforts to relet the Premises,
or the appointment of a receiver to protect the Lessor's interest under this
Lease, shall not constitute a termination of the Lessee's right to possession.
(c) Pursue any other remedy now or hereafter available to
Lessor under the laws or judicial decisions of the state wherein the Premises
are located.
(d) The expiration or termination of this Lease and/or the
termination of Lessee's right to possession shall not relieve Lessee from
liability under any indemnity provisions of this Lease as to matters occurring
or accruing during the term hereof or by reason of Lessee's occupancy of the
Premises.
13.3 Inducement Recapture in Event of Breach. Any agreement by
Lessor for free or abated rent or Tenant Improvement Allowances or other charges
applicable to the Premises, or for the giving or paying by Lessor to or for
Lessee of any cash or other bonus, inducement or consideration for Lessee's
entering into this Lease, all of which concessions are hereinafter referred to
as "Inducement Provisions" shall be deemed conditioned upon Lessee's full and
faithful performance of all of the terms, covenants and conditions of this Lease
to be performed or observed by Lessee during the term hereof as the same may be
extended. Upon the occurrence of a Breach (as defined in Paragraph 13.1) of this
Lease by Lessee, any such Inducement Provision shall automatically be deemed
deleted from this Lease and of no further force or effect, and any rent, other
charge, bonus, inducement or consideration theretofore abated, given or paid by
Lessor under such an Inducement Provision shall be immediately due and payable
by Lessee to Lessor, and recoverable by Lessor, as additional rent due under
this Lease and prorated based upon the portion of the Lease Term expired at the
time of the Breach when compared to the portion of the Lease Terms (including
unexercised options) remaining. The acceptance by Lessor of rent or the cure of
the Breach which initiated the operation of this Paragraph 13.3 shall not be
deemed a waiver by Lessor of the provisions of this Paragraph 13.3 unless
specifically so stated in writing by Lessor at the time of such acceptance.
13.4 Late Charges. Lessee hereby acknowledges that late payment by
Lessee to Lessor of rent and other sums due hereunder will cause Lessor to incur
costs not contemplated by this Lease, the exact amount of which will be
extremely difficult to ascertain. Such costs include, but are not limited to,
processing and accounting charges, and late charges which may be imposed upon
Lessor by the terms of any ground lease, mortgage or deed of trust covering the
Premises. Accordingly, if any installment of rent or other sum due from Lessee
shall not be received by Lessor or Lessor's designee within ten (10) days after
such amount shall be due, then, without any requirement for notice to Lessee,
Lessee shall pay to Lessor a late charge equal to
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six percent (6%) of such overdue amount. The parties hereby agree that such late
charge represents a fair and reasonable estimate of the costs Lessor will incur
by reason of late payment by Lessee. Acceptance of such late charge by Lessor
shall in no event constitute a waiver of Lessee's Default or Breach with respect
to such overdue amount, nor prevent Lessor from exercising any of the other
rights and remedies granted hereunder. In the event that a late charge is
payable hereunder, whether or not collected, for three (3) consecutive
installments of Base Rent, then notwithstanding Paragraph 4.1 or any other
provision of this Lease to the contrary, Base Rent shall, at Lessor's option,
become due and payable quarterly in advance.
13.5 Breach by Lessor. Lessor shall not be deemed in breach of this
Lease unless Lessor fails within a reasonable time to perform an obligation
required to be performed by Lessor. For purposes of this Paragraph 13.5, a
reasonable time shall in no event be less than thirty (30) days after receipt by
Lessor, and by any Lender(s) whose name and address shall have been furnished to
Lessee in writing for such purpose, of written notice specifying wherein such
obligation of Lessor has not been performed; provided, however, that if the
nature of Lessor's obligation is such that more than thirty (30) days after such
notice are reasonably required for its performance, then Lessor shall not be in
breach of this Lease if performance is commenced within such thirty (30) day
period and thereafter diligently pursued to completion.
14. Condemnation. If the Premises or any portion thereof are permanently
taken under the power of eminent domain or sold under the threat of the exercise
of said power (all of which are herein called "condemnation"), this Lease shall
terminate as to the part so taken as of the date the condemning authority takes
title or possession, whichever first occurs. If more than ten percent (10%) of
the floor area of the Premises, or more than twenty-five percent (25%) of the
portion of the Common Areas designated for Lessee's parking, is taken by
condemnation, Lessee may, at Lessee's option, to be exercised in writing within
ten (10) days after Lessor shall have given Lessee written notice of such taking
(or in the absence of such notice, within ten (10) days after the condemning
authority shall have taken possession) terminate this Lease as of the date the
condemning authority takes such possession. If Lessee does not terminate this
Lease in accordance with the foregoing, this Lease shall remain in full force
and effect as to the portion of the Premises remaining, except that the Base
Rent shall be reduced in the same proportion as the rentable floor area of the
Premises taken bears to the total rentable floor area of the Premises. No
reduction of Base Rent shall occur if the condemnation does not apply to any
portion of the Premises. Any award for the taking of all or any part of the
Premises under the power of eminent domain or any payment made under threat of
the exercise of such power shall be the property of Lessor, whether such award
shall be made as compensation for diminution of value of the leasehold or for
the taking of the fee, or as severance damages; provided, however, that Lessee
shall be entitled to any compensation, separately awarded to Lessee for Lessee's
relocation expenses and/or loss of Lessee's Trade Fixtures. In the event that
this Lease is not terminated by reason of such condemnation, Lessor shall to the
extent of its net severance damages received, over and above Lessee's Share of
the legal and other expenses incurred by Lessor in the condemnation matter,
repair any damage to the Premises caused by such condemnation authority. Lessee
shall be responsible for the payment of any amount in excess of such net
severance damages required to complete such repair.
15. Brokers' Fees
15.1 Representations and Warranties. Lessee and Lessor each
represent and warrant to the other that it has had no dealings with any person,
firm, broker or finder other than as named in Paragraph 1.10(a) in connection
with the negotiation of this Lease and/or the consummation of the transaction
contemplated hereby, and that no broker or other person, firm or entity other
than said named Broker(s) is entitled to any commission or finder's fee in
connection with said transaction. Lessee and Lessor do each hereby agree to
indemnify, protect, defend and hold the other harmless from and against
liability for compensation or charges which may be claimed by any such unnamed
broker, finder or other similar party by reason of any dealings or actions of
the indemnifying Party, including any costs, expenses, and/or attorneys' fees
reasonably incurred with respect thereto.
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16. Tenancy and Financial Statements.
16.1 Tenancy Statement. Each Party (as "Responding Party") shall
within ten (10) days after written notice from the other Party (the "Requesting
Party") execute, acknowledge and deliver to the Requesting Party a statement in
writing in a form similar to the then most current "Tenancy Statement" form
published by the American Industrial Real Estate Association, plus such
reasonable, factual additional information, confirmation and/or statements as
may be reasonably requested by the Requesting Party.
16.2 Financial Statement. If Lessor desires to finance, refinance,
or sell the Premises or the Building, or any part thereof, Lessee and all
Guarantors shall deliver to any potential lender or purchaser designated by
Lessor such financial statements of Lessee and such Guarantors as may be
reasonably required by such lender or purchaser, including but not limited to
Lessee's financial statements for the past three (3) years. All such financial
statements shall be received by Lessor and such lender or purchaser in
confidence and shall be used only for the purposes herein set forth.
17. Lessor's Liability. The term "Lessor" as used herein shall mean the
owner or owners at the time in question of the fee title to the Premises. In the
event of a transfer of Lessor's title or interest in the Premises or in this
Lease, Lessor shall deliver to the transferee or assignee (in cash or by credit)
any unused Security Deposit held by Lessor at the time of such transfer or
assignment. Except as provided in Paragraph 15.3, upon such transfer or
assignment and delivery of the Security Deposit, as aforesaid, the prior Lessor
shall be relieved of all liability with respect to the obligations and/or
covenants under this Lease thereafter to be performed by the Lessor. Subject to
the foregoing, the obligations and/or covenants in this Lease to be performed by
the Lessor shall be binding only upon the Lessor as hereinabove defined.
18. Severability. The invalidity of any provision of this Lease, as
determined by a court of competent jurisdiction, shall in no way affect the
validity of any other provision hereof.
19. Interest on Past-Due Obligations. Any monetary payment due Lessor
hereunder, other than late charges, not received by Lessor within ten (10) days
following the date on which it was due, shall bear interest from the date due at
the prime rate charged by the largest state chartered bank in the state in which
the Premises are located plus four percent (4%) per annum, but not exceeding the
maximum rate allowed by law, in addition to the potential late charge provided
for in Paragraph 13.4.
20. Time of Essence. Time is of the essence with respect to the
performance of all obligations to be performed or observed by the Parties under
this Lease.
21. Rent Defined. All monetary obligations of Lessee to Lessor under the
terms of this Lease are deemed to be rent.
22. No Prior or other Agreements. This Lease contains all agreements
between the Parties with respect to any matter mentioned herein, and no other
prior or contemporaneous agreement or understanding shall be effective.
23. Notices.
23.1 Notice Requirements. All notices required or permitted by this
Lease shall be in writing and shall be and deemed duly served or given when
actually delivered, if personally delivered (including delivery by Federal
Express, Express Mail or other similar overnight or personal courier service
which confirms delivery in writing), or within three (3) business days after
deposit in the U.S. Mail, if sent by certified mail, postage prepaid, return
receipt requested and shall be deemed sufficiently given if served in a manner
specified in this Paragraph 23. If notice is received on a Saturday or a Sunday
or a legal holiday, it shall be deemed received on the next business day. The
addresses noted adjacent to a Party's signature on this Lease shall be that
Party's address for delivery or mailing of notice purposes. Either Party may by
written notice to the other specify a different address for notice purposes,
except that upon Lessee's taking possession of the Premises, the Premises shall
constitute Lessee's address for the purpose of mailing or delivering notices to
Lessee. A copy of all notices required or
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permitted to be given to Lessor hereunder shall be concurrently transmitted to
such party or parties at such addresses as Lessor may from time to time
hereafter designate by written notice to Lessee.
23.2 Intentionally Omitted.
24. Waivers. No waiver by Lessor of the Default or Breach of any term,
covenant or condition hereof by Lessee, shall be deemed a waiver of any other
term, covenant or condition hereof, or of any subsequent Default or Breach by
Lessee of the same or any other term, covenant or condition hereof. Lessor's
consent to, or approval of, any such act shall not be deemed to render
unnecessary the obtaining of Lessor's consent to, or approval of, any subsequent
or similar act by Lessee, or be construed as the basis of an estoppel to enforce
the provision or provisions of this Lease requiring such consent. Regardless of
Lessor's knowledge of a Default or Breach at the time of accepting rent, the
acceptance of rent by Lessor shall not be a waiver of any Default or Breach by
Lessee of any provision hereof. Any payment given Lessor by Lessee may be
accepted by Lessor on account of moneys or damages due Lessor, notwithstanding
any qualifying statements or conditions made by Lessee in connection therewith,
which such statements and/or conditions shall be of no force or effect
whatsoever unless specifically agreed to in writing by Lessor at or before the
time of deposit of such payment.
25. Recording. Either Lessor or Lessee shall, upon request of the other,
execute, acknowledge and deliver to the other a short form memorandum of this
Lease, in a form acceptable to Lessor, for recording purposes. The Party
requesting recordation shall be responsible for payment of any fees or taxes
applicable thereto.
26. No Right to Holdover. Lessee has no right to retain possession of the
Premises or any part thereof beyond the expiration or earlier termination of
this Lease. In the event that Lessee holds over in violation of this Paragraph
26 then the Base Rent payable from and after the time of the expiration or
earlier termination of this Lease shall be increased to one hundred twenty five
percent (125%) of the Base Rent applicable during the month immediately
preceding such expiration or earlier termination. Nothing contained herein shall
be construed as a consent by Lessor to any holding over by Lessee.
27. Cumulative Remedies. No remedy or election hereunder shall be deemed
exclusive but shall, wherever possible, be cumulative with all other remedies at
law or in equity.
28. Covenants and Conditions. All provisions of this Lease to be observed
or performed by Lessee are both covenants and conditions.
29. Binding Effect; Choice of Law. This Lease shall be binding upon the
Parties, their personal representatives, successors and assigns and be governed
by the laws of the State in which the Premises are located. Any litigation
between the Parties hereto concerning this Lease shall be initiated in the
county in which the Premises are located.
30. Subordination; Attornment; Non-Disturbance.
30.1 Subordination. This Lease and any Option granted hereby shall
automatically be subject and subordinate to any ground lease, mortgage, deed of
trust, or other hypothecation or security device and amendment thereto
(collectively, "Security Device"), now or hereafter placed by Lessor upon the
real property of which the Premises are a part, to any and all advances made on
the security thereof, and to all renewals, modifications, consolidations,
replacements and extensions thereof. Lessee agrees that the Lenders holding any
such Security Device shall have no duty, liability or obligation to perform any
of the obligations of Lessor under this Lease, but that in the event of Lessor's
default with respect to any such obligation, Lessee will give any Lender whose
name and address have been furnished Lessee in writing for such purpose notice
of Lessor's default pursuant to Paragraph 13.5. If any, Lender shall elect to
have this Lease and/or any Option granted hereby superior to the lien of its
Security Device and shall give written notice thereof to Lessee, this Lease and
such Options shall be deemed prior to such Security Device, notwithstanding the
relative dates of the documentation or recordation thereof.
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30.2 Attornment. Subject to the non-disturbance provisions of
Paragraph 30.3, Lessee agrees to attorn to a Lender or any other party who
acquires ownership of the Premises by reason of a foreclosure of a Security
Device, and that in the event of such foreclosure, such new owner shall not: (i)
be liable for any act or omission of any prior lessor or with respect to events
occurring prior to acquisition of ownership, (ii) be subject to any offsets or
defenses which Lessee might have against any prior lessor, or (iii) be bound by
prepayment of more than one month's rent.
30.3 Non-Disturbance. With respect to Security Devices entered into
for the first time (as opposed to amendments or modifications to existing
Security Devices) by Lessor after the execution of this Lease, Lessee's
subordination of this Lease shall be subject to receiving assurance (a "non-
disturbance agreement") from the Lender that Lessee's possession and this Lease,
including any options to extend the term hereof, will not be disturbed so long
as Lessee is not in Breach hereof and attorns to the record owner of the
Premises.
30.4 Self-Executing. The agreements contained in this Paragraph 30
shall be effective without the execution of any further documents; provided,
however, that upon written request from Lessor or a Lender in connection with a
sale, financing or refinancing of Premises, Lessee and Lessor shall execute such
further writings as may be reasonably required to separately document any such
subordination or non-subordination, attornment and/or nondisturbance agreement
as is provided to herein.
31. Attorneys' Fees. If any Party brings an action or proceeding to
enforce the terms hereof or declare rights hereunder, the Prevailing Party (as
hereafter defined) in any such proceeding, action, or appeal thereon, shall be
entitled to reasonable attorneys' fees. Such fees may be awarded in the same
suit or recovered in a separate suit, whether or not such action or proceeding
is pursued to decision or judgment. The term "Prevailing Party" shall include,
without limitation, a Party who substantially obtains or defeats the relief
sought, as the case may be, whether by compromise, settlement, judgment, or the
abandonment by the other Party of its claim or defense. The attorneys' fee award
shall not be computed in accordance with any court fee schedule, but shall be
such as to fully reimburse all attorneys' fees reasonably incurred. Lessor shall
be entitled to attorneys' fees, costs and expenses incurred in preparation and
service of notices of Default and consultations in connection therewith, whether
or not a legal action is subsequently commenced in connection with such Default
or resulting Breach.
32. Lessor's Access; Showing Premises; Repairs. Lessor and Lessor's
agents shall have the right to enter the Premises at any time, in the case of an
emergency, and otherwise at reasonable times for the purpose of showing the same
to prospective purchasers, lenders, or lessees, and making such alterations,
repairs, improvements or additions to the Premises or to the Building, as Lessor
may reasonably deem necessary. Lessor may at any time place on or about the
Premises or Building any ordinary "For Sale" signs and Lessor may at any time
during the last one hundred eighty (180) days of the term hereof place on or
about the Premises any ordinary "For Lease" signs. All such activities of Lessor
shall be without abatement of rent or liability to Lessee.
33. Auctions. Lessee shall not conduct, nor permit to be conducted,
either voluntarily or involuntarily, any auction upon the Premises without first
having obtained Lessor's prior written consent. Notwithstanding anything to the
contrary in this Lease, Lessor shall not be obligated to exercise any standard
of reasonableness in determining whether to grant such consent.
34. Signs. Lessee shall not place any sign upon the exterior of the
Premises or the Building without Lessor's prior written consent. Any such signs
shall comply with Applicable Requirements and the signage criteria established
for the Project by Lessor. Subject to Lessor's reasonable prior consent as to
design, size and location, Lessee shall be entitled, at its sole cost and
expense, install a sign for "New Century Financial Corporation" or similar on
the exterior of the Building on the MacArthur Boulevard side of the Building,
which sign shall be no lower than the sign for any other tenant on the same side
of the exterior of the Building. The installation of any sign on the Premises by
or for Lessee shall be subject to the provisions of all governmental regulations
and this Lease, including Paragraph 7 (Maintenance, Repairs, Utility
Installations, Trade Fixtures and Alterations). Lessor shall use its good faith
efforts in cooperating with
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Lessee to acquire all necessary governmental approvals for Lessee's signs that
are otherwise acceptable to Lessor. Lessor shall provide, at its sole cost and
expense, an interior Building directory sign identifying Lessee and a sign on
the exterior door of the Premises also identifying Lessee. Unless otherwise
expressly agreed herein, Lessor reserves all rights to the use of the roof of
the Building, and the right to install advertising signs on the Building,
including the roof, which do not unreasonably interfere with the conduct of
Lessee's business; Lessor shall be entitled to all revenues from such
advertising signs.
35. Termination; Merger. Unless specifically stated otherwise in writing
by Lessor, the voluntary or other surrender of this Lease by Lessee, the mutual
termination or cancellation hereof, or a termination hereof by Lessor for Breach
by Lessee, shall automatically terminate any sublease or lesser estate in the
Premises; provided, however, Lessor shall, in the event of any such surrender,
termination or cancellation, have the option to continue any one or all of any
existing subtenancies. Lessor's failure within ten (10) days following any such
event to make a written election to the contrary by written notice to the holder
of any such lesser interest, shall constitute Lessor's election to have such
event constitute the termination of such interest.
36. Consents.
(a) Except for Paragraph 33 hereof (Auctions) or as otherwise
provided herein, wherever in this Lease the consent of a Party is required to an
act by or for the other Party, such consent shall not be unreasonably withheld
or delayed. Request for Lessor's consent to any matter hereunder, including
regarding a requested assignment or subletting of Lessee's leasehold or any
portion thereof, shall be responded to by Lessor within fifteen (15) business
days of receipt of all requisite documents and information pertaining to such
request. The failure of Lessor to respond to Lessee's request within such time
period shall be deemed to be Lessor's disapproval of such request. Lessor's
actual costs and expenses (including but not limited to architects', attorneys',
engineers' and other consultants' fees) incurred in the consideration of, or
response to, a request by Lessee for any Lessor consent pertaining to this Lease
or the Premises, including but not limited to consents to an assignment a
subletting or the presence or use of a Hazardous Substance, shall be paid by
Lessee to Lessor upon receipt of an invoice therefor. In addition to the deposit
described in Paragraph 12.2(e), Lessor may, as a condition to considering any
such request by Lessee, require that Lessee deposit with Lessor an amount of
money (in addition to the Security Deposit held under Paragraph 5) reasonably
calculated by Lessor to represent the cost Lessor will incur in considering and
responding to Lessee's request. Any unused portion of said deposit shall be
refunded to Lessee without interest. Lessor's consent to any act, assignment of
this Lease or subletting of the Premises by Lessee shall not constitute an
acknowledgement that no Default or Breach by Lessee of this Lease exists, nor
shall such consent be deemed a waiver of any then existing Default or Breach,
except as may be otherwise specifically stated in writing by Lessor at the time
of such consent.
(b) All conditions to Lessors consent authorized by this Lease are
acknowledged by Lessee as being reasonable. The failure to specify herein any
particular condition to Lessor's consent shall not preclude the impositions by
Lessor at the time of consent of such further or other conditions as are then
reasonable with reference to the particular matter for which consent is being
given.
37. Guarantor.
37.1 Form of Guaranty. If there are to be any Guarantors of this
Lease per Paragraph 1.11, the form of the guaranty to be executed by each such
Guarantor shall be in the form most recently published by the American
Industrial Real Estate Association, and each such Guarantor shall have the same
obligations as Lessee under this Lease, including but not limited to the
obligation to provide the Tenancy Statement and information required in
Paragraph 16.
37.2 Additional Obligations of Guarantor. It shall constitute a
Default of the Lessee under this Lease if any such Guarantor fails or refuses,
upon reasonable request by Lessor to give: (a) evidence of the due execution of
the guaranty called for by this Lease, including the authority of the Guarantor
(and of the party signing on Guarantor's behalf) to obligate such Guarantor on
said guaranty, and resolution of its board of directors authorizing the making
of such guaranty, together with a certificate of incumbency showing the
signatures of the persons
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authorized to sign on its behalf, (b) current financial statements of Guarantor
as may from time to time be requested by Lessor, (c) a Tenancy Statement, or
(d) written confirmation that the guaranty is still in effect.
38. Quiet Possession. Upon payment by Lessee of the rent for the Premises
and the performance of all of the covenants, conditions and provisions on
Lessee's part to be observed and performed under this Lease, and except as
otherwise provided herein, Lessee shall have quiet possession of the Premises
for the entire term hereof subject to all of the provisions of this Lease.
39. Options.
39.1 Definition. As used in this Lease, the word "Option" has the
following meaning: (a) the right to extend the term of this Lease or to renew
this Lease or to extend or renew any lease that Lessee has on other property of
Lessor; (b) the right of first refusal to lease the Premises or the right of
first offer to lease the Premises or the right of first refusal to lease other
property of Lessor or the right of first offer to lease other property of
Lessor; (c) the right to purchase the Premises, or the right of first refusal to
purchase the Premises, or the right of first offer to purchase the Premises, or
the right to purchase other property of Lessor, or the right of first refusal to
purchase other property of Lessor, or the right of first offer to purchase other
property of Lessor.
39.2 Options Personal to Original Lessee. Each Option granted to
Lessee in this Lease is personal to the original Lessee named in Paragraph 1.1
hereof, and cannot be voluntarily or involuntarily assigned or exercised by any
person or entity other than said original Lessee while the original Lessee is in
full and actual possession of the Premises and without the intention of
thereafter assigning or subletting. The Options, if any, herein granted to
Lessee are not assignable, either as a part of an assignment of this Lease or
separately or apart therefrom, and no Option may be separated from this Lease in
any manner, by reservation or otherwise.
39.3 Multiple Options. In the event that Lessee has any multiple
Options to extend or renew this Lease, a later option cannot be exercised unless
the prior Options to extend or renew this Lease have been validly exercised.
39.4 Effect of Default on Options.
(a) Lessee shall have no right to exercise an Option,
notwithstanding any provision in the grant of Option to the contrary: (i)
during the period commencing with the giving of any notice of Default under
Paragraph 13.1 and continuing until the noticed Default is cured, or (ii) during
the period of time any monetary obligation due Lessor from Lessee is unpaid
(without regard to whether notice thereof is given Lessee), or (iii) during the
time Lessee is in Breach of this Lease, or (iv) in the event that Lessor has
given to Lessee three (3) or more notices of separate Default under Paragraph
13.1 during the twelve (12) month period immediately preceding the exercise of
the Option, whether or not the Defaults are cured.
(b) The period of time within which an Option may be exercised
shall not be extended or enlarged by reason of Lessee's inability to exercise an
Option because of the provisions of Paragraph 39.4(a).
(c) All rights of Lessee under the provisions of an Option
shall terminate and be of no further force of effect, notwithstanding Lessee's
due and timely exercise of the Option, if, after such exercise and during the
term of this Lease, (i) Lessee fails to pay to Lessor a monetary obligation of
Lessee for a period of thirty (30) days after such obligation becomes due
(without any necessity of Lessor to give notice thereof to Lessee), or
(ii) Lessor gives to Lessee three (3) or more notices of separate Defaults under
Paragraph 13.1 during any twelve (12) month period, whether or not the Defaults
are cured, or (iii) if Lessee commits a Breach of this Lease.
40. Rules and Regulations. Lessee agrees that it will abide by, and keep
and observe all reasonable rules and regulations ("Rules and Regulations") which
Lessor may make from time to time for the management, safety, care, and
cleanliness of the grounds, the parking and
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unloading of vehicles and the preservation of good order, as well as for the
convenience of other occupants or tenants of the Building and the Project and
their invitees.
41. Security Measures. Lessee hereby acknowledges that the rental payable
to Lessor hereunder does not include the cost of guard service or other security
measures, and that Lessor shall have no obligation whatsoever to provide same.
Lessee assumes all responsibility for the protection of the Premises, Lessee,
its agents and invitees and their property from the acts of third parties and
shall install, at Lessee's sole cost and expense, any and all necessary security
devices. Nothing herein contained shall prevent Lessor, at Lessor's sole option,
from providing security protection for the Project or any part thereof, in which
event the cost thereof shall be included within the definition of Operating
Expenses
42. Reservations. Lessor reserves the right, from time to time, to grant,
without the consent or joinder Lessee, such easements, rights of way, utility
raceways, and dedications that Lessor deems necessary, and to cause the
recordation of parcel maps and restrictions, so long as such easements, rights
of way, utility race-ways, dedications maps and restrictions do not reasonably
interfere with the use of the Premises by Lessee. Lessee agrees to sign any
documents reasonably requested by Lessor to effectuate any such easement rights,
dedication, map or restrictions.
Lessor shall further have the following rights:
(a) To change the name, address or title of the Office
Building Project or building in which the Premises are located upon not less
than 90 days prior written notice;
(b) To, at Lessee's expense, provide and install Building
standard graphics on the door of the Premises and such portions of the Common
Areas as Lessor shall reasonably deem appropriate;
(c) To permit any lessee the exclusive right to conduct any
business as long as such exclusive does not conflict with any rights expressly
given herein;
(d) To place such signs, notices or displays as Lessor
reasonably deems necessary or advisable upon the roof, exterior of the buildings
or the Office Building Project or on pole signs in the Common Areas;
In addition to the foregoing, Lessee shall not:
(a) Use a representation (photographic or otherwise) of the
Building or the Office Building Project or their name(s) in connection with
Lessee's business;
(b) Suffer or permit anyone, except in emergency, to go upon
the roof of the Building.
43. Performance Under Protest. If at any time a dispute shall arise as to
any amount or sum of money to be paid by one Party to the other under the
provisions hereof, the Party against whom the obligation to pay the money is
asserted shall have the right to make payment "under protest" and such payment
shall not be regarded as a voluntary payment and there shall survive the right
on the part of said Party to institute suit for recovery of such sum. If it
shall be adjudged that there was no legal obligation on the part of said Party
to pay such sum or any part thereof, said Party shall be entitled to recover
such sum of much thereof as it was not legally required to pay under the
provisions of this Lease.
44. Authority. If either Party thereto is a corporation, trust, or
general or limited partnership, each individual executing this Lease on behalf
of such entity represents and warrants that he or she is duly authorized to
execute and deliver this Lease on its behalf. If Lessee is a corporation, trust
or partnership, Lessee shall, within thirty (30) days after request by Lessor,
deliver to Lessor evidence satisfactory to Lessor of such authority.
45. Conflict. Any conflict between the printed provisions of this Lease
and the typewritten or handwritten provisions shall be controlled by the
typewritten or handwritten provisions.
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46. Offer. Preparation of this Lease by either Lessor or Lessee or
Lessor's agent or Lessee's agent and submission of same to Lessee or Lessor
shall not be deemed an offer to lease. This Lease is not intended to be binding
until executed and delivered by all Parties hereto.
47. Amendments. This Lease may be modified only in writing, signed by the
parties in interest at the time of the modification. The Parties shall amend
this Lease from time to time to reflect any adjustments that are made to the
Base Rent or other rent payable under this Lease. As long as they do not
materially change Lessee's obligations hereunder, Lessee agrees to make such
reasonable non-monetary modifications to this Lease as may be reasonably
required by an institutional insurance company or pension plan Lender in
connection with the obtaining of normal financing or refinancing of the property
of which the Premises are a part.
48. Multiple Parties. Except as otherwise expressly provided herein, if
more than one person or entity is named herein as either Lessor or Lessee, the
obligations of such multiple parties shall be the joint and several
responsibility of all persons or entities named herein as such Lessor or Lessee.
49. Lender Modification. Lessee agrees to make such reasonable
modifications to this Lease as may be reasonably required by an institutional
lender in connection with the obtaining of normal financing or refinancing of
the Building or the Project or any portion thereof.
50. Construction. Headings at the beginning of each paragraph and
subparagraph are solely for the convenience of the parties and are not a part of
the Lease. Whenever required by the context of this Lease, the singular shall
include the plural and the masculine shall include the feminine and vice versa.
This Lease shall not be construed as if it had been prepared by one of the
parties, but rather as if both parties had prepared the same and, consequently,
any inconsistencies or ambiguities herein shall not be interpreted against
either party as the drafter of the Lease. Unless otherwise indicated, all
references to paragraphs and subparagraphs are to this Lease. All exhibits
referred to in this Lease are attached and incorporated by this reference.
51. Satellite Dish. Lessor acknowledges that Lessee intends to install a
satellite dish on the roof of the Building, in size and type and location
reasonably approved by Lessor in writing. Lessor agrees that Lessee, at its sole
cost and expense, and subject to all applicable governmental rules and
regulations, has the right to install the satellite dish on the roof of the
Building, so long as the same conforms to the design and specifications approved
by Lessor. Lessee agrees to install the satellite dish in accordance with sound
construction practices. Lessee further agrees to use any specified roofing
contractor specified by Lessor. Upon the expiration or earlier termination of
the Lease, Lessee shall, if so directed by Lessor, remove the Satellite Dish and
repair the roof of the Building so as not to impair the integrity of the roof or
any portion thereof, or otherwise affect the Building or any warranty benefiting
the Building.
52. Notice of Intent to Sell. If, during the Lease Term, Lessor intends
to sell the Building or the Project and such sale is not a part of a portfolio
sale or other sale including other property or properties, then Lessor shall
notify Lessee of its intent to so sell the Building or the Project.
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LESSOR AND LESSEE HAVE CAREFULLY READ AND REVIEWED THIS LEASE AND EACH TERM
AND PROVISION CONTAINED HEREIN, AND BY THE EXECUTION OF THIS LEASE SHOW THEIR
INFORMED AND VOLUNTARY CONSENT THERETO, THE PARTIES HEREBY AGREE THAT, AT THE
TIME THIS LEASE IS EXECUTED, THE TERMS OF THIS LEASE ARE COMMERCIALLY REASONABLE
AND EFFECTUATE THE INTENT AND PURPOSE OF LESSOR AND LESSEE WITH RESPECT TO THE
PREMISES,
The parties hereto have executed this Lease at the place and on the dates
specified above their respective signatures.
Executed at:__________________________ Executed at:_________________________
on:___________________________________ on:__________________________________
By LESSOR: By LESSEE:
AGBRI Cowan, LLC, a Delaware limited New Century Financial Corporation, a
liability company Delaware corporation
By: AG Asset Manager
By: /s/ ??^^ By: /s/ BRAD A. MORRICE
----------------------------------- ----------------------------------
Name Printed: Name Printed: BRAD A. MORRICE
------------------------- ------------------------
Title: Title: PRESIDENT
-------------------------------- -------------------------------
By: By:
----------------------------------- ----------------------------------
Name Printed: Name Printed:
------------------------- ------------------------
Title: Title:
-------------------------------- -------------------------------
Address: Address:
------------------------------ -----------------------------
- - -------------------------------------- -------------------------------------
Telephone: ( ) Telephone: (718) 440-7030
----------------------- ---------------------
Facsimile: ( ) Facsimile: (718) 440-7033
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Initials:
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EXTENSION OPTION RIDER
This Extension Option Rider ("Rider") is made and entered into by and
between AGBRI Cowan, LLC, a Delaware limited liability company ("Lessor"), and
New Century Financial Corporation, a Delaware corporation ("Lessee"), and is
dated as of the Effective Date of the Lease ("Lease") by and between Lessor and
Lessee to which this Rider is attached. The agreements set forth in this Rider
shall have the same force and effect as if set forth in the Lease. To the extent
the terms of this Rider are inconsistent with the terms of the Lease, the terms
of this Rider shall control.
1. Option to Extend Lease Term. Lessor hereby grants to Lessee one
---------------------------
(1) option to extend the Lease Term for a period of sixty (60) months (the
"Option Term"). The option must be exercised, if at all, by written notice
("Option Notice") delivered by Lessee to Lessor not more than thirteen (13) and
not less than six (6) months prior to the end of the initial Lease Term.
Further, the option shall be deemed not to be properly exercised, if, as of the
date of the Option Notice or at the end of the initial Lease Term or extended
Lease Term (whichever is applicable), Lessee is in default under the Lease or if
Lessee has previously been in default under this Lease more than once. Provided
Lessee has properly and timely exercised the option, the Lease Term shall be
extended for the number of months specified above, and, except as provided
below, all terms, covenants and conditions of the Lease shall remain
unmodified and in full force and effect. The rights contained in this Extension
Option Rider shall be personal to Lessee and may only be exercised by Lessee
(and not any assignee, sublessee or other transferee of Lessee's interest in
this Lease) if Lessee occupies the entire Premises.
2. Adjustment to Base Rent. Base Rent shall be adjusted as of the
-----------------------
commencement of the Option Term to reflect 95% of the then-current prevailing
market rental rate, as reasonably determined by Lessor (the "Fair Market Rental
Value"). Fair Market Rental Value shall be established by comparison of similar
space, improved as the Premises have been improved, including all Lessee-Owned
Alterations and/or Utility Installations, within comparable office buildings in
Irvine, as determined herein. In addition to the foregoing, and for purposes of
calculating Fair Market Rental Value, rental inducements and concessions then
being offered to prospective tenants, and brokerages commissions payable by
landlords, shall be disregarded.
3. Exercise of Option. The option contained in this Extension Option
------------------
Rider shall be exercised by Lessee, if at all, and only in the following manner:
(i) Lessee shall deliver written notice to Lessor not more than thirteen (13)
months nor less than six (6) months prior to the expiration of the initial Lease
Term, stating that Lessee is interested in exercising its option; (ii) Lessor,
after receipt of Lessee's notice, shall deliver notice (the "Option Rent
Notice") to Lessee not less than four (4) months prior to the expiration of the
initial Lease Term, setting forth the Fair Market Rental Value. Lessee shall
have thirty (30) days after receipt of Lessor's notice of such estimated Fair
Market Rental Value within which to (a) rescind in writing its exercise of the
option to extend, or (b) to accept Lessor's estimated Fair Market Rental Value,
in which case Lessor's estimated Fair Market Rental Value shall be the Base
Rent for the extended term, or (c) to confirm in writing Lessee's election to
extend the term of this Lease, and to object in writing to Lessor's estimated
Fair Market Rental Value. Failure of Lessee to timely object to the estimated
Fair Market Rental Value submitted by Lessor shall conclusively be deemed to be
Lessee's acceptance of said estimated Fair Market Rental Value so submitted by
Lessor and the Lease Term shall be deemed to have been extended at the Base
Rent stated in Lessor's Option Notice. In the event Lessee objects to the
estimated Fair Market Rental Value submitted by Lessor, Lessor and Lessee shall
attempt in good faith to agree upon the Fair Market Rental Value of the
Premise. If Lessor and Lessee fail to reach agreement on such Fair Market Rental
Value within fifteen (15) days after Lessee has objected to or has been deemed
to have objected to Lessor's estimated Fair Market Rental Value (the "Outside
Agreement Date"), then Lessee shall submit to Lessor its estimated Fair Market
Rental Value and each party's estimated Fair Market Rental shall be submitted
to arbitration in accordance with Subparagraphs (a) through (g) below.
(a) Lessor and Lessee shall attempt to agree upon a single
arbitrator within fifteen (15) days after the Outside Agreement Date. If no
such agreement is reached, then within thirty (30) days after the Outside
Agreement Date Lessor and Lessee shall each appoint one arbitrator who shall
by profession be a real estate broker who has been unaffiliated with and
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transacted no business on behalf of Lessor or Lessee, as the case may be, over
the previous five (5) year period and who shall have been active over the five
(5) year period ending on the date of such appointment in the Irvine area, of
the type of the Premises.
(b) The two arbitrators so appointed shall within fifteen (15)
days of the date of the appointment of the last appointed arbitrator agree upon
and appoint a third arbitrator who shall be qualified under the same criteria
set forth hereinabove for qualification of the initial two arbitrators.
(c) The three arbitrators shall within thirty (30) days of the
appointment of the third arbitrator reach a decision as to whether the parties
shall use Lessor's or Lessee's estimated Fair Market Rental Value for the
Premises, and shall notify Lessor and Lessee thereof. Such decision shall be
based only upon whether each arbitrator believes that the Fair Market Rental
Value estimated by Lessor or by Lessee is closest to the Fair Market Rental
Value that such arbitrator believes would be payable as of the Expiration Date
for similar commercial office space, taking into account such variables as are
set forth above, and shall not be based upon a compromise or average of the
figures submitted by Lessor and Lessee, respectively.
(d) The decision of the majority of the three arbitrators shall be
binding upon Lessor and Lessee.
(e) If either Lessor or Lessee fails to appoint an arbitrator
within the time period specified in Subparagraph (a) hereinabove, the arbitrator
appointed by one of them shall reach a decision, notify Lessor and Lessee
thereof, and such arbitrator's decision shall be binding upon Lessor and Lessee.
(f) If the two arbitrators fail to agree upon and appoint a third
arbitrator, both arbitrators shall be dismissed and the matter to be decided
shall be forthwith submitted to arbitration under the provisions of the American
Arbitration Association, subject to the requirements of this Paragraph 3.
(g) The costs of arbitration shall be paid by Lessor and Lessee
equally.
If the process set forth in Subparagraphs (a) through (f) above has not resulted
in a selection of Lessor's or Lessee's estimated Fair Market Rental Value by the
commencement of the then applicable option period, Lessee shall continue to pay
the Rent then being paid by Lessee, with an appropriate adjustment for accrued
and unpaid rental if the arbitrators select Lessee's estimated Fair Market
Rental Value.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Extension
Option Rider as of the Effective Date.
LESSOR: LESSEE:
- - ------- -------
AGBRI Cowan, LLC, a Delaware limited New Century Financial Corporation,
liability company a Delaware corporation
By AG Asset Manager
By: /s/ ^^ILLEGIBLE SIGNATURE^^ By: /s/ BRAD A. MORRICE
---------------------------------- -------------------------------
Name Printed: Name Printed:
------------------------ ---------------------
Title: Title:
------------------------------- ----------------------------
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EXHIBIT "A"
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DEPICTION OF THE PREMISES
[CHART OF FLOOR PLAN APPEARS HERE]
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EXHIBIT "B"
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NEW CENTURY FINANCIAL CORPORATION
TENANT WORK LETTER
------------------
This Tenant Work Letter shall set forth the terms and conditions relating
to the construction of the "Tenant Improvements" within the Premises, as such
term is defined below. Defined terms utilized herein and not otherwise defined
shall have the meaning given them in the Lease. This Tenant Work Letter is
organized chronologically and addresses the issues of the construction of the
Tenant Improvements within the Premises, in sequence, as such issues will arise
during the actual construction of such Tenant Improvements. All references in
this Tenant Work Letter to Articles or Sections of "this Lease" shall mean the
relevant portions of Articles 1 through 52 (together with all Exhibits and
---------------------
Riders) of this Lease to which this Tenant Work Letter is attached as Exhibit B
---------
and all references in this Tenant Work Letter to Sections of "this Tenant Work
Letter" shall mean the relevant portions of Sections 1 through 5 of this Tenant
--------------------
Work Letter.
SECTION 1
---------
DELIVERY OF THE PREMISES AND BASE BUILDING
------------------------------------------
Upon the execution and delivery of the Lease and evidence of insurance
thereunder, Lessor shall deliver the Premises and "Base Building," as that term
is defined below, to Lessee, and Lessee shall accept the Premises and Base
Building from Lessor in their presently existing "as-is" condition. The "Base
Building" shall consist of those portions of the Premises which were in
existence prior to the construction of the tenant improvements in the Premises
for the prior tenant of the Premises.
SECTION 2
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TENANT IMPROVEMENTS
-------------------
2.1 Tenant Improvement Allowance. Lessee shall be entitled to a one-time
----------------------------
improvement allowance (the "Tenant Improvement Allowance") in the amount of
$25.00 per rentable square foot of the Initial Premises and $22.50 per rentable
square foot of the Expansion Premises for the costs relating to the initial
design and construction of Lessee's improvements, which are permanently affixed
to the Premises (the "Tenant Improvements"). In no event shall Lessor be
obligated to make disbursements pursuant to this Tenant Work Letter in a total
amount which exceeds the Tenant Improvement Allowance. The Improvements to be
constructed in the Initial Premises and in the Expansion Premises shall be
constructed concurrently pursuant to this Work Letter and the Lease.
2.2 Disbursement of the Tenant Improvement Allowance.
------------------------------------------------
2.2.1 Tenant Improvement Allowance Items. Except as otherwise set
----------------------------------
forth in this Tenant Work Letter, the Tenant Improvement Allowance shall be
disbursed by Lessor only for the following items and costs (collectively the
"Tenant Improvement Allowance Items"):
2.2.1.1 Payment of the fees of the "Architect" and the
"Engineers," as those terms are defined in Section 3.1 of this Tenant Work
-----------
Letter, which fees shall, notwithstanding anything to the contrary contained in
this Tenant Work Letter, not exceed an aggregate amount equal to One Dollar and
Thirty Cents ($1.30) per square foot of the Premises, and payment of the fees
incurred by, and the cost of documents and materials supplied by, Lessor and
Lessor's consultants in connection with the preparation and review of the
"Construction Drawings," as that term is defined in Section 3.1 of this Tenant
-----------
Work Letter;
2.2.1.2 The payment of plan check, permit and license fees
relating to construction of the Tenant Improvements;
<PAGE>
2.2.1.3 The cost of construction of the Tenant Improvements,
including, without limitation, testing and inspection costs, freight elevator
usage, hoisting and trash removal costs, and contractors' fees and general
conditions;
2.2.1.4 The cost of any changes in the Base Building when
such changes are required by the Construction Drawings (including if such
changes are due to the fact that such work is prepared on an unoccupied basis),
such cost to include all direct architectural and/or engineering fees and
expenses incurred in connection therewith;
2.2.1.5 The cost of any changes to the Construction Drawings
or Tenant Improvements required by any applicable governmental regulations or
building codes;
2.2.1.6 Sales and use taxes; and
2.2.1.7 All other costs actually incurred by Lessor in
connection with the construction of the Tenant Improvements.
2.2.2 Disbursement of Tenant Improvement Allowance. During the
--------------------------------------------
construction of the Tenant Improvements, Lessor shall make monthly disbursements
of the Tenant Improvement Allowance for Tenant Improvement Allowance Items for
the benefit of Lessee and shall authorize the release of monies for the benefit
of Lessee as follows:
2.2.2.1 Monthly Disbursements. On or before the 22nd day of
---------------------
each calendar month, as determined by Lessor, during the construction of the
Tenant Improvements (or such other date as Lessor may designate), Lessee shall
deliver to Lessor: (i) a request for payment of the "Contractor," as that term
is defined in Section 4.1 of this Tenant Work Letter, approved by Lessee, in a
-----------
form to be provided by Lessor, showing the schedule, by trade, of percentage of
completion of the Tenant Improvements in the Premises, detailing the portion of
the work completed and the portion not completed; (ii) invoices from all of
"Lessee's Agents," as that term is defined in Section 4.1.2 of this Tenant Work
-------------
Letter, for labor rendered and materials delivered to the Premises; (iii)
executed mechanic's lien releases from all of Lessee's Agents which shall
comply with the appropriate provisions, as reasonably determined by Lessor, of
California Civil Code Section 3262(d); and (iv) all other information reasonably
requested by Lessor. Lessee's request for payment shall be deemed Lessee's
acceptance and approval of the work furnished and/or the materials supplied as
set forth in Lessee's payment request. Thereafter, Lessor shall deliver a check
to Lessee made jointly payable to Contractor and Lessee in payment of the
lesser of: (A) the amounts so requested by Lessee, as set forth in this Section
-------
2.2.2.1, above, less a ten percent (10%) retention (the aggregate amount of such
- - -------
retentions to be known as the "Final Retention"), and (B) the balance of any
remaining available portion of the Tenant Improvement Allowance (not including
the Final Retention), provided that Lessor does not dispute any request for
payment based on non-compliance of any work with the "Approved Working
Drawings," as that term is defined in Section 3.4 below, or due to any
-----------
substandard work, or for any other reason. Lessor's payment of such amounts
shall not be deemed Lessor's approval or acceptance of the work furnished or
materials supplied as set forth in Lessee's payment request.
2.2.2.2 Final Retention. Subject to the provisions of this
---------------
Tenant Work Letter, a check for the Final Retention payable jointly to Lessee
and Contractor shall be delivered by Lessor to Lessee following the completion
of construction of the Premises, provided that (i) Lessee delivers to Lessor
properly executed mechanics lien releases in compliance with both California
Civil Code Section 3262(d)(2) and either Section 3262(d)(3) or Section
3262(d)(4), (ii) Lessor has determined that no substandard work exists which
adversely affects the mechanical, electrical, plumbing, heating, ventilating and
air conditioning, life-safety or other systems of the Building, the curtain wall
of the Building, the structure or exterior appearance of the Building, or any
other Lessee's use of such other Lessee's leased premises in the Building and
(iii) Architect delivers to Lessor a certificate, in a form reasonably
acceptable to Lessor, certifying that the construction of the Tenant
Improvements in the Premises has been substantially completed.
2.2.2.3 Other Terms. Lessor shall only be obligated to make
-----------
disbursements from the Tenant Improvement Allowance to the extent costs are
incurred by Lessee for Tenant
-2-
<PAGE>
Improvement Allowance Items. All Tenant Improvement Allowance Items for which
the Tenant Improvement Allowance has been made available shall be deemed
Lessor's property under the terms of the Lease.
SECTION 3
---------
CONSTRUCTION DRAWINGS
---------------------
3.1 Selection of Architect/Construction Drawings. Lessee shall retain an
--------------------------------------------
architect/space planner designated by or approved by Lessor (the "Architect") to
prepare the "Construction Drawings," as that term is defined in this Section
-------
3.1. Lessee shall retain the engineering consultants designated by or approved
- - ---
by Lessor (the "Engineers") to prepare all plans and engineering working
drawings relating to the structural, mechanical, electrical, plumbing, HVAC,
lifesafety, and sprinkler work in the Premises, which work is not part of the
Base Building. The plans and drawings to be prepared by Architect and the
Engineers hereunder shall be known collectively as the "Construction Drawings."
All Construction Drawings shall comply with the drawing format and
specifications determined by Lessor, and shall be subject to Lessor's approval.
Lessee and Architect shall verify, in the field, the dimensions and conditions
as shown on the relevant portions of the base building plans, and Lessee and
Architect shall be solely responsible for the same, and Lessor shall have no
responsibility in connection therewith. Lessor's review of the Construction
Drawings as set forth in this Section 3.1, shall be for its sole purpose and
-----------
shall not imply Lessor's review of the same, or obligate Lessor to review the
same, for quality, design, Code compliance or other like matters. Accordingly,
notwithstanding that any Construction Drawings are reviewed by Lessor or its
space planner, architect, engineers and consultants, and notwithstanding any
advice or assistance which may be rendered to Lessee by Lessor or Lessor's space
planner, architect, engineers, and consultants, Lessor shall have no liability
whatsoever in connection therewith and shall not be responsible for any
omissions or errors contained in the Construction Drawings, and Lessee's waiver
and indemnity set forth in Section 10.1 of this Lease shall specifically apply
------------
to the Construction Drawings.
3.2 Final Space Plan. Lessee shall supply Lessor with four (4) copies
----------------
signed by Lessee of its final space plan for the Premises before any
architectural working drawings or engineering drawings have been commenced. The
final space plan (the "Final Space Plan") shall include a layout and designation
of all offices, rooms and other partitioning, their intended use, and equipment
to be contained therein. Lessor may request clarification or more specific
drawings for special use items not included in the Final Space Plan. Lessor
shall advise Lessee within five (5) business days after Lessor's receipt of the
Final Space Plan for the Premises if the same is unsatisfactory or incomplete in
any respect. If Lessee is so advised, Lessee shall promptly cause the Final
Space Plan to be revised to correct any deficiencies or other matters Lessor may
reasonably require.
3.3 Final Working Drawings. After the Final Space Plan has been approved
----------------------
by Lessor, Lessee shall supply the Engineers with a complete listing of standard
and non-standard equipment and specifications for the Premises, to enable the
Engineers and the Architect to complete the "Final Working Drawings" (as that
term is defined below) in the manner as set forth below. Upon the approval of
the Final Space Plan by Lessor and Lessee, Lessee shall promptly cause the
Architect and the Engineers to complete the architectural and engineering
drawings for the Premises, and Architect shall compile a fully coordinated set
of architectural, structural, mechanical, electrical and plumbing working
drawings in a form which is complete to allow subcontractors to bid on the work
and to obtain all applicable permits (collectively, the "Final Working
Drawings") and shall submit the same to Lessor for Lessor's approval. Lessee
shall supply Lessor with four (4) copies signed by Lessee of such Final Working
Drawings. Lessor shall advise Lessee within five (5) business days after
Lessor's receipt of the Final Working Drawings for the Premises if the same is
unsatisfactory or incomplete in any respect. If Lessee is so advised, Lessee
shall immediately revise the Final Working Drawings in accordance with such
review and any disapproval of Lessor in connection therewith.
3.4 Approved Working Drawings. The Final Working Drawings shall be
-------------------------
approved by Lessor (the "Approved Working Drawings") prior to the commencement
of construction of the Tenant Improvements by Lessee. After approval by Lessor
of the Final Working Drawings,
-3-
<PAGE>
Lessee may submit the same to the City of San Diego for all applicable building
permits. Lessee hereby agrees that neither Lessor nor Lessor's consultants shall
be responsible for obtaining any building permit or certificate of occupancy for
the Premises and that obtaining the same shall be Lessee's responsibility;
provided, however, that Lessor shall cooperate with Lessee in executing permit
applications and performing other ministerial acts reasonably necessary to
enable Lessee to obtain any such permit or certificate of occupancy. No changes,
modifications or alterations in the Approved Working Drawings may be made
without the prior written consent of Lessor, which consent may not be
unreasonably withheld.
SECTION 4
---------
CONSTRUCTION OF THE TENANT IMPROVEMENTS
---------------------------------------
4.1 Lessee's Selection of Contractors.
---------------------------------
4.1.1 The Contractor. A general contractor shall be retained by
--------------
Lessee to construct the Tenant Improvements. Such general contractor
("Contractor") shall be selected by Lessee and approved by Lessor in writing.
4.1.2 Lessee's Agents. All subcontractors, laborers, materialmen,
---------------
and suppliers used by Lessee (such subcontractors, laborers, materialmen, and
suppliers, and the Contractor to be known collectively as "Lessee's Agents")
must be approved in writing by Lessor, which approval shall not be unreasonably
withheld or delayed. If Lessor does not approve any of Lessee's proposed
subcontractors, laborers, materialmen or suppliers, Lessee shall submit other
proposed subcontractors, laborers, materialmen or suppliers for Lessor's written
approval.
4.2 Construction of Tenant Improvements by Lessee's Agents.
------------------------------------------------------
4.2.1 Construction Contract; Cost Budget. Prior to Lessee's
----------------------------------
execution of the construction contract and general conditions with Contractor
(the "Contract"), Lessee shall submit the Contract to Lessor for its approval,
which approval shall not be unreasonably withheld or delayed. Prior to the
commencement of the construction of the Tenant Improvements, and after Lessee
has accepted all bids for the Tenant Improvements, Lessee shall provide Lessor
with a detailed breakdown, by trade, of the final costs to be incurred or which
have been incurred in connection with the design and construction of the Tenant
Improvements to be performed by or at the direction of Lessee or the Contractor,
which costs form a basis for the amount of the Contract (the "Final Costs").
Prior to the commencement of construction of the Tenant Improvements, Lessee
shall supply Lessor with cash in an amount (the "Over-Allowance Amount") equal
to the difference between the amount of the Final Costs and the amount of the
Tenant Improvement Allowance (less any portion thereof already disbursed by
Lessor, or in the process of being disbursed by Lessor, on or before the
commencement of construction of the Tenant Improvements). The Over-Allowance
Amount shall be disbursed by Lessor prior to the disbursement of any of the then
remaining portion of the Tenant Improvement Allowance, and such disbursement
shall be pursuant to the same procedure as the Tenant Improvement Allowance. In
the event that, after the Final Costs have been delivered by Lessee to Lessor,
the costs relating to the design and construction of the Tenant Improvements
shall change, any additional costs necessary to such design and construction in
excess of the Final Costs, shall be paid by Lessee to Lessor immediately as an
addition to the Over-Allowance Amount or at Lessor's option, Lessee shall make
payments for such additional costs but of its own funds, but Lessee shall
continue to provide Lessor with the documents described in Sections 2.2.2.1 (i),
---------------------
(ii), (iii) and (iv) of this Tenant Work Letter, above, for Lessor's approval,
- - --------------------
prior to Lessee paying such costs.
4.2.2 Lessee's Agents:
---------------
4.2.2.1 Lessor's General Conditions for Lessee's Agents and
---------------------------------------------------
Tenant Improvement Work. Lessee's and Lessee's Agent's construction of the
- - -----------------------
Tenant Improvements shall comply with the following: (i) the Tenant Improvements
shall be constructed in strict accordance with the Approved Working Drawings;
(ii) Lessee's Agents shall submit schedules of
-4-
<PAGE>
all work relating to the Tenant's Improvements to Contractor and Contractor
shall, within five (5) business days of receipt thereof, inform Lessee's Agents
of any changes which are necessary thereto, and Lessee's Agents shall adhere to
such corrected schedule; and (iii) Lessee shall abide by all rules made by
Lessor with respect to the use of any freight, loading dock and service
elevators, parking areas and any staging areas, storage of materials,
coordination of work with the contractors of other tenants, and any other matter
in connection with this Tenant Work Letter, including, without limitation, the
construction of the Tenant Improvements.
4.2.2.2 Indemnity. Lessee's indemnity obligations under the Lease
---------
shall also apply with respect to any and all claims, costs, losses, damages,
injuries and liabilities related in any way to any act or omission of Lessee or
Lessee's Agents, or anyone directly or indirectly employed by any of them, or in
connection with Lessee's non-payment of any amount arising out of the Tenant
Improvements and/or Lessee's disapproval of all or any portion of any request
for payment. Such indemnities by Lessee, as set forth in this Lease, shall also
apply with respect to any and all costs, losses, damages, injuries and
liabilities related in any way to Lessor's performance of any ministerial acts
reasonably necessary (i) to permit Lessee to complete the Tenant Improvements,
and (ii) to enable Lessee to obtain any building permit or certificate of
occupancy for the Premises.
4.2.2.3 Requirements of Lessee's Agents. Each of Lessee's
-------------------------------
Agents shall guarantee to Lessee and for the benefit of Lessor that the portion
of the Tenant Improvements for which it is responsible shall be free from any
defects in workmanship and materials for a period of not less than one (1) year
from the date of completion thereof. Each of Lessee's Agents shall be
responsible for the replacement or repair, without additional charge, of all
work done or furnished in accordance with its contract that shall become
defective within one (1) year after the later to occur of (i) completion of the
work performed by such contractor or subcontractors and (ii) the Lease
Commencement Date. The correction of such work shall include, without additional
charge, all additional expenses and damages incurred in connection with such
removal or replacement of all or any part of the Tenant Improvements, and/or the
Building and/or common areas that may be damaged or disturbed thereby. All such
warranties or guarantees as to materials or workmanship of or with respect to
the Tenant Improvements shall be contained in the Contract or subcontract and
shall be written such that such guarantees or warranties shall inure to the
benefit of both Lessor and Lessee, as their respective interests may appear,
and can be directly enforced by either. Lessee covenants to give to Lessor any
assignment or other assurances which may be necessary to effect such right of
direct enforcement.
4.2.2.4 Insurance Requirements.
----------------------
4.2.2.4.1 General Coverages. All of Lessee's Agents shall
-----------------
carry worker's compensation insurance covering all of their respective
employees, and shall also carry public liability insurance, including property
damage, all with limits, in form and with companies as are required to be
carried by Lessee as set forth in this Lease.
4.2.2.4.2 Special Coverages. Lessee shall carry
-----------------
"Builder's All Risk" insurance in an amount approved by Lessor covering the
construction of the Tenant Improvements, and such other insurance as Lessor may
require, it being understood and agreed that the Tenant Improvements shall be
insured by Lessee pursuant to Lessee's insurance requirements under the Lease
immediately upon completion thereof. Such insurance shall be in amounts and
shall include such extended coverage endorsements as may be reasonably required
by Lessor including, but not limited to, the requirement that all of Lessee's
Agents shall carry excess liability and Products and Completed Operation
Coverage insurance, each in amounts not less than $500,000 per incident,
$1,000,000 in aggregate, and in form and with companies as are required to be
carried by Lessee as set forth in the Lease.
4.2.2.4.3 General Terms. Certificates for all insurance
-------------
carried pursuant to this Section 4.2.2.4 shall be delivered to Lessor before
---------------
the commencement of construction of the Tenant Improvements and before the
Contractor's equipment is moved onto the site. All such policies of insurance
must contain a provision that the company writing said policy will give Lessor
thirty (30) days prior written notice of any cancellation or lapse of the
effective date or any reduction in the amounts of such insurance. In the event
that the Tenant
-5-
<PAGE>
Improvements are damaged by any cause during the course of the construction
thereof, Lessee shall immediately repair the same at Lessee's sole cost and
expense. Lessee's Agents shall maintain all of the foregoing insurance coverage
in force until the Tenant Improvements are fully completed and accepted by
Lessor, except for any Products and Completed Operation Coverage insurance
required by Lessor, which is to be maintained for ten (10) years following
completion of the work and acceptance by Lessor and Lessee. All policies carried
under this coverage in force until the Tenant Improvements are fully completed
and accepted by Lessor, except for any Products and Completed Operation Coverage
insurance required by Lessor, which is to be maintained for ten (10) years
following completion of the work and acceptance by Lessor and Lessee. All
policies carried under this Section 4.2.2.4 shall insure Lessor and Lessee, as
---------------
their interests may appear, as well as Contractor and Lessee's Agents. All
insurance, except Workers' Compensation, maintained by Lessee's Agents shall
preclude subrogation claims by the insurer against anyone insured thereunder.
Such insurance shall provide that it is primary insurance as respects the owner
and that any other insurance maintained by owner is excess and noncontributing
with the insurance required hereunder. The requirements for the foregoing
insurance shall not derogate from the provisions for indemnification of Lessor
by Lessee under Section 4.2.2.2 of this Tenant Work Letter. Lessor may, in its
---------------
discretion, require Lessee to obtain a lien and completion bond or some
alternate form of security satisfactory to Lessor in an amount sufficient to
ensure the lien-free completion of the Tenant Improvements and naming Lessor as
co-obligee.
4.2.3 Governmental Compliance. The Tenant Improvements shall comply
-----------------------
in all respects with the following: (i) all applicable governmental regulations,
including building codes, the Americans with Disabilities Act of 1990, and other
state, federal, city or quasi-governmental laws, codes, ordinances and
regulations, as each may apply according to the rulings of the controlling
public official, agent or other person; (ii) applicable standards of the
American Insurance Association (formerly, the National Board of Fire
Underwriters) and the National Electrical Code; and (iii) building material
manufacturer's specifications.
4.2.4 Inspection by Lessor. Lessor shall have the right to inspect
--------------------
the Tenant Improvements at all times, provided however, that Lessor's failure to
inspect the Tenant Improvements shall in no event constitute a waiver of any of
Lessor's rights hereunder nor shall Lessor's inspection of the Tenant
Improvements constitute Lessor's approval of the same. Should Lessor disapprove
any portion of the Tenant Improvements, Lessor shall notify Lessee in writing of
such disapproval and shall specify the items disapproved. Any defects or
deviations in, and/or disapproval by Lessor of, the Tenant Improvements shall be
rectified by Lessee at no expense to Lessor, provided however, that in the
event Lessor determines that a defect or deviation exists or disapproves of any
matter in connection with any portion of the Tenant Improvements and such
defect, deviation or matter might adversely affect the mechanical, electrical,
plumbing, heating, ventilating and air conditioning or life-safety systems of
the Building, the structure or exterior appearance of the Building or any other
tenant's use of such other tenant's leased premises, Lessor may, take such
action as Lessor deems necessary, at Lessee's expense and without incurring any
liability on Lessor's part, to correct any such defect, deviation and/or matter,
including, without limitation, causing the cessation of performance of the
construction of the Tenant Improvements until such time as the defect, deviation
and/or matter is corrected to Lessor's satisfaction.
4.2.5 Meetings. Commencing upon the execution of this Lease, Lessee
--------
shall hold weekly meetings at a reasonable time, with the Architect and the
Contractor regarding the progress of the preparation of Construction Drawings
and the construction of the Tenant Improvements, which meetings shall be held at
a location designated by Lessor, and Lessor and/or its agents shall receive
prior notice of, and shall have the right to attend, all such meetings, and,
upon Lessor's request, certain of Lessee's Agents shall attend such meetings. In
addition, minutes shall be taken at all such meetings, a copy of which minutes
shall be promptly delivered to Lessor. One such meeting each month shall include
the review of Contractor's current request for payment.
4.3 Notice of Completion: Copy of "As Built" Plans. Within ten (10) days
----------------------------------------------
after completion of construction of the Tenant Improvements, Lessee shall cause
a Notice of Completion to be recorded in the office of the Recorder of the
County of Orange in accordance
-6-
<PAGE>
with Section 3093 of the Civil Code of the State of California or any successor
statute, and shall furnish a copy thereof to Lessor upon such recordation. If
Lessee fails to do so, Lessor may execute and file the same on behalf of Lessee
as Lessee's agent for such purpose, at Lessee's sole cost and expense. At the
conclusion of construction, (i) Lessee shall cause the Architect and Contractor
(A) to update the Approved Working Drawings as necessary to reflect all
changes made to the Approved Working Drawings during the course of construction,
(B) to certify to the best of their knowledge that the "record-set" of as-built
drawings are true and correct, which certification shall survive the expiration
or termination of this Lease, and (C) to deliver to Lessor two (2) sets of
copies of such as-built drawings within ninety (90) days following issuance of a
certificate of occupancy for the Premises, and (ii) Lessee shall deliver to
Lessor a copy of all warranties, guaranties, and operating manuals and
information relating to the improvements, equipment, and systems in the
Premises.
4.4 Commencement Date and Substantial Completion.
--------------------------------------------
4.4.1 Substantial Completion: Punch-List. The Improvements shall be
----------------------------------
deemed to be "Substantially Completed," and "Substantial Completion" shall be
deemed to occur when Contractor certifies in writing to Lessor and Lessee that:
(a) Lessee has reasonable access to the Premises; (b) Contractor has
substantially performed all of the Improvements work to be performed under this
Work Letter, other than decoration and minor "punch list" items and adjustments
which do not materially interfere with Lessee's access to or use of the Premises
or Lessor or any other tenant's use of the Building, or in Lessor's reasonable
determination, do not adversely affect any system of the Building; and (c)
Contractor or Lessee has obtained a temporary certificate of occupancy or other
required approval from the local governmental authority permitting occupancy of
the Premises. Within three (3) business days after receipt of such certificate
from Lessee, Lessor shall conduct a walk-through inspection of the Premises with
Lessee to inspect the Premises and the Improvements. Within five (5) business
days following such inspection, Lessor shall develop and provide to Lessee a
written "punch list" specifying those improvements which require completion and
other reasonable corrective work, which punch list items Lessee or Contractor
shall thereafter diligently complete.
4.4.2 Commencement Date. The Term of the Lease shall commence as
-----------------
provided in Section 1.3 of the Lease. The Commencement Date shall only be
extended for Lessor's Delays and by Unavoidable Delays (as defined below). In no
event shall the Commencement Date be extended as a result of any Lessee Delays.
If, there are delays caused by Lessor or by Unavoidable Delays, the Commencement
Date shall be extended by the number of days of Lessor Delays and Unavoidable
Delays; provided, however, that if Substantial Completion of the Improvements is
delayed as a result of any Lessee Delays described below, then the Commencement
Date shall be accelerated by the number of days of such Lessee Delays.
4.4.3 Lessee Delays.
-------------
4.4.3.1 Lessee's Delays. For purposes of this Work Letter,
---------------
"Lessee Delays" shall mean any delay in substantial completion of the
Improvements resulting from any or all of the following:
4.4.3.1.1 Lessee's failure to timely perform any of
its obligations pursuant to this Work Letter;
4.4.3.1.2 Lessee's changes to Final Working Drawings
after Lessee's and Lessor's approval thereof;
4.4.3.1.3 Lessee's request for long lead-time
materials, finished or installations unless approved by Lessor in the Final
Working Drawings;
4.4.3.1.4 Any other delay, act or failure to act by
Lessee, Lessee's employees, agents, independent contractors, consultants and/or
any other person performing or required to perform services on behalf of Lessee,
including the Contractor;
4.4.3.2 Lessor Delays. For purposes of this Work Letter,
-------------
"Lessor Delays" shall mean any delay in substantial completion of the
Improvements resulting from any or all of the following:
-7-
<PAGE>
4.4.3.2.1 Lessor's failure to timely approve revisions to the
Final Working Drawings requested by Lessee; or
4.4.3.2.2 Lessor's failure to timely approve the Contract.
4.4.3.3 Unavoidable Delays. Performance by either party under this
------------------
Work Letter shall not be deemed to be in default where delays or defaults are
otherwise due to war, insurrection, strikes, lock-outs, riots, floods,
earthquakes, fires, casualties, acts of God, acts of public enemy, epidemics,
quarantine restrictions, freight embargoes, lack of general transportation,
governmental restrictions, moratoriums, acts or failure to act of any public,
private or governmental agency or entity or any other causes beyond the control
or without the fault of the party claiming an extension of time to perform as a
result thereof (excluding a party's financial inability to perform)
(individually, an "Unavoidable Delay").
SECTION 5
---------
MISCELLANEOUS
-------------
5.1 Lessee's Representative. Lessee has designated William Dodge as its
----------------------- -------------
sole representative with respect to the matters set forth in this Tenant Work
Letter, who shall have full authority and responsibility to act on behalf of the
Lessee as required in this Tenant Work Letter.
5.2 Lessor's Representative. Lessor has designated Jim Ingebritsen, Matt
-----------------------
Root and Tracy Knott as its sole representatives with respect to the matters set
forth in this Tenant Work Letter, who, until further notice to Lessee, shall
have full authority and responsibility to act on behalf of the Lessor as
required in this Tenant Work Letter.
5.3 Time of the Essence in This Tenant Work Letter. Unless otherwise
----------------------------------------------
indicated, all references herein to a "number of days" shall mean and refer to
calendar days. If any item requiring approval is timely disapproved by Lessor,
the procedure for preparation of the document and approval thereof shall be
repeated until the document is approved by Lessor.
5.4 Landlord's Fee. Landlord shall be paid a fee in connection with
--------------
Landlord's obligations set forth in this Tenant Work Letter with respect to
reviewing, approving and supervising the design and construction of the Tenant
Improvements for the Premises in the amount of 5% of the total cost to permit
and construct the Tenant Improvements (exclusive of the lesser of (i) the costs
paid by Lessee to third-party Architects or Engineers, or (ii) One Dollar and
Thirty Cents ($1.30) per square foot of the Premises) which amount shall be
deducted from the Tenant Improvement Allowance.
5.5 Lessee's Lease Default. Notwithstanding any provision to the
----------------------
contrary contained in this Lease, if an event of Lessee Default as described in
the Lease or this Tenant Work Letter has occurred at any time on or before the
Substantial Completion of the Premises, then (i) in addition to all other rights
and remedies granted to Lessor pursuant to this Lease, Lessor shall have the
right to withhold payment of all or any portion of the Tenant Improvement
Allowance and/or Lessor may cause Contractor to cease the construction of the
Premises (in which case, Lessee shall be responsible for any delay in the
substantial completion of the Premises caused by such work stoppage), and (ii)
all other obligations of Lessor under the terms of this Tenant Work Letter shall
be forgiven until such time as such Default is cured pursuant to the terms of
this Lease (in which case, Lessee shall be responsible for any delay in the
substantial completion of the Premises caused by such inaction by Lessor).
5.6 Fire Sprinkler System. Lessee acknowledges that Lessor is in the
---------------------
process of installing a Fire Sprinkler System in the Building. Lessee shall hold
Lessor harmless from any delay or interference in Lessee's work schedule as a
result of such work.
-8-
<PAGE>
================================================================================
MASTER LOAN AND SECURITY AGREEMENT
------------------------------
Dated as of November 18, 1997
------------------------------
NEW CENTURY MORTGAGE CORPORATION
as Borrower
and
GREENWICH CAPITAL FINANCIAL PRODUCTS, INC.
as Lender
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
RECITALS
SECTION 1 Definitions and Accounting Matters.................................... 1
1.01 Certain Defined Terms.................................................... 1
1.02 Accounting Terms and Determinations...................................... 14
SECTION2 Advances, Note and Prepayments........................................ 14
2.01 Advances................................................................. 14
2.02 Notes.................................................................... 14
2.03 Procedure for Borrowing.................................................. 15
2.04 Repayment of Advances; Interest.......................................... 15
2.05 Limitation on Types of Advances; Illegality.............................. 16
2.06 Determination of Borrowing Base; Mandatory Prepayments or Pledge......... 16
2.07 Optional Prepayments..................................................... 17
2.08 Requirements of law...................................................... 17
2.09 Purposes of Advances..................................................... 18
2.10 Taxes.................................................................... 18
2.11 Extension of Termination Date............................................ 19
SECTION 3 Payments; Computations; Etc........................................... 19
3.01 Payments................................................................. 19
3.02 Computations............................................................. 20
SECTION 4 Collateral Security................................................... 20
4.01 Collateral; Security Interest............................................ 20
4.02 Further Documentation.................................................... 21
4.03 Changes in Locations, Name, etc.......................................... 21
4.04 Lender's Appointment as Attorney-in-Fact................................. 21
4.05 Performance by Lender of Borrower's Obligations.......................... 23
4.06 Proceeds................................................................. 23
4.07 Remedies................................................................. 23
4.08 Limitation on Duties Regarding Presentation of Collateral................ 24
4.09 Powers Coupled with an Interest.......................................... 24
4.10 Release of Security Interest............................................. 24
SECTION 5 Conditions Precedent.................................................. 24
5.01 Initial Advance,......................................................... 24
5.02 Initial and Subsequent Advances.......................................... 26
SECTION 6 Representations and Warranties........................................ 28
6.01 Financial Condition..................................................... 28
6.02 No Change............................................................... 28
6.03 Corporate Existence; Compliance with Law................................ 28
6.04 Corporate Power; Authorization; Enforceable Obligations................. 28
6.05 No Legal Bar............................................................ 29
</TABLE>
<PAGE>
<TABLE>
<S> <C>
6.06 No Material Litigation.................................................. 29
6.07 No Default.............................................................. 29
6.08 Collateral; Collateral Security......................................... 29
6.09 Chief Executive Office.................................................. 30
6.10 Location of Books and Records........................................... 30
6.11 Burdensome Restrictions................................................. 30
6.12 Taxes................................................................... 30
6.13 Margin Regulations...................................................... 30
6.14 Investment Company Act; Other Regulations............................... 30
6.15 Subsidiaries............................................................ 30
6.16 Origination and Acquisition of Mortgage Loans........................... 30
6.17 No Adverse Selection.................................................... 31
6.18 Borrower Solvent; Fraudulent Conveyance.................................
6.19 ERISA................................................................... 31
6.20 True and Complete Disclosure............................................ 31
6.21 Relevant States......................................................... 31
6.22 True Sales.............................................................. 32
SECTION 7 Covenants of the Borrower............................................. 32
7.01 Financial Statements.................................................... 32
7.02 Existence, Etc.......................................................... 32
7.03 Maintenance of Property; Insurance...................................... 33
7.04 Notices................................................................. 33
7.05 Other Information....................................................... 34
7.06 Further Identification of Collateral.................................... 34
7.07 Mortgage Loan Determined to be Defective................................ 34
7.08 Monthly Reporting....................................................... 34
7.09 Financial Condition Covenants........................................... 34
7.10 Borrowing Base Deficiency............................................... 35
7.11 Prohibition on Fundamental Changes...................................... 35
7.12 Limitation on Liens on Collateral ...................................... 35
7.13 Limitation on Sale or Other Disposal of Collateral...................... 35
7.14 Limitation on Transactions with Affiliates.............................. 35
7.15 Underwriting Guidelines................................................. 35
7.16 Limitations on Modifications, Waivers and Extensions of Mortgage Loans.. 36
7.17 Servicing............................................................... 36
7.18 Limitation on Distributions............................................. 36
7.19 Use of Proceeds......................................................... 36
7.20 Restricted Payments..................................................... 36
SECTION 8 Events of Default..................................................... 36
SECTION 9 Remedies Upon Default
SECTION 10 No Duty of Lender..................................................... 39
SECTION 11 Miscellaneous......................................................... 39
11.01 Waiver.................................................................. 39
11.02 Notices................................................................. 40
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
11.03 Indemnification and Expenses............................................. 40
11.04 Amendments............................................................... 41
11.05 Successors and Assigns................................................... 41
11.06 Survival................................................................. 41
11.07 Captions................................................................. 41
11.08 Counterparts............................................................. 41
11.09 Governing Law, Etc....................................................... 41
11.10 Submission To Jurisdiction; Waivers...................................... 41
11.11 Waiver Of Jury Trial..................................................... 42
11.12 Acknowledgments.......................................................... 42
11.13 Hypothecation and Pledge of Collateral................................... 42
11.14 Assignments, Participations.............................................. 42
11.15 Servicing................................................................ 43
11.16 Periodic Due Diligence Review............................................ 44
11.17 Set-Off.................................................................. 45
</TABLE>
SCHEDULES
- - ---------
SCHEDULE 1 Representations and Warranties re: Mortgage Loans
SCHEDULE 2 Filing Jurisdictions and Offices
SCHEDULE 3 Subsidiaries
SCHEDULE 4 Litigation
SCHEDULE 5 Relevant Stares
EXHIBITS
- - --------
EXHIBIT A Form of Promissory Note
EXHIBIT B Form of Custodial Agreement
EXHIBIT C Form of Opinion of Counsel to Borrower
EXHIBIT D Form of Notice of Borrowing and Pledge
EXHIBIT E Underwriting Guidelines
EXHIBIT F Form of Blocked Account Agreement
EXHIBIT G Form of Data Edit Sheet (Funding Date)
EXHIBIT H Form of Borrowing Base Certificate
EXHIBIT I Form of Remittance Report
iii
<PAGE>
MASTER LOAN AND SECURITY AGREEMENT
MASTER LOAN AND SECURITY AGREEMENT, dated as of November 18, 1997,
between NEW CENTURY MORTGAGE CORPORATION, a California corporation (the
"Borrower"), and GREENWICH CAPITAL FINANCIAL PRODUCTS, INC., a Delaware
--------
corporation (the "Lender").
------
RECITALS
The Borrower wishes to obtain financing from time to time to provide
interim funding for the origination and acquisition of certain Mortgage Loan
(as defined herein), which Mortgage Loans are to be sold or contributed by the
Borrower to one or more trusts or other entities to be sponsored by the
Borrower or an Affiliate (as defined herein) thereof, or to third-parties with
the consent of the Lender, and which Mortgage Loans shall secure Advances (as
defined herein) to be made by the Lender hereunder.
The Lender has agreed, subject to the terms and conditions of this
Loan Agreement (as defined herein), to provide such financing to the Borrower,
with a portion of the proceeds of the sale of all mortgage-backed securities
issued by any such trust or other entity, together with a portion of the
proceeds of any permitted whole loan sales, together with other funds of the
Borrower, if necessary, being used to repay any Advances made hereunder as
more particularly described herein.
Accordingly, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree
as follows:
SECTION 1 Definitions and Accounting Matters.
----------------------------------
1.01 Certain Defined Terms. As used herein, the following terms
---------------------
shall have the following meanings (all terms defined in this Section 1.01 or
in other provisions of this Loan Agreement in the singular to have the same
meanings when used in the plural and vice versa):
---- -----
"Accepted Servicing Practices" shall have the meaning assigned
----------------------------
thereto in Section 11.15(a) hereof.
"Advance" shall have the meaning provided in Section 2.01 hereof.
-------
"Affiliate" means, with respect to any Person, any other Person
---------
which, directly or indirectly, controls, is controlled by, or is under common
control with, such Person. For purposes of this definition, "control"
(together with the correlative meanings of "controlled by" and "under common
control with") means possession, directly or indirectly, of the power (a) to
vote 10% or more of the securities (on a fully diluted basis) having ordinary
voting power for the directors or managing general partners (or their
equivalent) of such Person, or (b) to direct or cause the direction of the
management or policies of such Person, whether through the ownership of voting
securities, by contract, or otherwise.
"Affiliate Guaranty" shall mean that certain Affiliate Guaranty dated
------------------
as of the date hereof, made by New Century Financial Corporation in favor of the
Lender, as amended from time to time.
1
<PAGE>
"Applicable Margin" shall mean, with respect to Advances that are
-----------------
Tranche A Advances, Tranche B Advances and Tranche C Advances, respectively,
the applicable rate per annum set forth below:
Tranche A Advances....................... 1.25%
Tranche B Advances....................... 1.75%
Tranche C Advances....................... 2.50%
"Appraised Value" shall mean the value set forth in an appraisal made
---------------
in connection with the origination of the related Mortgage Loan as the value
of the Mortgaged Property.
"Attorney Bailee Letter" shall have the meaning assigned to such
----------------------
term in the Custodial Agreement.
"Bankruptcy Code" shall mean the United States Bankruptcy Code of
---------------
1978, as amended from time to time.
"Blocked Account" shall mean any bank account subject to a Blocked
---------------
Account Agreement.
"Blocked Account Agreement" shall mean the agreement between the
-------------------------
Servicer and the Lender substantially in the form of Exhibit F, attached
---------
hereto.
"Borrower" shall have the meaning provided in the heading hereof.
--------
"Borrowing Base" shall mean the aggregate Collateral Value of all
--------------
Eligible Mortgage Loans that have been, and remain, pledged to the Lender
hereunder.
"Borrowing Base Deficiency" shall have the meaning provided in
-------------------------
Section 2.06 hereof.
"Business Day" shall mean any day other than (i) a Saturday or Sunday
------------
or (ii) a day on which the New York Stock Exchange, the Federal Reserve Bank
of New York or the Custodian is authorized or obligated by law or executive
order to be closed.
"Cash Equivalents" shall mean (a) securities with maturities of 90
----------------
days or less from the date of acquisition issued or fully guaranteed or
insured by the United States Government or any agency thereof, (b)
certificates of deposit and eurodollar time deposits with maturities of 90
days or less from the date of acquisition and overnight bank deposits of any
commercial bank having capital and surplus in excess of $500,O00,000, (c)
repurchase obligations of any commercial bank satisfying the requirements of
clause (b) of this definition, having a term of not more than seven days with
respect to securities issued or fully guaranteed or insured by the United
States Government, (d) commercial paper of a domestic issuer rated at least
A-l or the equivalent thereof by Standard and Poor's Ratings Group ("S&P") or
---
P-1 or the equivalent thereof by Moody's Investors Service, Inc. ("Moody's")
-------
and in either case maturing within 90 days after the day of acquisition, (e)
securities with maturities of 90 days or less from the date of acquisition
issued or fully guaranteed by any state, commonwealth or territory of the
United States, by any political subdivision or taxing authority of any such
state, commonwealth or territory or by any foreign government, the securities
of which state, commonwealth, territory, political subdivision, taxing
authority or foreign government (as the case may be) are rated at least A by
S&P or A by Moody's, (f) securities with maturities of 90 days or less
2
<PAGE>
from the date of acquisition backed by standby letters of credit issued by
any commercial bank satisfying the requirements of clause (b) of this
definition or (g) shares of money market mutual or similar funds which invest
exclusively in assets satisfying the requirements of clauses (a) through (f)
of this definition.
"Change of Control" shall mean either (i) two of any of the
-----------------
following four individuals are no longer employed by either Loan Party or an
Affiliate thereof: Brad Morrice, Steve Holder, Robert Cole and Ed Gotschall,
or (ii) there occurs a change of "control" of either Loan Party as such term
is defined in the Securities Exchange Act of 1934, as amended.
"Code" shall mean the Internal Revenue Code of 1986, as amended
----
from time to time.
"Collateral" shall have the meaning provided in Section 4.01(b)
----------
hereof.
"Collateral Value" shall mean with respect to each Eligible
----------------
Mortgage Loan that is:
(a) a Core Mortgage Loan, the lesser of (i) the Market Value of
such Core Mortgage Loan and (ii) 103% of the Par Amount of such Core Mortgage
Loan; provided, however, the Lender shall provide notice to the Borrower and
the Borrower's other warehouse lender, First Bank National Association, at
the following address: First Bank National Association, Mortgage Banking
Services Division, First Bank Place MPFP 0801, 601 Second Avenue South,
Minneapolis, Minn. 55402, Attention: Edwin D. Jenkins, Phone: (612) 973-0588,
Fax: (612) 973-0826, in the event that clause (i) is less than clause (ii);
(b) a Jumbo Mortgage Loan, the lesser of (i) 95% of the Market
Value of such Jumbo Mortgage Loan and (ii) the Par Amount of such Jumbo
Mortgage Loan; provided, however, the Lender shall provide Notice to the
Borrower and the Borrower's other warehouse lender, First Bank National
Association, at the following address: First Bank National Association,
Mortgage Banking Services Division, First Bank Place MPFP 0801, 601 Second
Avenue South, Minneapolis, Minn. 55402, Attention: Edwin D. Jenkins, Phone:
(612) 973-0588, Fax: (612) 973-0826, in the event that clause (i) is less
than clause (ii); and
(c) a Non-Conforming Mortgage Loan, the lesser of (i) the Market
Value of such Non-Conforming Mortgage Loan and (ii) the percentage of the Par
Amount of such Non-Conforming Mortgage Loan set forth below corresponding to
the number of days since such Non-Conforming Mortgage Loan first became a
"Non-Conforming Mortgage Loan" hereunder; provided, however, the Lender shall
provide notice to the Borrower and the Borrower's other warehouse lender,
First Bank National Association, at the following address: First Bank
National Association, Mortgage Banking Services Division, First Bank Place
MPFP 0801, 601 Second Avenue South, Minneapolis, Minn. 55402, Attention:
Edwin D. Jenkins, Phone: (612) 973-0588, Fax: (612) 973-0826, in the event
that clause (i) is less than clause (ii):
3
<PAGE>
<TABLE>
<CAPTION>
Number of Days Percentage
- - -------------------------------------------------
<S> <C>
Less than 30 days 80
- - -------------------------------------------------
30 days or more but less than 6o days 80
- - -------------------------------------------------
60 days or more but less than 90 days 60
- - -------------------------------------------------
90 days or more but less than 120 days 40
- - -------------------------------------------------
120 days or more but less than 150 days 20
- - -------------------------------------------------
150 days or more 0
- - -------------------------------------------------
</TABLE>
provided that, in all events the additional limitations on Collateral Value set
forth below shall apply:
(i) the aggregate Collateral Value of Jumbo Mortgage Loans may not at
any one time exceed $10,000,000;
(ii) the aggregate Collateral Value of Non-Conforming Mortgage Loans may
not at any one time exceed $10,000,000;
(iii) the aggregate Collateral Value of Core Mortgage Loans that are
Second Lien Mortgage Loans may not at any one time exceed $20,000,000:
(iv) the Collateral Value shall be zero for each Eligible Mortgage
----
Loan:
(A) which is thirty (30) days or more delinquent in respect of
the first Monthly Payment, except for Subsequent Non-Conforming Mortgage
Loans;
(B) which is sixty (60) days or more delinquent in respect of any
Monthly Payment (other than the first Monthly Payment), except for
Subsequent Non-Conforming Mortgage Loans;'
(C) (a) that is a Core Mortgage Loan, a Jumbo Mortgage Loan or an
Initial Non-Conforming Mortgage Loan in respect of which 150 days or more
have passed since such Eligible Mortgage Loan was first pledged to the
Lender hereunder and, (b) that is a Subsequent Non-Conforming Mortgage Loan
in respect of which 150 days have passed since such Subsequent Non-
Conforming Mortgage Loan first became a "Non-Conforming Mortgage Loan"
hereunder;
(D) which has been released from the possession of the Custodian
under Section 5(a) of the Custodial Agreement to any Person other than the
Lender or its bailee for a period in excess of fifteen (15) calendar days;
(E) which has been released from the possession of the Custodian
(i) under Section 5(b) of the Custodial Agreement under any Transmittal
Letter in excess of the time period stated in such Transmittal Letter for
release, or (ii) under Section 5(c) of the Custodial Agreement under an
Attorney Bailee Letter, from and after the date such Attorney's Bailee
Letter is terminated or ceases to be in full force and effect;
4
<PAGE>
(F) in respect of which (1) the related Mortgaged Property is
the subject of a foreclosure proceeding or (2) the related Mortgage
Note has been extinguished under relevant state law in connection with
a judgment of foreclosure or foreclosure sale or otherwise;
(G) as to which (i) the related Mortgage Note or the related
Mortgage is not genuine or is not the legal, valid, binding and
enforceable obligation of the maker thereof, subject to no right of
rescission, set-off, counterclaim or defense, or (ii) such Mortgage,
is not a valid, subsisting, enforceable and perfected first or second
lien on the Mortgaged Property;
(H) which the Leader determines, in its reasonable discretion,
that such Eligible Mortgage Loan is not eligible for sale in the
secondary market or for securitization without unreasonable credit
enhancement;
(I) which has a Material Exception with respect thereto; or
(J) in respect of which the related Mortgagor is the subject of
a bankruptcy proceeding.
"Commonly Controlled Entity" shall mean an entity, whether or not
--------------------------
incorporated, which is under common control with either Loan Party within the
meaning of Section 4001 of ERISA or is part of a group which includes either
Loan Party and which is treated as a single employer under Section 414 of the
Code.
"Contractual Obligation" shall mean as to any Person, any provision
----------------------
of any agreement, instrument or other undertaking to which such person is a
party or by which it or any of its property is bound or any provision of any
security issued by such Person.
"Core Mortgage Loan" shall mean a First Lien Mortgage Loan or a
------------------
Second Lien Mortgage Loan which has been originated in accordance with the
Underwriting Guidelines and as to which the representations and warranties set
forth on Schedule 1 hereof are true and correct.
"Custodial Agreement" shall mean the Custodial Agreement, dated as of
-------------------
the date hereof, among the Borrower, the Custodian and the Lender, substantially
in the form of Exhibit B hereto, as the same shall be modified and supplemented
---------
and in effect from time to time.
"Custodian" shall mean First Trust National Association, as custodian
---------
under the Custodial Agreement and its successors and permitted assigns
thereunder.
"Data Edit Sheet" shall mean a Data Edit Sheet in the form attached
---------------
as Exhibit G.
- - ------------
"Default" shall mean an Event of Default or an event that with notice
-------
or lapse of time or both would become an Event of Default.
"Dollars" and "$" shall mean lawful money of the United States of
------- -
America.
5
<PAGE>
"Due Diligence Review" shall mean the performance by the Lender of
--------------------
any or all of the reviews permitted under Section 11.16 hereof with respect to
any or all of the Mortgage Loans or the Borrower or related parties, as desired
by the Lender from time to time.
"Effective Date" shall mean the date upon which the conditions
--------------
precedent set forth in Section 5.01 shall have been satisfied.
"Eligible Mortgage Loan" shall mean a Mortgage Loan that is a Core
----------------------
Mortgage Loan, a Jumbo Mortgage Loan, or a Non-Conforming Mortgage Loan.
"ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as amended from time to time.
"ERISA Affiliate" shall mean any corporation or trade or business
---------------
that is a member of any group of organizations (i) described in Section 414(b)
or (c) of the Code of which the Borrower is a member and (ii) solely for
purposes of potential liability under Section 302(c)(11) of ERISA and Section
412(c)(11) of the Code and the lien created under Section 302(f) of ERISA and
Section 412(n) of the Code, described in Section 414(m) or (o) of the Code of
which either Loan Party is a member.
"Event of Default" shall have the meaning provided in Section 8
----------------
hereof.
"Exception" shall have the meaning assigned thereto in the Custodial
---------
Agreement.
"Exception Report" shall mean the exception report prepared by the
----------------
Custodian pursuant to the Custodial Agreement.
"Federal Funds Rate" shall mean, for any day, the weighted average of
------------------
the rates on overnight federal funds transactions with members of the Federal
Reserve System arranged by federal funds brokers, as published on the next
succeeding Business Day by the Federal Reserve Bank of New York, or, if such
rate is not so published for any day which is a Business Day, the average of the
quotations for the day of such transactions received by the Lender from three
federal funds brokers of recognized standing selected by it.
"First Lien Mortgage Loan" shall mean an Eligible Mortgage Loan
------------------------
secured by the lien on the Mortgaged Property, subject to no prior liens on such
Mortgaged Property other than Permitted Exceptions.
"Funding Date" shall mean the date on which an Advance is made
------------
hereunder.
"GAAP" shall mean generally accepted accounting principles as in
----
effect from time to time in the United States of America.
"Governmental Authority" shall mean any nation or government, any
----------------------
state or other political subdivision thereof, any entity exercising executive,
legislative, judicial, regulatory or administrative functions of or pertaining
to government and any court or arbitrator having jurisdiction over any Loan
Party, any of its Subsidiaries or any of its properties.
"Guarantee Obligation" as to any Person (the "guaranteeing
-------------------- ------------
person"), shall mean any obligation of (a) the guaranteeing person or (b)
------
another Person (including, without limitation, any
6
<PAGE>
bank under any letter of credit) with respect to which the guaranteeing person
has issued a reimbursement, counterindemnity or similar obligation, in either
case guaranteeing or in effect guaranteeing any Indebtedness, leases, dividends
or other obligations (the "primary obligations") of any other third Person
-------------------
(the "primary obligor") in any manner, whether directly or indirectly,
---------------
including, without limitation, any obligation of such guaranteeing person,
whether or not contingent, (i) to purchase any such primary obligation or any
property constituting direct or indirect security therefor, (ii) to advance or
supply funds (1) for the purchase or payment of any such primary obligation or
(2) to maintain working capital or equity capital of the primary obligor or
otherwise to maintain the net worth or solvency of the primary obligor, (iii) to
purchase property, securities or services primarily for the purpose of assuring
the owner of any such primary obligation of the ability of the primary obligor
to make payment of such primary obligation or (iv) otherwise to assure or hold
harmless the owner of any such primary obligation against loss in respect
thereof; provided, however, that the term Guarantee Obligation shall not include
-------- -------
endorsements of instruments for deposit or collection in the ordinary course of
business. The terms "Guarantee" and "Guaranteed" used as a verb shall have a
--------- ----------
correlative meaning. The amount of any Guarantee Obligation of any guaranteeing
person shall be deemed to be the lower of (a) an amount equal to the stated or
determinable amount of the primary obligation in respect of which such Guarantee
Obligation is made and (b) the maximum amount for which such guaranteeing person
may be liable pursuant to the terms of the instrument embodying such Guarantee
Obligation, unless such primary obligation and the maximum amount for which such
guaranteeing person may be liable are not stated or determinable, in which case
the amount of such Guarantee Obligation shall be such guaranteeing person's
maximum reasonably anticipated liability in respect thereof as determined by the
Loan Party in good faith.
"Guarantor" shall mean New Century Financial Corporation.
---------
"HUD" shall mean the Department of Housing and Urban Development, or
---
any federal agency or official thereof which may from time to time succeed to
the functions thereof.
"Indebtedness" shall mean, of any Person at any date, without
------------
duplication, (a) all indebtedness of such Person for borrowed money (whether by
loan or the issuance and sale of debt securities) or for the deferred purchase
price of property or services (other than current trade liabilities incurred in
the ordinary course of business and payable in accordance with customary
practices), (b) any other indebtedness of such Person which is evidenced by a
note, bond, debenture or similar instrument, (c) all obligations of such Person
under financing leases, (d) all obligations of such Person in respect of letters
of credit, acceptances or similar instruments issued or created for the account
of such Person and (e) all liabilities secured by any Lien on any property owned
by such Person even though such Person has not assumed or otherwise become
liable for the payment thereof.
"Indemnified Party" shall have the meaning provided in Section 11.03
-----------------
hereof.
"Initial Non-Conforming Mortgage Loan" shall mean a Mortgage Loan
------------------------------------
that, on the day such Mortgage Loan was first pledged to the Lender hereunder,
fails to conform to the Underwriting Guidelines but as to which all
representation and warranties contained in Schedule 1 (other than representation
(w)) are true and correct, and which is otherwise acceptable to the Lender in
its sole discretion.
"Interest Period" shall mean, with respect to any Advance, (i)
---------------
initially, the period commencing on the Funding Dare with respect to such
Advance and ending on the calendar day prior to the Payment Date of the next
succeeding month and (ii) thereafter, each period commencing on the
7
<PAGE>
Payment Date of a month and ending on the calendar day prior to the Payment Date
of the next succeeding month. Notwithstanding the foregoing, no Interest Period
may end after the Termination Date.
"Investment Common Act" shall mean the Investment Company Act of
---------------------
1940, as amended.
"Jumbo Mortgage Loan" shall mean a First Lien Mortgage Loan with a
-------------------
Par Amount which is at least $500,000 but no greater than $750,000 (unless
expressly approved in writing by the Lender), which has been originated in
accordance with the Underwriting Guidelines (except that the Par Amount is
greater than $500,000), and as to which the representations and warranties set
forth on Schedule 1 hereof are true and correct.
"Lender" shall have the meaning provided in the heading hereof.
------
"Loan Party" shall mean the collective reference to the Borrower and
----------
the Guarantor.
"LIBO Base Rate" shall mean for any Advance, with respect to each
--------------
day during each Interest Period pertaining to such Advance, the rate per annum
equal to the rate appearing at page 3750 of the Telerate Screen is one-month
LIBOR on the first day of such Interest Period, and if such rate shall not be so
quoted, the rate per annum at which the Lender is offered Dollar deposits at or
about 11:00 a.m., New York City time, on such date by prime banks in the
interbank eurodollar market where the eurodollar and foreign currency exchange
operations in respect of its Advances are then being conducted for delivery on
such day for a period of one month, and in an amount comparable to the amount of
the Advances to be outstanding on such day.
"LIBO Rate" shall mean with respect to each day during each interest
---------
Period pertaining to an Advance, a rate per annum determined by the Lender in
accordance with the following formula (rounded upwards to the nearest 1/100th of
one percent), which rate as determined by the Lender shall be conclusive absent
manifest error by the Lender:
LIBO Base Rate
------------------------------------------
1.00 - LIBO Reserve Requirements
"LIBO Reserve Requirements" shall mean for any interest Period for
-------------------------
any Advance, the aggregate (without duplication) of the rates (expressed as a
decimal fraction) of reserve requirements in effect on such day or during such
Interest Period, as applicable (including, without limitation, basic,
supplemental, marginal and emergency reserves under any regulations of the Board
of Governors of the Federal Reserve System or other Governmental Authority
having jurisdiction with respect thereto), dealing with reserve requirements
prescribed for eurocurrency funding (currently referred to as "Eurocurrency
Liabilities" in Regulation D of such Board) maintained by a member bank of such
Governmental Authority.
"Lien" shall mean any mortgage, lien, pledge, charge, security
----
interest or similar encumbrance.
"Loan Agreement" shall mean this Master Loan and Security Agreement,
--------------
as the same may be amended, supplemented or otherwise modified from time to
time.
8
<PAGE>
"Loan Documents" shall mean, collectively, this Loan Agreement, the
--------------
Note, the Custodial Agreement, and the Affiliate Guaranty.
"Loan-to-Value Ratio" or "LTV" shall mean with respect to any Mortgage
----------------------------
Loan, the ratio of (a) the Par Amount of the Mortgage Loan as of the date of
origination (unless otherwise indicated) to (b) the Appraised Value of the
Mortgaged Property or if the Mortgage Loan was made in connection with the
purchase of the related Mortgaged Property, the lesser of the Appraised Value
and the sales price of such property.
"Market Value" shall mean, with respect to any Mortgage Loan, the
------------
price at which such Mortgage Loan could be sold to a third-party, as determined
by the Lender in its sole discretion (exercised in good faith).
"Material Adverse Effect" shall mean a material adverse effect on (a)
-----------------------
the business, assets, property, business, condition (financial or otherwise) or
prospects of either Loan Party, (b) the ability of either Loan Party to perform
its obligations under any of the Loan Documents to which it is a party, (c) the
validity or enforceability of any of the Loan Documents, (d) the rights and
remedies of the Lender under any of the Loan Documents, (e) the timely payment
of the principal of or interest on the Advances or other amounts payable in
connection therewith or (f) the Collateral.
"Material Exception" shall mean, with respect to any Mortgage Loan,
------------------
any Exception listed on the Exception Report consisting of the absence from the
Mortgage File, or deficiency in respect of, any of the Mortgage Loan Documents
set forth in Section 2(I)(a), 2(I)(c), 2(I)(d), 2(I)(e), 2(I)(f), or 2(I)(g) of
the Custodial Agreement.
"Maximum Credit" shall mean $250,000,000.
--------------
"Monthly Payment" means the scheduled monthly payment of principal and
---------------
interest on a Mortgage Loan as adjusted in accordance with changes in the
Mortgage Interest Rate pursuant to the provisions of the Mortgage Note for an
adjustable rate Mortgage Loan.
"Mortgage" shall mean the mortgage, deed of trust or other instrument
--------
securing a Mortgage Note, which creates a first or second lien on the fee simple
in real property securing the Mortgage Note.
"Mortgage File" shall have the meaning assigned thereto in the
-------------
Custodial Agreement.
"Mortgage Interest Rate" means the annual rate of interest borne on a
----------------------
Mortgage Note, which shall be adjusted from time to time with respect to
adjustable rate Mortgage Loans.
"Mortgage Loan" shall mean a mortgage loan which the Custodian has
-------------
been instructed to hold for the Lender pursuant to the Custodial Agreement, and
which mortgage loan includes, without limitation (i) a Mortgage Note and related
Mortgage and (ii) all right, title and interest of the Borrower in and to the
Mortgaged Property covered by such Mortgage.
"Mortgage Loan Documents" shall mean, with respect to a Mortgage
-----------------------
Loan, the documents comprising the Mortgage File for such Mortgage Loan.
9
<PAGE>
"Mortgage Loan Schedule" shall mean a schedule of Mortgage Loans
----------------------
containing the following information with respect to each Mortgage Loan, to be
delivered by the Borrower to the Lender pursuant to Section 2.03(a) hereof: (i)
the Borrower's Mortgage Loan number; (ii) the Mortgagor's name and the street
address; (iii) the current principal balance; (iv) the original principal amount
with respect to any Mortgage Loan originated by the Borrower and the principal
amount purchased by the Borrower with respect to a Mortgage Loan acquired by the
Borrower with respect to a Mortgage Loan acquired by the Borrower subsequent to
its origination; (v) the combined LTV as of the date of the origination of the
related Mortgage Loan; (vi) the paid through date; (vii) the mortgage interest
rate; (viii) the final maturity date under the Mortgage Note; (ix) the Monthly
Payment; (x) whether such Mortgage Loan is a First Lien Mortgage Loan or a
Second Lien Mortgage Loan; (xi) such other information as shall be mutually
agreed upon by Borrower and Lender; and (xii) the Qualified Originator that
originated the Mortgage Loan.
"Mortgage Loan Tape" shall mean a computer-readable magnetic tape
------------------
containing the information with respect to each Mortgage Loan, to be delivered
by the Borrower to the Lender pursuant to Section 2.03(a) hereof.
"Mortgage Note" shall mean the original executed promissory note or
-------------
other evidence of the indebtedness of a mortgagor/borrower with respect to a
Mortgage Loan.
"Mortgage Property" shall mean the real property (including all
-----------------
improvements, buildings, fixtures, building equipment and personal property
thereon and all additions, alterations and replacements made at any time with
respect to the foregoing) and all other collateral securing repayment of the
debt evidenced by a Mortgage Note.
"Mortgagor" shall mean the obligor on a Mortgage Note.
---------
"Multiemployer Plan" shall mean a Plan which is a multiemployer plan
------------------
as defined in Section 4001(a)(3) of ERISA.
"Net Worth" shall mean, with respect to any Person, the excess of
---------
total assets of such Person, over total liabilities of such Person, determined
in accordance with GAAP.
"Non-Conforming Mortgage Loan" shall mean either an Initial
----------------------------
Non-Conforming Mortgage Loan or a Subsequent Non-Conforming Mortgage Loan.
"Non-Excluded Taxes" shall have the meaning provided in Section 2.09
------------------
hereof.
"Note" shall mean the promissory note provided for by Section 2.02(a)
----
hereof for Advances and any promissory note delivered in substitution or
exchange therefor, in each case as the same shall be modified and supplemented
and in effect from time to time.
"Notice of Borrowing and Pledge" shall have the meaning provided in
------------------------------
Section 2.03(a) hereof.
"Par Amount" shall mean, in respect of a Mortgage Loan at any time,
----------
the outstanding principal balance of such Mortgage Loan at such time.
"Participants" shall have the meaning set forth in Section 11.114(b)
------------
hereof.
10
<PAGE>
"Payment Date" shall mean the tenth day of each calendar month, or if
------------
such day is not a Business Day, the next succeeding Business Day.
"Payoff" shall mean, with respect to any Mortgage Loan, repayment by
------
the applicable Mortgagor of all outstanding principal thereunder together with
all interest accrued thereon to the date of such repayment and any penalty or
premium thereon.
"Payoff Proceeds" shall mean, with respect to any Mortgage Loan, all
---------------
funds received from the applicable Mortgagor in connection with a Payoff.
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
----
entity succeeding to any or all of its functions under ERISA.
"Permitted Exceptions" shall mean the exceptions to lien priority
--------------------
including but not limited to: (i) the lien of current real property taxes and
assessments not yet due and payable; (ii) covenants, conditions and
restrictions, rights of way, easements and other matters of the public record as
of the date of recording acceptable to mortgage lending institutions generally
and specifically referred to in the lender's title insurance policy delivered to
the originator of the Mortgage Loan and (A) referred to or to otherwise
considered In the appraisal (if any) made for the originator of the Mortgage
Loan or (B) which do not adversely affect the appraised value of the Mortgaged
Property set forth in such appraisal; (iii) other matters to which like
properties are commonly subject which do not materially interfere with the
benefits of the security intended to be provided by the Mortgage or the use,
enjoyment, value or marketability of the related Mortgaged Property; and (iv) in
the case of a Second Lien Mortgage Loan, a First Lien on the Mortgaged Property.
"Person" shall mean any individual, corporation, company, voluntary
------
association, partnership, joint venture, limited liability company, trust,
unincorporated association, government (or any agency, instrumentality or
political subdivision thereof) or any other entity of whatever nature.
"Plan" shall mean at a particular time, any employee benefit plan
----
which is covered by ERISA and in respect of which either Loan Party or a
Commonly Controlled Entity is (or, if such plan were terminated at such time,
would under Section 4069 of ERISA be deemed to be) an "employer" as defined in
Section 3(5) of ERISA.
"Post-Default Rate" shall mean, in respect of any principal of any
-----------------
Advance or any other amount under this Loan Agreement, the Note or any other
Loan Document that is not paid when due to the Lender (whether at stated
maturity, by acceleration, by optional or mandatory prepayment or otherwise), a
rate per annum during the period from and including the due date to but
excluding the date on which such amount is paid in full equal to 2% per annum
plus (a) the interest rate otherwise applicable to such Advance or other amount,
- - ----
or (b) if no interest rate is otherwise applicable, the LIBO Rate.
"Property" shall mean any right or interest in or to property of any
--------
kind whatsoever, whether real, personal or mixed and whether tangible or
intangible.
"Qualified Originator" shall mean (a) the Borrower and (b) any other
--------------------
originator of Mortgage Loans acceptable to the Lender.
11
<PAGE>
"Regulations G, T, U and X" shall mean Regulations G, T, U and X of
-------------------------
the Board of Governors of the Federal Reserve System (or any successor), as the
same may be modified and supplemented and in effect from time to time.
"Relevant States" shall have the meaning provided in Section 6.21
---------------
hereof.
"Reportable Event" shall mean any of the events set forth in Section
----------------
4043(b) of ERISA, other than those events as to which the thirty day notice
period is waived under subsections .13, .14, .16, .18, .l9 or .20 of PBGC Reg.
(S)2615.
"Responsible Officer" shall mean, as to any Person, the chief
-------------------
executive officer or, with respect to financial matters, the chief financial
officer of such Person; provided, that in the event any such officer is
--------
unavailable at any time he or she is required to take any action hereunder,
Responsible Officer shall mean any officer authorized to act on such officer's
behalf as demonstrated to the Lender to its reasonable satisfaction.
"Restricted Payments" shall mean with respect to any Person,
-------------------
collectively, all dividends or other distributions of any nature (cash,
securities, assets or otherwise), and all payments, by virtue of redemption or
otherwise, on any class of equity securities (including, without limitation,
warrants, options or rights therefor) issued by such Person, whether such
securities are now or may hereafter be authorized or outstanding and any
distribution in respect of any of the foregoing, whether directly or indirectly.
"Requirement of Law" shall mean as to any Person, the certificate
------------------
of incorporation and by-laws or other organizational or governing documents of
such Person, and any law, treaty; rule or regulation or determination of an
arbitrator or a court or other Governmental Authority, in each case applicable
to or binding upon such Person or any of its property or to which such Person or
any of its property is subject.
"Second Lien Mortgage Loan" shall mean an Eligible Mortgage Loan
-------------------------
secured by the lien on the Mortgaged Property, subject to one prior lien on such
Mortgaged Property securing financing obtained by the related Mortgagor and to
Permitted Exceptions.
"Secured Obligations" shall mean the unpaid principal amount of, and
-------------------
interest on the Advances, and all other obligations and liabilities of the
Borrower to the Lender, whether direct or indirect, absolute or contingent, due
or to become due, or now existing or hereafter incurred, which may arise under,
out of or in connection with this Loan Agreement, the Note, any other Loan
Document and any other document made, delivered or given in connection herewith,
or therewith, whether on account of principal, interest, reimbursement
obligations, fees, indemnities, costs, expenses (including, without limitation,
all fees and disbursements of counsel to the Lender that are required to be paid
by the Borrower pursuant to the terms hereof or thereof) or otherwise. For
purposes hereof, "interest" shall include, without limitation, intact accruing
after the maturity of the Advances and interest accruing after the filing of any
petition in bankruptcy, or the commencement of any insolvency, reorganization or
like proceeding, relating to the Borrower, whether or not a claim for post-
filing or post-petition interest is allowed in such proceeding.
"Securitization Letter" shall mean that certain letter agreement by
---------------------
and among Borrower, Lender, and Greenwich Capital Markets, Inc., dated the date
hereof, outlining rights and
12
<PAGE>
obligations with respect to subsequent securitizations of Mortgage Loans subject
to this Loan Agreement from time to time.
"Servicer" shall mean Comerica Mortgage Corporation, the Borrower or
--------
any other Servicer acceptable to the Lender in its sole discretion.
"Servicing Agreement" shall mean that certain servicing agreement
-------------------
between Comerica and the Borrower dated of September 15, 1997, or any other
Servicing Agreement acceptable to the Lender in its sole discretion.
"Servicing Records" shall have the meaning provided in Section
-----------------
11.15(b) hereof.
"Single Employer Plan" shall mean any Plan which is covered by Title
--------------------
IV of ERISA, but which is not a Multiemployer Plan.
"Subsequent Non-Conforming Mortgage Loan" shall mean a Non-Conforming
--------------------------------------
Mortgage Loan that was a Core Mortgage Loan or a Jumbo Mortgage Loan on the day
such Mortgage Loan was first pledged to the Lender hereunder, and that would
qualify as a Core Mortgage Loan or a Jumbo Mortgage Loan but for the fact that
it is now in excess of fifty-nine (59) days delinquent or thirty (30) days or
more delinquent in respect of the first Monthly Payment.
"Subsidiary" shall mean, with respect to any Person, any other Person
----------
of which at least a majority of the securities or other ownership interests
having by the terms thereof ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions of such
corporation, partnership or other entity (irrespective of whether or not at the
time securities or other ownership interests of any other class or classes of
such corporation, partnership or other entity shall have or might have voting
power by reason of the happening of any contingency) is at the time directly or
indirectly owned or controlled by such Person or one or more Subsidiaries of
such Person or by such Person and one or more Subsidiaries of such Person.
"Tangible Net Worth" shall mean, with respect to any Person, as of any
------------------
date of determination, the consolidated Net Worth of such Person and its
Subsidiaries, less the consolidated net book value of all assets of such Person
and its Subsidiaries (to the extent reflected as an asset in the balance sheet
of such Person or any Subsidiary at such date) which will be treated as
intangibles under GAAP, including, without limitation, such items as deferred
financing expenses, net leasehold improvements, good will, trademarks, trade
names, service marks, copyrights, patents, licenses and unamortized debt
discount and expense; provided, that residual securities issued by such Person
or its Subsidiaries shall not be treated as intangibles for purposes of this
definition.
"Termination Date" shall mean March 31, 1998, or such earlier date on
----------------
which this Loan Agreement shall terminate in accordance with the provisions
hereof or by operation of law, as same may be extended in accordance with
Section 2.11 hereof.
"Tranche A Advances" shall mean Advances so long as, and to the extent
------------------
that, they are secured by Core Mortgage Loans.
"Tranche B Advances" shall mean Advances so long as, and to the extent
------------------
that, they are secured by Jumbo Mortgage Loans.
13
<PAGE>
"Tranche C Advances" shall mean Advances so long as, and to the
-------------------
extent that, they are secured by Non-Conforming Mortgage Loans.
"Transmittal Letter" shall have the meaning assigned to such term
------------------
in the Custodial Agreement.
"Trust Receipt" shall have the meaning assigned to such term in the
-------------
Custodial Agreement.
"Underwriting Guidelines" shall mean the underwriting guidelines
-----------------------
attached as Exhibit E hereto, as amended from time to time in accordance with
---------
Section 7.15
"Uniform Commercial Code" shall mean the Uniform Commerical Code as in
-----------------------
effect on the date hereof in the State of New York; provided that if by reason
of mandatory provision of law, the perfection or the effect of perfection or
non-perfection of the security interest in any Collateral is governed by the
Uniform Commercial Code as in effect in a jurisdiction other than New York,
"Uniform Commercial Code" shall mean the Uniform Commercial Code as in effect in
such other jurisdiction for purposes of the provisions hereof relating to such
perfection or effect or perfection or non-perfection.
1.02 Accounting Terms and Determinations. Except as otherwise
-----------------------------------
expressly provided herein, all accounting terms used herein shall be
interpreted, and all financial statements and certificates and reports as to
financial matters required to be delivered to the Lender hereunder shall be
prepared, in accordance with GAAP.
SECTION 2 Advances. Note and Prepayments.
------------------------------
2.01 Advances. Subject to the terms and conditions of this Loan
--------
Agreement, the Lender agrees to make loans (individually, an "Advance";
-------
collectively, the "Advances") to the Borrower, from time to time on any
---------
Business Day from and including the Effective Date to but excluding the
Termination Date, in an aggregate principal amount at any one time outstanding
up to but not exceeding the lesser of (i) the Maximum Credit, and (ii) the
Borrowing Base at such time. Subject to the terms and conditions of this Loan
Agreement, the Borrower may borrow, repay and reborrow hereunder.
2.02 Notes.
-----
(a) The Advances made by the Lender shall be evidenced by a single
promissory note of the Borrower substantially in the form of Exhibit A hereto
---------
(the "Note"), dated the date hereof, payable to the Lender in a principal amount
----
equal to the amount of the Maximum Credit and otherwise duly completed. The
Lender shall have the right to have its Note subdivided, by exchange for
promissory notes of lesser denominations or otherwise.
(b) The date, amount and interest rate of each Advance made by the
Lender to the Borrower, and each payment made on account of the principal and
interest thereof, shall be recorded by the Lender on its books and, prior to any
transfer of the Note, endorsed by the Lender on the schedule attached to the
Note or any continuation thereof; provided that the failure of the Lender to
--------
make any such recordation or endorsement shall nor affect the obligations of the
Borrower to make a payment when due of any amount owing hereunder or under the
Note in respect of the Advances.
14
<PAGE>
2.03 Procedure for Borrowing.
-----------------------
(a) The Borrower may request a borrowing hereunder, on any Business
Day during the period from and including the Effective Date to and including the
Termination Date, by delivering to the Lender, with a copy to the Custodian, a
Mortgage Loan Tape, and an irrevocable written Notice of Borrowing and Pledge
substantially in the form of Exhibit D hereto (a "Notice of Borrowing and
--------- -----------------------
Pledge"), appropriately completed, which Notice of Borrowing and Pledge must be
- - ------
received by the Lender, with a copy to the Custodian, prior to 10:00 am., New
York City time, at least two (2) Business Days prior to the requested Funding
Date; provided that the Lender shall be under no obligation to make an Advance
more than once in any given week. Such Notice of Borrowing and Pledge shall (i)
contain the amount of the requested Advance, which shall in all events be at
least equal to $1,000,000, to be made on such Funding Date (setting forth the
amount of the Advance allocable to each Mortgage Loan set forth on the attached
Mortgage Loan Schedule). (ii) specify the requested Funding Date, which shall be
not earlier than the second Business Day following the date of such Notice of
Borrowing and Pledge, and (iii) contain (by attachment) such other information
reasonably requested by the Lender from time to time.
(b) The Borrower shall deliver (or cause to be delivered) and
release to the Custodian no later than 10:00 a.m., New York City time, two (2)
Business Days prior to the requested Funding Date, a complete Mortgage File
pertaining to each Eligible Mortgage Loan to be pledged to the Lender and
included in the Borrowing Base on such requested Funding Date, in accordance
with the terms and conditions of the Custodial Agreement.
(c) Pursuant to the Custodial Agreement, the Custodian shall
deliver to the Lender and the Borrower, no later 1:00 p.m., New York City time,
on a Funding Date, a Trust Receipt in respect of all Mortgage Loans pledged to
the Lender on such Funding Date and an Exception Report in respect of all
Mortgage Loans so pledged to the Lender. Subject to Section 5 hereof, such
Advance will then be made available to the Borrower by the Lender transferring,
via wire transfer (pursuant to wire transfer instructions provided by the
Borrower on or prior to such Funding Date) the aggregate amount of such Advance
in immediately available funds.
2.04 Repayment of Advances: Interest.
-------------------------------
(a) The Borrower hereby promises to repay in full on the
Termination Date the then aggregate outstanding principal amount of the
Advances.
(b) The Borrower hereby promises to pay to the Lender interest on
the unpaid principal amount of each Advance for the period from and including
the Funding Date of such Advance to but excluding the date such Advance shall be
paid in full, at a rate per annum equal to the LIBO Rate plus the Applicable
----
Margin. Notwithstanding the foregoing, the Borrower hereby promises to pay to
the Lender interest at the applicable Post-Default Rate on any principal of any
Advance and on any other amount payable by the Borrower hereunder or under the
Note that shall not be paid in full when due (whether at stated maturity, by
acceleration or by mandatory prepayment or otherwise) for the period from and
including the due date thereof to but excluding the date the same is paid in
full. Accrued interest on each Advance shall be payable monthly on each Payment
Date and on the Termination Date. Notwithstanding the foregoing, interest
accruing at the Post-Default Rate shall be payable to the Lender on demand.
Promptly after the determination of any interest rate provided for herein or any
change therein, the Lender shall give notice thereof to the Borrower.
15
<PAGE>
2.05 Limitation on Types of Advances: Illegality. Anything herein
-------------------------------------------
to the contrary notwithstanding, if, on or prior to the determination of any
LIBO Base Rate:
(a) the Lender determines, which determination shall be conclusive;
that quotations of interest rates for the relevant deposits referred to in
the definition of "LIBO Base Rate" in Section 1.01 hereof are not being
provided in the relevant amounts or the relevant maturities for purposes of
determining rates of interest for Advances as provided herein; or
(b) the Lender determines, which determination shall be conclusive,
that the relevant rate of interest referred to in the definition of "LIBO
Base Rate" in Section 1.01 hereof upon the basis of which the rate of
interest for Advances is to be determined is not likely adequately to cover
the cost to the Lender of making or maintaining Advances; or
(c) it becomes unlawful for the Lender to honor its obligation to
make or maintain Advances hereunder using a LIBO Rate;
then the Lender shall give the Borrower prompt notice thereof and, so long as
such condition remains in effect, the Lender shall be under no obligation to
make additional Advances, and the Borrower shall, at its option, either prepay
all such Advances as may be outstanding or pay interest on such Advances at a
rate per annum equal to the Federal Funds Rate plus the Applicable Margin;
provided, however that in the case of clause (b) above, if the Borrower decides
to pay interest on such Advances at the new rate, the Advances shall accrue
interest at the prior rate until five (5) days after the Borrower receives
notice from the Lender of such new interest rate.
2.06 Determination of Borrowing Base: Mandatory Prepayments or
---------------------------------------------------------
Pledge.
- - ------
(a) If at any time the aggregate outstanding principal amount of
Advances exceeds the Borrowing Base (a "Borrowing Base Deficiency"), as
-------------------------
determined by the Lender and notified to the Borrower on any Business Day, the
Borrower shall no later than one (1) Business Day after receipt of such notice,
at the option of the Borrower, either prepay the Advances in part or in whole or
pledge additional Eligible Mortgage Loans to the Lender (which shall be in all
respects acceptable to the Lender), such that after giving effect to such
prepayment or pledge the aggregate outstanding principal amount of the Advances
does not exceed the Borrowing Base.
(b) On the ninth day of each month (or if such day is not a
Business Day, the next succeeding Business Day), the Lender (or the Borrower if
the Borrower and the Lender shall mutually agree) shall calculate and deliver a
Borrowing Base Certificate in the form attached hereto as Exhibit H, such
---------
certificate to be based on the principal balance of the Mortgage Loans as of the
last calendar day of the prior month. In the event that such Borrowing Base
Certificate indicates that a Borrowing Base Deficiency exists, the Borrower
shall on the following Payment Date either prepay the Advances in part or in
whole or pledge additional Eligible Mortgages Loan to the Lender (which shall be
in all respects acceptable to the Lender), such that after giving effect to such
prepayment or pledge the aggregate outstanding principal amount of the Advances
does not exceed the Borrowing Base.
2.07 Optional Prepayments.
--------------------
(a) The Advances are prepayable without premium or penalty, in
whole or in part on each Payment Date. The Advances are prepayable at any other
time, in whole or in part, in accordance herewith and subject to clause (b)
below. Any amounts prepaid shall be applied to repay
16
<PAGE>
the outstanding principal amount of any Advances (together with interest
thereon) until paid in full. Amounts repaid may be reborrowed in accordance with
the terms of this Loan Agreement. If the Borrower intends to prepay a Advance in
whole or in part from any source, the Borrower shall give two (2) Business Days'
prior written notice thereof to the Lender. If such notice is given, the amount
specified in such notice shall be due and payable on the date specified therein,
together with accrued interest to such date on the amount prepaid. Partial
prepayments shall be in an aggregate principal amount of at least $100,000.
(b) If the Borrower makes a prepayment of the Advances on any day
which is not a Payment Date, the Borrower shall indemnify the Lender and hold
the Lender harmless from any actual loss or expense which the Lender may sustain
or incur arising from (a) the reemployment of funds obtained by the Lender to
maintain the Advances hereunder or from (b) fees payable to terminate the
deposits from which such funds were obtained, in either case, which actual loss
or expense shall be equal to an amount equal to the excess, as reasonably
determined by the Lender, of (i) its cost of obtaining funds for such Advances
for the period from the date of such payment to the last day of the Interest
Period(s) then in effect for such Advances over (ii) the amount of interest
likely to be realized by such Lender in redeploying the funds not utilized by
reason of such payment for such period. This Section 2.07 shall survive
termination of this Loan Agreement and payment of the Note.
2.08 Requirements of Law.
-------------------
(a) If any Requirement of Law (other than with respect to any
amendment made to the Lender's certificate of incorporation and by-laws or other
organizational or governing documents) or any change in the interpretation or
application thereof or compliance by the Lender with any request or directive
(whether or not having the force of law) from any central bank or other
Governmental Authority made subsequent to the date thereof:
(i) shall subject the Lender to any tax of any kind whatsoever with
respect to this Loan Agreement, the Note or any Advance made by it
(excluding net income taxes) or change the basis of taxation of payments to
the Lender in respect thereof;
(ii) shall impose, modify or hold applicable any reserve, special
deposit, compulsory Advance or similar requirement against assets held by,
deposits or other liabilities in or for the account of, advances, Advances
or other extensions of credit by, or any other acquisition of funds by, any
office of the Lender which is not otherwise included in the determination
of the LIBO Base Rate hereunder;
(iii) shall impose on the Lender any other condition;
and the result of any of the foregoing is to increase the cost to the Lender, by
an amount which the Lender deems to be material, of making, continuing or
maintaining any Advance or to reduce any amount receivable hereunder in respect
thereof, then, in any such case, the Borrower shall promptly pay the Lender such
additional amount or amounts as will compensate the Lender for such increased
cost or reduced amount receivable, commencing five (5) days following receipt of
notice thereof from the Lender.
(b) If the Lender shall have determined that the adoption of or any
change in any Requirement of Law (other than with respect to any amendment made
to the Lender's certificate of incorporation and by-laws or other organizational
or governing documents) regarding capital adequacy
17
<PAGE>
or in the interpretation or application thereof or compliance by the Lender or
any corporation controlling the Lender with any request or directive regarding
capital adequacy (whether or not having the force of law) from any Governmental
Authority made subsequent to the date hereof shall have the effect of reducing
the rate of return on the Lender's or such corporation's capital as a
consequence of its obligations hereunder to a level below that which the Lender
or such corporation (taking into consideration the Lender's or such
corporation's policies with respect to capital adequacy) by an amount deemed by
the Lender to be material, then from time to time, the Borrower shall promptly
pay to the Lender such additional amount or amounts as will compensate the
Lender for such reduction.
(c) If the Lender becomes entitled to claim any additional amounts
pursuant to this subsection, it shall promptly notify the Borrower of the event
by reason of which it has become so entitled. A certificate as to any
additional amounts payable pursuant to this subsection submitted by the Lender
to the Borrower shall be conclusive in the absence of manifest error.
2.09 Purposes of Advances. Each Advance shall be used to finance
--------------------
the origination or purchase of Eligible Mortgage Loans identified to the Lender
in writing on each Mortgage Loan Schedule, as such Mortgage Loan Schedule may be
amended from time to time.
2.10 Taxes.
-----
(a) All payments made by the Borrower under this Loan Agreement and
the Note shall be made free and clear of, and without deduction or withholding
for or on account of, any present or future income, stamp or other taxes,
levies, imposts, duties, charges, fees, deductions or withholdings, now or
hereafter imposed, levied, collected, withheld or assessed by any Governmental
Authority, excluding net income taxes and franchise taxes (imposed in lieu of
net income taxes) imposed on the Lender as a result of a present or former
connection between the Lender and the jurisdiction of the Governmental Authority
imposing such tax or any political subdivision or taxing authority thereof or
therein (other than any such connection arising solely from the Lender having
executed, delivered or performed its obligations or received a payment under, or
enforced, this Loan Agreement or any Note). If any such non-excluded taxes,
levies, imposts, duties, charges, fees deductions or withholdings ("Non-Excluded
------------
Taxes") are required to be withheld from any amounts payable to the Lender
- - -----
hereunder or under the Note, the amounts so payable to the Lender shall be
increased to the extent necessary to yield to the Lender (after payment of all
Non-Excluded Taxes) interest or any such other amounts payable hereunder at the
rates or in the amounts specified in this Loan Agreement; provided, however,
-------- -------
that the Borrower shall not be required to increase any such amounts payable to
the Lender that is not organized under the laws of the United States of America
or a state thereof if the Lender fails to comply with the requirements of clause
(b) of this Section. Whenever any Non-Excluded Taxes are payable by the
Borrower, as promptly as possible thereafter the Borrower shall send to the
Lender, as the case may be, a certified copy of an original official receipt
received by the Borrower showing payment thereof. If the Borrower fails to pay
any Non-Excluded Taxes when due to the appropriate taxing authority or fails to
remit to the Lender the required receipts or other required documentary
evidence, the Borrower shall indemnify the Lender for any incremental taxes,
interest or penalties that may become payable by the Lender as a result of any
such failure. The agreements in this Section shall survive the termination of
this Loan Agreement and the payment of the Advances and all other amounts
payable hereunder.
(b) If the Lender hereunder (or an assignee or participant that
acquires an interest hereunder in accordance with Section 11.14 hereof) that is
not incorporated under the laws of the United States of America or a state
thereof shall:
18
<PAGE>
(i) deliver to the Borrower (A) two duly completed copies of United
States Internal Revenue Service Form 1001 or 4224. or successor applicable
form, as the case may be, and (B) an Internal Revenue Service Form W-8 or W
-9, or successor app1icable form, as the case may be;
(ii) deliver to the Borrower two further copies of any such form or
certification on or before the date that any such form or certification
expires or becomes obsolete and after the occurrence of any event requiring
a change in the most recent form previously delivered by it to the
Borrower; and
(iii) obtain such extensions of time for filing and complete such
forms or certifications as may reasonably be requested by the Borrower;
unless in any such case an event (including, without limitation, any change in
treaty, law or regulation) has occurred prior to the date on which any such
delivery would otherwise be required which renders all such forms inapplicable
or which would prevent such Lender from duly completing and delivering any such
form with respect to it and such Lender so advises the Borrower. Such Lender
shall certify (i) in the case of a Form 1001 or 4224, that it is entitled to
receive payments under this Loan Agreement without deduction or withholding of
any United States federal income taxes and (ii) in the case of a Form W-8 or W-
9, that it is entitled to an exemption from United States backup withholding
tax. Each Person that shall become a Lender or a participant pursuant to Section
11.14 hereof shall, upon the effectiveness of the related transfer, be required
to provide all of the forms and statements required pursuant to this Section,
provided that in the case of a participant, such participant shall furnish all
- - --------
such required forms and statements to the Lender from which the related
participation shall have been purchased.
2.11 Extension of Termination Date. At the request of the Borrower,
-----------------------------
at least thirty (30) days prior to the then current Termination Date, the Lender
may in its sole discretion extend the Termination Date for a period of 364 days
by giving written notice of such extension to the Borrower no later than twenty
(20) days, but in no event earlier than thirty (30) days, prior to the then
current Termination Date.
SECTION 3 Payments: Computations: Etc.
----------------------------
3.01 Payments.
--------
(a) Except to the extent otherwise provided herein, all payments of
principal, interest and other amounts to be made by the Borrower under this Loan
Agreement and the Note, shall be made in Dollars, in immediately available
funds, without deduction, set-off or counterclaim, to the Lender at the
following account maintained by the Lender: Greenwich Capital Financial
Products, Inc., For the A/C of New Century Mortgage Corporation, Attn: Jim
Glover, at Chase Manhattan Bank, N.A., Account # 140095961, ABA # 021000021 not
later than 1:00 p.m., New York City time, on the date on which such payment
shall become due (and each such payment made after such time on such due date
shall be deemed to have been made on the next succeeding Business Day). The
Borrower acknowledges that it has no rights of withdrawal from the foregoing
account.
(b) Except to the extent otherwise expressly provided herein, if
the due date of any payment under this Loan Agreement or the Note would
otherwise fall on a day that is not a Business
19
<PAGE>
Day, such date shall be extended to the next succeeding Business Day, and
interest shall be payable for any principal so extended for the period of such
extension.
3.02 Computations. Interest on the Advances shall be computed on the
------------
basis of a 360-day year for the actual days elapsed (including the first day but
excluding the last day) occurring in the period for which payable.
SECTION 4 Collateral Security.
-------------------
4.01 Collateral; Security Interest.
-----------------------------
(a) Pursuant to the Custodial Agreement, the Custodian shall hold
the Mortgage Loan Documents as exclusive bailee and agent for the Lender
pursuant to terms of the Custodial Agreement and shall deliver Trust Receipts to
the Lender each to the effect that it has reviewed such Mortgage Loan Documents
in the manner and to the extent required by the Custodial Agreement and
identifying any Exceptions in such Mortgage Loan Documents as so reviewed in the
Exception Reports.
(b) Each of the following items of property is hereinafter referred
to as the "Collateral":
----------
(i) all Mortgage Loans identified on a Notice of Borrowing and
Pledge delivered by the Borrower to the Lender and the Custodian from time
to time ;
(ii) all Mortgage Loan Documents, including without limitation all
promissory notes, and all Servicing Records, Servicing Agreements,
servicing rights, and any other collateral pledged or otherwise relating to
such Mortgage Loan, together with all files, documents, instruments,
surveys, certificates, correspondence, appraisals, computer programs,
computer storage media, accounting records and other books and records
relating thereto;
(iii) all mortgage guaranties and insurance relating to such Mortgage
Loans (issued by governmental agencies or otherwise) and any mortgage
insurance certificate or other document evidencing such mortgage guaranties
or insurance relating to such Mortgage Loans and all claims and payments
thereunder;
(iv) all other insurance policies and insurance proceeds relating to
any Mortgage Loan or the related Mortgaged Property;
(v) all purchase or take-out commitments relating to or
constituting any or all of the foregoing;
(vi) all Blocked Accounts and the balance from time to time standing
to the credit of Blocked Accounts and all rights with respect thereto;
(vii) all collateral, however defined, under any other agreement
between the Borrower or any of its Affiliates on the one hand and the
Lender or any of its Affilitates on the other hand;
20
<PAGE>
(viii) all "accounts", "chattel paper" and "general intangibles" as
defined in the Uniform Commercial Code relating to or constituting any and
all of the foregoing; and
(ix) any and all replacements, substitutions, distributions on or
proceeds of any and all of the foregoing.
(c) The Borrower hereby pledges to the Lender, and grants a security
interest in favor of the Lender in, all of the Borrower's right, title and
interest in, to and under the Collateral, whether now owned or hereafter
acquired, now existing or hereafter created and wherever located, to secure the
Secured Obligations. The Borrower agrees to mark its computer records and tapes
to evidence the interests granted to the Lender hereunder.
4.02 Further Documentation. At any time and from time to time, upon
---------------------
the written request of the Lender, and at the sole expense of the Borrower, the
Borrower will promptly and duly execute and deliver, or will promptly cause to
be executed and delivered, such further instruments and documents and take such
further action as the Lender may reasonably request for the purpose of obtaining
or preserving the full benefits of this Loan Agreement and of the rights and
powers herein granted, including, without limitation, the filing of any
financing or continuation statements under the Uniform Commercial Code in effect
in any jurisdiction with respect to the Liens created hereby. The Borrower also
hereby authorizes the Lender to file any such financing or continuation
statement without the signature of the Borrower to the extent permitted by
applicable law. A carbon, photographic or other reproduction of this Loan
Agreement shall be sufficient as a financing statement for filing in any
jurisdiction.
4.03 Changes in Locations, Name, etc. The Borrower shall not (i)
-------------------------------
change the location of its chief executive office/chief place of business from
that specified in Section 6 hereof or (ii) change its name, identity or
corporate structure (or the equivalent) or change the location where it
maintains its records with respect to the Collateral unless it shall have given
the Lender at least 30 days prior written notice thereof and shall have
delivered to the Lender all Uniform Commercial Code financing statements and
amendments thereto as the Lender shall request and taken all other actions
deemed necessary by the Lender to continue its perfected status in the
Collateral with the same or better priority.
4.04 Lender's Appointment as Attorney-in-Fact.
----------------------------------------
(a) The Borrower hereby irrevocably constitutes and appoints the
Lender and any officer or agent thereof, with full power of substitution, as its
true and lawful attorney-in-fact with full irrevocable power and authority in
the place and stead of the Borrower and in the name of the Borrower or in its
own name, from time to time in the Lender's discretion, for the purpose of
carrying out the terms of this Loan Agreement, to take any and all appropriate
action and to execute any and all documents and instruments which may be
necessary or desirable to accomplish the purpose of this Loan Agreement, and,
without limiting the generality of the foregoing, the Borrower hereby gives the
Lender the power and right, on behalf of the Borrower, without assent by, but
with notice to, the Borrower, if an Event of Default shall have occurred and be
continuing, to do the following:
(i) in the name of the Borrower or its own name, or otherwise, to take
possession of and endorse and collect any checks, drafts, notes,
acceptances or other instruments for the payment of moneys due under any
mortgage insurance or with respect to any other Collateral and to file any
claim or to take any other action or proceeding in any court of law or
equity or
21
<PAGE>
otherwise deemed appropriate by the Lender for the purpose of collecting
any and all such money due under any such mortgage insurance or with
respect to any other Collateral whenever payable;
(ii) to pay or discharge taxes and Liens levied or placed on or
threatened against the Collateral; and
(iii) (A) to direct any party liable for any payment under any
Collateral to make payment of any and all moneys due or to become due
thereunder directly to the Lender or as the Lender shall direct; (B) to ask
or demand for, collect, receive payment of and receipt for, any and all
moneys, claims and others amount due or to become due at any time in
respect of or arising out of any Collateral; (C) to sign and endorse any
invoices, assignments, verifications, notices and other documents in
connection with any of the Collateral; (D) to commence and prosecute any
suits, actions or proceedings at law or in equity in any court of competent
jurisdiction to collect the Collateral or any thereof and to enforce any
other right in respect of any collateral; (E) to defend any suit, action or
proceeding brought against the Borrower with respect to any Collateral; (F)
to settle, compromise or adjust any suit, action or proceeding described
in clause (E) above and, in connection therewith, to give such discharges
or releases as the Lender may deem appropriate; and (G) generally, to sell,
transfer, pledge and make any agreement with respect to or otherwise deal
with any of the Collateral as fully and completely as though the Lender
were the absolute owner thereof for all purposes, and to do, at the
Lender's option and the Borrower's expenses, at any time, and from time to
time, all acts and things which the Lender deems necessary to protect,
preserve to realize upon the Collateral and the Lender's Liens thereon and
to effect the intent of this Loan Agreement, all as fully and effectively
as the Borrower might do.
The Borrower hereby ratifies all that said attorneys shall lawfully do or cause
to be done by virtue hereof. This power of attorney is a power coupled with an
interest and shall be irrevocable.
(b) The Borrower also authorizes the Lender, at any time and from
time to time, to execute, in connection with any sale provided for in Section
4.07 hereof, any endorsements, assignments or other instruments of conveyance or
transfer with respect to the Collateral.
(c) The powers conferred on the Lender are solely to protect the
Lender's interests in the Collateral and shall not impose any duty upon the
Lender to exercise any such powers. The Lender shall be accountable only for
amounts that it actually receives as a result of the exercise of such powers,
and neither the Lender nor any of its officers, directors, or employees shall be
responsible to the Borrower for any act failure to act hereunder, except for its
own gross negligence or willful misconduct.
4.05 Performance by Lender of Borrower's Obligations. If the
-----------------------------------------------
Borrower fails to perform or comply with any of its agreements contained in the
Loan Documents and the Lender may itself perform or comply, or otherwise cause
performance or compliance, with such agreement, the expenses of the Lender
incurred in connection with such performance or compliance, together with
interest thereon at a rate per annum equal to the Post-Default Rate, shall be
payable by the Borrower to the Lender on demand and shall constitute Secured
Obligations.
4.06 Proceeds. If an Event of Default shall occur and be continuing,
--------
(a) all proceeds of Collateral receive by the Borrower consisting of cash,
checks and other near-cash items
22
<PAGE>
shall be held by the Borrower in trust for the Lender, segregated from other
funds of the Borrower, and shall forthwith upon receipt by the Borrower be
turned over to the Lender in the exact form received by the Borrower (duly
endorsed by the Borrower to the Lender, if required) and (b) any and all such
proceeds received by the Lender (whether from the Borrower or otherwise) may, in
the sole discretion of the Lender, be held by the Lender as collateral security
for, and/or then or at any time thereafter may be applied by the Lender against,
the Secured Obligations (whether matured or unmatured), such application to be
in such order as the Lender shall elect. Any balance of such proceeds remaining
after the Secured Obligations shall have been paid in full and this Loan
Agreement shall have been terminated shall be paid over to the Borrower or to
whomsoever may be lawfully entitled to receive the same. For purposes hereof,
proceeds shall include, but not be limited to, all principal and interest
payments, all prepayments and payoffs, insurance claims, condemnation awards,
sale proceeds, real estate owned rents and any other income and all other
amounts received with respect to the Collateral.
4.07 Remedies. If an Event of Default shall occur and be continuing,
--------
the Lender may exercise, in addition to all other rights and remedies granted to
it in this Loan Agreement and in any other instrument or agreement securing,
evidencing or relating to the Secured Obligations, all rights and remedies of a
secured party under the Uniform Commercial Code. Without limiting the generality
of the foregoing, the Lender without demand of performance or other demand,
presentment, protest, advertisement or notice of any kind (except any notice
required by law referred to below) to or upon the Borrower or any other Person
(each and all of which demands, presentments, protests, advertisements and
notices are hereby waived), may in such circumstances forthwith collect,
receive, appropriate and realize upon the Collateral, or any part thereof,
and/or may forthwith sell (on a servicing released basis, at the Lender's
option), lease, assign, give option or options to purchase, or otherwise dispose
of and deliver the Collateral or any part thereof (or contract to do any of the
foregoing), in one or more parcels or as an entirety at public or private sale
or sales, at any exchange, broker's board or office of the Lender or elsewhere
upon such terms and conditions as it may deem advisable and at such prices as it
may deem best, for cash or on credit or for future delivery without assumption
of any credit risk. The Lender shall have the right upon any such public sale or
sales, and, to the extent permitted by law, upon any such private sale or sales,
to purchase the whole or any part of the Collateral so sold, free of any right
or equity of redemption in the Borrower, which right or equity is hereby waived
or released. The Borrower further agrees, at the Lender's request, to assemble
the Collateral and make it available to the Lender at places which the Lender
shall resonably select, whether at the Borrower's premises or elsewhere. The
Lender shall apply the net proceeds of any such collection, recovery, receipt,
appropriation, realization or sale, after deducting all reasonable costs and
expenses of every kind incurred therein or incidental to the care or safekeeping
of any of the Collateral or in any way relating to the Collateral or the rights
of the Lender hereunder, including without limitation reasonable attorneys' fees
and disbursements, to the payment in whole or in part of the Secured
Obligations, in such order as the Lender may elect, and only after such
application and after the payment by the Lender of any other amount required or
permitted by any provision of law, including without limitation Section 9-
504(1)(c) of the Uniform Commercial Code, need the Lender account for the
surplus, if any, to the Borrower. To the extent permitted by applicable law, the
Borrower waives all claims, damages and demands it may acquire against the
Lender arising out of the exercise by the Lender of any of its rights hereunder,
other than those claims, damages and demands arising from the gross negligence
or willful misconduct of the Lender. If any notice of a proposed sale or other
disposition of Collateral shall be required by law, such notice shall be deemed
reasonable and proper if given at least 10 days before such sale or other
disposition. The Borrower shall remain liable for any deficiency (plus accrued
interest thereon as contemplated pursuant to Section 2.04(b) hereof) if
23
<PAGE>
the proceeds of any sale or other disposition of the Collateral are insufficient
to pay the Secured Obligations and the fees and disbursements of any attorneys
employed by the Lender to collect such deficiency.
4.08 Limitation on Duties Regarding Presentation of Collateral. The
---------------------------------------------------------
Lender's duty with respect to the custody, safekeeping and physical preservation
of the Collateral in its possession, under Section 9-207 of the Uniform
Commercial Code or otherwise, shall be to deal with it in the same manner as the
Lender deals with similar property for its own account. Neither the Lender nor
any of its directors, officers or employees shall be liable for failure to
demand, collect or realize upon all or any part of the Collateral or for any
delay in doing so or shall be under any obligation to sell or otherwise dispose
of any Collateral upon the request of the Borrower or otherwise.
4.09 Powers Coupled with an Interest. All authorizations and agencies
-------------------------------
herein contained with respect to the Collateral are irrevocable and powers
coupled with an interest.
4.10 Release of Security Interest. Upon termination of this Loan
----------------------------
Agreement and repayment to the Lender of all Secured Obligations and the
performance of all obligations under the Loan Documents the Lender shall release
its security interest in any remaining Collateral; provided that if any payment,
or any part thereof, of any of the Secured Obligations is rescinded or must
otherwise be restored or returned by the Lender upon the insolvency, bankruptcy,
dissolution, liquidation or reorganization of the Borrower, or upon or as a
result of the appointment of a receiver, intervenor or conservator of, or a
trustee or similar officer for, the Borrower or any substantial part of its
Property, or otherwise, this Loan Agreement, all rights hereunder and the Liens
created hereby shall continue to be effective, or be reinstated, as though such
payments had not been made.
SECTION 5 Conditions Precedent
--------------------
5.01 Initial Advance. The agreement of the Lender to make the initial
---------------
Advance requested to be made by it hereunder is subject to the satisfaction,
immediately prior to or concurrently with the making of such Advance, of the
following conditions precedent:
(a) Loan Agreement. The Lender shall have received this Loan
--------------
Agreement, executed and delivered by a duly authorized officer of the
Borrower.
(b) Note. The Lender shall have received the Note, conforming to
----
the requirements hereof and executed by a duly authorized officer of the
Borrower.
(c) Custodial Agreement. The Lender shall have received the Custodial
-------------------
Agreement, conforming to the requirements hereof and executed by a duly
authorized officer of the Borrower and the Custodian.
(d) Securitization Letter. The Lender shall have received the
---------------------
Securitization Letter, in form and substance satisfactory to the Lender and
executed by a duly authorized officer of the Borrower.
(e) Servicing Agreement(s); Blocked Account Agreement. The Lender
-------------------------------------------------
shall have received a Blocked Account Agreement from the Servicer, with the
Servicing Agreement attached thereto. Such Blocked Account Agreement shall
certify that the attached Servicing Agreement is a true, correct and
complete copy of the original and that the Servicer consents to
24
<PAGE>
terminate such Servicing Agreement upon notification by the Lender of an
occurrence of an Event of Default.
(f) Filings, Registrations, Recordings. Any documents (including,
----------------------------------
without limitation, financing statements) required to be filed, registered
or recorded in order to create, in favor of the Lender, a perfected, first-
priority security interest in the Collateral, subject to no Liens other
than those created hereunder, shall have been properly prepared and
executed for filing (including the applicable county(ies) if the Lender
determines such filings are necessary in its sole discretion), registration
or recording in each office in each jurisdiction in which such filings,
registrations and recordations are required to perfect such first-priority
security interest.
(g) Corporate Proceedings. The Lender shall have received a
---------------------
certificate of the Secretary or Assistant Secretary of each Loan Party,
dated as of the date hereof, and certifying (A) that attached thereto is a
true, complete and correct copy of (i) the articles of incorporation of
each Loan Party, (ii) the by-laws of each Loan Party, and (iii) resolutions
duly adopted by the Board of Directors of each Loan Party authorizing the
execution, delivery and performance of this Loan Agreement, the Notes and
the other Loan Documents to which it is a party, and the borrowings
contemplated hereunder, and that such resolutions have not been amended,
modified, revoked or rescinded, and (B)as to the incumbency and specimen
signature of each officer executing any Loan Documents on behalf of each
Loan Party and authorized to execute any Notice of Borrowing, and such
certificate and the resolutions attached thereto shall be in form and
substance satisfactory to the Lender.
(h) Good Standing Certificates. The Lender shall have received
--------------------------
copies of certificates evidencing the good standing of the Borrower and the
Guarantor respectively, dated as of a recent date, from the Secretary of
State (or other appropriate authority) of the State of California and the
Secretary of State (or other appropriate authority) of the State of
Delaware, respectively, and of each other jurisdiction where the ownership,
lease or operation of property, or the conduct of business, requires the
Borrower or the Guarantor to qualify as a foreign corporation, except where
the failure to qualify would not have a Material Adverse Effect.
(i) Legal Opinions. The Lender shall have received the executed
--------------
legal opinion of Brad A. Morrice, Esq., General Counsel of each Loan Party,
addressing the matters set forth in the form attached hereto as Exhibit C,
---------
dated the initial Funding Date and otherwise in form and substance
acceptable to the Lender and covering such other matters incident to the
transactions contemplated by this Loan Agreement as the Lender shall
reasonably request.
(j) Fees and Expenses. The Lender shall have received all fees and
-----------------
expenses required to be paid by the Borrower on or prior to the initial
Funding Date pursuant to Section 11.03(b).
(k) Financial Statements. The Lender shall have received the
--------------------
financial statements referenced in Section 6.01(a).
(l) Underwriting Guidelines. The Lender and the Borrower shall have
-----------------------
agreed upon the Borrower's current Underwriting Guidelines for Mortgage
Loans and the Lender shall have received a certified copy thereof.
25
<PAGE>
(m) Consents, Licenses, Approvals, etc. The Lender shall have
-----------------------------------
received copies certified by the Borrower of all consents, licenses and
approvals, if any, required in connection with the execution, delivery and
performance by the Borrower of, and the validity and enforceability of, the
Loan Documents, which consents, licenses and approvals shall be in full
force and effect.
(n) Insurance. The Lender shall have received evidence in form and
---------
substance satisfactory to the Lender showing compliance by the Borrower as
of such initial Funding Date with Section 7.03 hereof.
(o) Affiliate Guaranty. The Lender shall have received the Affiliate
------------------
Guaranty, duly executed by the Guarantor; and
(p) Other Documents. The Lender shall have received such other
---------------
documents as the Lender or its counsel may reasonably request.
5.02 Initial and Subsequent Advances. The making of each Advance to
------------------------------
the Borrower (including the initial Advance) on any Business Day is subject to
the satisfaction of the following further conditions precedent, both immediately
prior to the making of such Advance and also after giving effect thereto and to
the intended use thereof:
(a) No Default. No Default or Event of Default shall have occurred
----------
and be continuing.
(b) Representations and Warranties. Each representation and
------------------------------
warranty made by the Borrower in Section 6 hereof and elsewhere in each of
the Loan Documents, shall be true and correct on and as of the date of the
making of such Advance (in the case of the representations and warranties
in Schedule 1, solely with respect to Mortgage Loans included in the
Borrowing Base on such date) with the same force and effect as if made on
and as of such date (or, if any such representation or warranty is
expressly stated to have been made as of a specific date, as of such
specific date). The Borrower shall also be in compliance with all
governmental licenses and authorizations and qualified to do business and
in good standing in all required jurisdictions where the failure to be so
qualified should reasonably be expected to have a Material Adverse Effect.
(c) Borrowing Base. The Aggregate outstanding principal amount of
--------------
the Advances shall not exceed the lesser of the Borrowing Base and the
Maximum Credit.
(d) Notice of Borrowing and Pledge. The Lender shall have received
------------------------------
a Notice of Borrowing and Pledge and Mortgage Loan Schedule in accordance
with Section 2.O3(a) hereof, appropriately completed.
(e) Trust Receipt: Exception Report. The Lender shall have received
-------------------------------
from the Custodian a Trust Receipt in respect of all Mortgage Loans to be
pledged hereunder on such Business Day and a corresponding Exception
Report, with Exceptions (as defined in the Custodial Agreement) in respect
of such Mortgage Loans acceptable to the Lender in its sole discretion, in
each case dated such Business Day and duly completed.
26
<PAGE>
(f) Additional Matters. All corporate and other proceedings, and
------------------
all documents, instruments and other legal matters in connection with the
transactions contemplated by this Loan Agreement and the other Loan Documents
shall be reasonably satisfactory in form and substance to the Lender, and the
Lender shall have received such other documents and legal opinions in respect of
any aspect or consequence of the transactions contemplated hereby or thereby as
it shall reasonably request.
(g) No Material Adverse Effect. There shall not have occurred one or
--------------------------
more events that, in the reasonable judgment of the Lender, constitutes
or should reasonably be expected to constitute a Material Adverse Effect.
(h) Additional Option. In the event that the Mortgage Loans to be
-----------------
pledged would cause the aggregate outstanding principal balance of Mortgage
Loans pledged secured by Mortgaged Property from any state to exceed 10% of the
aggregate outstanding principal balance of Mortgage Loans pledged hereunder,
then the Borrow shall, upon request by the Lender, deliver an opinion acceptable
to the Lender from outside counsel in such state, substantially in the form of
items #12 and 13 of Exhibit C.
(i) Due Diligence Review. Subject to the Lender's right to perform
--------------------
one or more Due Diligence Reviews pursuant to Section 11.16 hereof, the Lender
shall have completed its due diligence review of the Mortgage Loan Documents for
each Advance and such other documents, records, agreements, instruments,
mortgaged properties or information relating to such Advances as the Lender in
its sole discretion deems appropriate to review and such review shall be
satisfactory to the Lender in its sole discretion.
(j) True Sale Opinion. With respect to any Mortgage Loan that was
-----------------
funded in the name of or acquired by a Qualified Originator which is an
Affiliate of the Borrower, the Lender may, in its sole discretion, require the
Borrower to provide evidence sufficient to satisfy the Lender that such Mortgage
Loan was acquired in a legal sale, including without limitation, an opinion, in
form and substance and from an attorney, in both cases, acceptable to the Lender
in its sole discretion, that such Mortgage Loan was acquired in a legal sale.
SECTION 6 Representations and Warranties. As of the Effective Date and
------------------------------
each Funding Date, Borrower represents and warrants to the Lender that:
6.01 Financial Condition.
-------------------
(a) The audited consolidated balance sheet of each Loan Party and
its respective consolidated Subsidiaries as at December 31, 1996, reported
thereon by KPMG Peat Marwick, a copy of which has heretofore been furnished to
the Lender, is complete and correct and presents fairly the consolidated
financial condition of each Loan Party and its respective consolidated
Subsidiaries as at such dates and the consolidated results of their operations
and their consolidated cash flows for the fiscal year then ended.
(b) Such financial statement, including the related schedules and
notes thereto, has been prepared in accordance with GAAP applied consistently
throughout the periods involved (except as approved by such accountants or
Responsible Officer, as the case may be, and as disclosed therein).
27
<PAGE>
(c) Neither Loan Party, nor any of its respective consolidated
Subsidiaries had, at the date of the financial statement referred to above, any
material Guarantee Obligation, contingent liability or liability for taxes,
or any long-term lease or unusual forward or long-term commitment, including,
without limitation, any interest rate or foreign currency swap or exchange
transaction, or other financial derivative, which is not reflected in the
foregoing statements or in the notes thereto.
6.02 No Change. Since December 31, 1996, there has been no
---------
development or event nor any prospective development or event which has had or
should reasonably be expected to have a Material Adverse Effect.
6.03 Corporate Existence: Compliance with Law. (a) The Borrower is a
----------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of California, (b) The Guarantor is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
(c) Each Loan Party has the corporate power and authority, and has all
governmental licenses, authorizations, consents and approvals necessary, to own
and operate its property, to lease the property it operates as lessee and to
carry on its business as now being or as proposed to be conducted, (d) Each Loan
Party is duly qualified to do business and is in good standing under the laws of
each jurisdiction in which the nature of the business conducted by it makes such
qualification necessary and where failure so to qualify should be reasonably
expected (either individually or in the aggregate) to have a Material Adverse
Effect, and (e) Each Loan Party is in compliance in all material respects with
all Requirements of Law.
6.04 Corporate Power: Authorization; Enforceable Obligations.
-------------------------------------------------------
(a) Each Loan Party has the corporate power and authority, and the
legal right, to make, deliver and perform its obligations under each Loan
Document to which it is a party, and to perform thereunder, and has taken all
necessary corporate action to authorize the terms and conditions of each Loan
Document to which it is a party, and the execution, delivery and performance
thereof.
(b) No consent or authorization of, approval by, notice to, filing
with or other act by or in respect of, any Governmental Authority or any other
Person is required or necessary in connection with the execution, delivery,
performance, validity or enforceability of each Loan Document, except (i) for
filings and recordings in respect of the Liens created pursuant to this Loan
Agreement, and (ii) as previously obtained and currently in full force and
effect.
(c) Each Loan Document has been duly and validly executed and
delivered by each Loan Party which is a party thereto, and constitutes, a
legal, valid and binding obligation of each Loan Party which is a party thereto,
enforceable against such Loan Party in accordance with their terms, except as
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting the enforcement of
creditors' rights generally and by general equitable principles (whether
enforcement is sought by proceedings in equity or at law).
6.05 No Legal Bar. The execution, delivery and performance of each
------------
Loan Document which each Loan Party is a party thereto will not violate any
Requirement of Law or Contractual Obligation of such Loan Party or of any of its
Subsidiaries and will not result in, or require, the creation or Imposition of
any Lien (other than the Liens created hereunder) on any of their respective
properties or revenues pursuant to any such Requirement of Law or Contractual
Obligation.
28
<PAGE>
6.06 No Material Litigation. There are no actions, suits,
----------------------
arbitrations, investigations or proceedings of or before any arbitrator or
Governmental Authority pending or, to the knowledge of either Loan Party,
threatened against either Loan Party or any of its respective Subsidiaries or
against any of its or their respective properties or revenues, other than those
actions, suits, arbitrations, investigations or proceedings described on
Schedule 4 hereto, none of which should reasonably be expected to have a
Material Adverse Effect.
6.07 No Default. Neither Loan Party nor any of their respective
----------
Subsidiaries is in default under or with respect to any of their Contractual
Obligations in any respect which should reasonably be expected to have a
Material Adverse Effect. No Default or Event of Default has occurred and is
continuing.
6.08 Collateral: Collateral Security.
-------------------------------
(a) The Borrower has not assigned, pledged, or otherwise conveyed or
encumbered any of the Collateral to any Person other than the Lender, and
immediately prior to the pledge of such Collateral, the Borrower was the sole
owner of the Collateral and had good and marketable title thereto, free and
clear of all Liens, in each case except for Liens that have been released or are
to be released simultaneously with the Liens granted in favor of the Lender
hereunder.
(b) The provisions of this Loan Agreement are effective to create in
favor of the Lender a valid security interest in all right, title and interest
of the Borrower in, to and under the Collateral.
(c) Upon (i) receipt by the Custodian of each Mortgage Note, and
(ii) the filing (to the extent such interest can be perfected by filing under
the Uniform Commercial Code) of financing statements on Form UCC-l naming the
Lender as "Secured Party" and the Borrower as "Debtor", and describing the
Collateral, in the jurisdictions and recording offices listed on Schedule 2
attached hereto, in both instances, the security interests granted hereunder in
the Collateral will constitute fully perfected first-priority security interests
under the Uniform Commercial Code in all right, title and interest of the
Borrower in, to and under such Collateral.
6.09 Chief Executive Office. The Borrower's chief executive office on
----------------------
the Effective Date is located at 18400 Von Karman, Suite 1000, Irvine,
California 92612. The Guarantor's chief executive office on the Effective Date
is located at 18400 Von Karman, Suite 1000, Irvine, California 92612.
6.10 Location of Books and Records. The location where the Borrower
-----------------------------
keeps its books and records, including all computer tapes and records relating
to the Collateral is its chief executive office.
6.11 No Burdensome Restrictions. No Requirement of Law or Contractual
--------------------------
Obligation of the Borrower or any of its Subsidiaries has a Material Adverse
Effect.
6.12 Taxes. Each of the Loan Parties and its respective Subsidiaries
-----
has filed all Federal and state income tax returns and all other material tax
returns that are required to be filed by them and has paid all taxes due
pursuant to such returns or pursuant to any assessment received by any of them,
except for any such taxes or assessments, if any, that are being appropriately
contested in good faith by appropriate proceedings diligently conducted and with
respect to which adequate reserves
29
<PAGE>
in conformity with GAAP have been provided. No tax Lien has been filed, and, to
the knowledge of the Borrower, no claim is being asserted, with respect to any
such tax or assessment.
6.13 Margin Regulations. No part of the proceeds of any Advances will
------------------
be used for "purchasing" or "carrying" any "margin stock" within the respective
meanings of each of the quoted terms under, or for any other purpose which
violates or would be inconsistent with the provisions of, Regulation G, T, U or
X.
6.14 Investment Company Act: Other Regulations. The Borrower is not
-----------------------------------------
an "investment company", or a company "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940, as amended. The
Borrower is not subject to regulation under any Federal or state statute or
regulation which limits its ability to incur Indebtedness.
6.15 Subsidiaries. All of the Subsidiaries of each Loan Party at the
-----------
date hereof are listed on Schedule 3 to this Loan Agreement.
6.16 Origination and Acquisition of Mortgage Loans. The Mortgage were
---------------------------------------------
originated or acquired by the Borrower, and the origination and collection
practices used by the Borrower or Qualified Originator, if applicable, with
respect to the Mortgage Loans have been, in all respects legal, proper, prudent
and customary in the residential mortgage loan servicing business, and in
accordance with the Underwriting Guidelines, except for the Initial Non-
Conforming Mortgage Loans. With respect to Mortgage Loans acquired by the
Borrower (other than Initial Non-Conforming Mortgage Loans) all such Mortgage
Loans are in conformity with the Underwriting Guidelines.
6.17 No Adverse Selection. The Borrower used no selection procedures
--------------------
that identified the Mortgage Loans as being less desirable or valuable than
other comparable Mortgage Loans owned by the Borrower.
6.18 Loan Party Solvent: Fraudulent Conveyance. As of the date
-----------------------------------------
hereof and immediately after giving effect to each Advance, the fair value
of the assets of each Loan Party is greater than the fair value of the
liabilities (including, without limitation, contingent liabilities if and to the
extend required to be recorded as a liability on the financial statements of
such Loan Party in accordance with GAAP) of such Loan Party and such Loan Party
is and will be solvent, is and will be able to pay its debts as they mature and
does not and will not have an unreasonably small capital to engage in the
business in which it is engaged and proposes to engage. Neither Loan Party
intends to incur, or believes that it has incurred, debts beyond its ability to
pay such debts as they mature. Neither Loan Party is contemplating the
commencement of insolvency, bankruptcy, liquidation or consolidation proceedings
or the appointment of a receiver, liquidator, conservator, trustee or similar
official in respect of such Loan Party or any of its assets. Neither Loan Party
is transferring any Mortgage Loans with any intent to hinder, delay or
defraud any of its creditors.
6.19 ERISA. Each Plan to which either Loan Party or its Subsidiaries
-----
make direct contributions, and, to the knowledge of the Borrower, each other
Plan and each Multiemployer Plan, is in compliance in all material respects
with, and has been administered in all material respects in compliance with, the
applicable provisions of ERISA, the Code and any other Federal or state law.
6.20 True and Complete Disclosure. The information, reports,
----------------------------
financial statements, exhibits and schedules furnished in writing by or on
behalf each Loan Party to the Lender in connection with the negotiation,
preparation or delivery of this Loan Agreement and the other Loan
30
<PAGE>
Documents or included herein or therein or delivered pursuant hereto or thereto,
do not contain any untrue statement of material fact or omit to state any
material fact necessary to make the statements herein or therein not misleading.
All written information furnished after the date hereof by or on behalf of any
Loan Party to the Lender in connection with this Loan Agreement and the other
Loan Documents and the transactions contemplated hereby and thereby will be
true, correct and accurate in every material respect, or (in the case of
projections) based on reasonable estimates, on the date as of which such
information is stated or certified. There is no fact known to a Responsible
Officer of any Loan Party that, after due inquiry, should reasonably be expected
to have a Material Adverse Effect that has not been disclosed herein, in the
other Loan Documents or in a report, financial statement, exhibit, schedule,
disclosure letter or other writing furnished to the Lender for use in connection
with the transactions contemplated hereby or thereby.
6.21 Relevant States. Schedule 5 sets forth all of the states or
--------------- ----------
other jurisdictions (the "Relevant States") in which the Borrower originates
---------------
Mortgage Loans in its own name or through brokers on the date of this Loan
Agreement.
6.22 True Sales. Any Mortgage Loan funded in the name of or acquired
----------
by a Qualified Originator which is an Affiliate of the Borrower has been
conveyed to the Borrower pursuant to a legal sale, and if so requested by the
Lender, is covered by an opinion of counsel to that effect in form and substance
acceptable to the Lender.
SECTION 7 Covenants of the Borrower. The Borrower covenants and
-------------------------
agrees with the Lender that, so long as any Advance is outstanding and until the
later to occur of the payment in full of all Secured Obligations and the
termination of this Loan Agreement:
7.01 Financial Statements. Each Loan Party shall deliver to the
--------------------
Lender:
(a) as soon as available, but in any event not later than thirty
(30) days after the end of each calendar month, unaudited consolidated balance
sheets of each Loan Party and its respective consolidated Subsidiaries as at the
end of each such month and the related unaudited consolidated statements of
income and cash flows of each Loan Party and its respective consolidated
Subsidiaries for such month and the portion of the fiscal year through such
date, setting forth in each case in comparative form the figures for the
previous year, certified by a Responsible Officer as being fairly stated in all
material respects and prepared in accordance with GAAP consistently applied;
(b) if available, as soon as available and in any event within
forty-five (45) days after the end of each of the first three quarterly fiscal
periods of each fiscal year of the Borrower, the consolidated and consolidating
balance sheets of each Loan Party and its respective consolidated Subsidiaries
as at the end of such period and the related unaudited consolidated and
consolidating statements of income and of cash flows for each Loan Party and its
respective consolidated Subsidiaries for such period and the portion of the
fiscal year through the end of such period, setting forth in each case in
comparative form the figures for the previous year, accompanied by a certificate
of a Responsible Officer of each Loan Party, which certificate shall state that
said consolidated financial statements fairly present the consolidated and
consolidating financial condition and results of operations of each Loan Party
and its respective Subsidiaries in accordance with GAAP, consistently applied,
as at the end of, and for, such period (subject to normal year-end audit
adjustments);
(c) as soon as available and in any event within ninety (90) days
after the end of each fiscal year of each Loan Party, the audited consolidated
and consolidating balance sheets of each
31
<PAGE>
Loan Party and its respective consolidated Subsidiaries as at the end of such
fiscal year and the related consolidated and consolidating statements of income
and retained earnings and of cash flows for each Loan Party and its respective
consolidated Subsidiaries for such year, setting forth in each case in
comparative form the figures for the previous year, accompanied by an opinion
thereon of independent certified public accountants of recognized national
standing, which opinion shall not be qualified as to scope of audit or going
concern and shall state that said consolidated and consolidating financial
statements fairly present the consolidated and consolidating financial condition
and results of operations of each Loan Party and its respective consolidated
Subsidiaries as at the end of, and for, such fiscal year in accordance with
GAAP; and
(d) from time to time such other information regarding the financial
condition, operations, or business of each Loan Party and its respective
Subsidiaries as the Lender may reasonably request.
7.02 Existence, Etc. Each Loan Party and its respective Subsidiaries
--------------
will:
(a) preserve and maintain its legal existence;
(b) preserve and maintain all of its material rights, privileges,
licenses and franchises;
(c) comply with the requirements of all applicable Requirements of
Law (including, without limitation, the Truth in Lending Act, the Real
Estate Settlement Procedures Act and all environmental laws) if failure to
comply with such requirements should reasonably be expected (either
individually or in the aggregate) to have a Material Adverse Effect; and
(d) keep adequate records and books of account, in which complete
entries will be made in accordance with GAAP consistently applied.
7.03 Maintenance of Property: Insurance. The Borrower shall keep all
----------------------------------
property useful and necessary in its business in good working order and
condition. Each Loan Party shall maintain errors and omissions insurance and/or
mortgage impairment insurance and blanket bond coverage in such amounts as are
in effect on the Effective Date (as disclosed to Lender in writing) and shall
not reduce such coverage without the written consent of the Lender, and shall
also maintain such other insurance with financially sound and reputable
insurance companies, and with respect to property and risks of a character
usually maintained by entities engaged in the same or similar business similarly
situated, against loss, damage and liability of the kinds and in the amounts
customarily maintained by such entities.
7.04 Notices.
-------
(a) The Borrower shall give notice to the Lender promptly:
(i) upon the Borrower becoming aware of, and in any event within one
(1) Business Day after, the occurrence of any Default or Event of Default
or any Event of Default or Default under any other material agreement of
the Borrower;
(ii) upon, and in any event within three (3) Business Days after,
service of process on any Loan Party or its respective Subsidiaries, or any
agent thereof for service of process, in
32
<PAGE>
respect of any legal or arbitrable proceedings affecting any Loan Party or
its respective Subsidiaries (a) that questions or challenges the validity
or enforceability of any of the Loan Documents or (b) in which the amount
in controversy exceeds $150,000;
(iii) upon the Borrower becoming aware of any Material Adverse Effect
or any event or change in circumstances which should reasonably be expected
to have a Material Adverse Effect;
(iv) upon the Borrower becoming aware that the Mortgaged Property in
respect of any Mortgage Loan has been damaged by waste, fire, earthquake or
earth movement, windstorm, flood, tornado or other casualty, or otherwise
damaged so as to materially and adversely affect the Collateral Value of
such Mortgage Loan;
(v) upon the Borrower's receipt of any Payoff Proceeds of any
Mortgage Loan, and in any event within one (1) Business Day after receipt
thereof;
(vi) of entry any of a judgment or decree against any Loan Party or
its respective Subsidiaries in an amount in excess of $150,000.
Each notice pursuant to this Section 7.04(a) (other than 7.04(a)(v)) shall
be accompanied by a statement of a Responsible Officer of the Borrower
setting forth details of the occurrence referred to therein and stating what
action the Borrower has taken or proposes to take with respect thereto.
7.05 Other Information. The Borrower shall furnish to the Lender,
-----------------
as soon as available, copies of any and all proxy statements, financial
statements and reports which any Loan Party sends to its stockholders, and
copies of all regular, periodic and special reports, and all registration
statements filed with the Securities and Exchange Commission, any Governmental
Authority which supervises the issuance of securities by the Borrower.
7.06 Further Identification of Collateral. The Borrower will furnish
------------------------------------
to the Lender from time to time statements and schedules further identifying and
describing the Collateral and such other reports in connection with the
Collateral as the Lender or any Lender may reasonably request, all in reasonable
detail.
7.07 Mortgage Loan Determined to be Defective. Upon discovery by the
----------------------------------------
Borrower or the Lender of any breach of any representation or warranty listed on
Schedule 1 hereto appicable to any Mortgage Loan, the party discovering such
breach shall promptly give notice of such discovery to the other.
7.08 Monthly Reporting.
-----------------
(a) The Borrower shall deliver or cause to be delivered to the
Lender, no later than seven (7) days after the last day of each calendar month,
a monthly servicing report and Mortgage Loan Tape in a computer-readable format
reasonably acceptable to the Lender, listing and setting forth such information
in respect of, all Mortgage Loans as the Lender may reasonably request,
including, without limitation, the outstanding principal balance and delinquency
status of each such Mortgage Loan as at the last day of the prior calendar
month, and shall provide to the Lender no later than seven (7) days after the
last day of each calendar month, (i) all information delivered by the Servicer
to the Borrower under the Servicing Agreement, (ii) a Remittance Report in the
form attached hereto as
33
<PAGE>
Exhibit I, (iii) if the Borrower and the Lender shall mutually agree (in
- - ---------
accordance with Section 2.06 (b) hereof), a Borrowing Base Certificate in the
form attached hereto as Exhibit H and (v) any other information as the Lender
---------
shall reasonably request.
(b) The Borrower shall deliver to the Lender, no later than seven (7)
days after the last day of any calendar month in which the list of Relevant
States listed on Schedule 5 is not complete, an updated complete copy of
Schedule 5.
7.09 Financial Condition Covenants.
-----------------------------
(a) Maintenance of Tangible Net Worth. The Borrower will at all
---------------------------------
times maintain Tangible Net Worth of not less than the greater of (i)
$35,000,000 or (ii) eighty-five percent (85%) of the Tangible Net Worth at the
end of its most recently completed fiscal year (or, in the case of the Tangible
Net Worth at the end of any fiscal year, its prior fiscal year) plus ninety
----
percent (90%) of capital contributions made during such fiscal year plus fifty
----
percent (50%) of year-to-date net income.
(b) Maintenance of Ratio of Indebtedness to Tangible Net Worth.
----------------------------------------------------------
With respect to either Loan Party or its respective Subsidiaries, the ratio of
Indebtedness to Tangible Net Worth shall not at any time be greater than 8:1.
(c) Maintenance of Liquidity. The Borrower will ensure that, as of
------------------------
the end of each calendar month, it will have Cash Equivalents in an amount of
not less than $1,500,000.
7.10 Borrowing Base Deficiency. If at any time there exists a
-------------------------
Borrowing Base Deficiency the Borrower shall cure same in accordance with
Section 2.06 hereof.
7.11 Prohibition on Fundamental Changes. Neither Loan Party shall
----------------------------------
engage in any business activities or operations unrelated to mortgage banking or
consumer finance, enter into any transaction of merger or consolidation in which
it is not the surviving entity, or liquidate, wind up or dissolve itself (or
suffer any liquidation or dissolution), or convey, sell, lease, transfer or
otherwise dispose of, in one transaction or a series of transactions, any of its
assets, whether now owned or hereafter acquired, except that either Loan Party
may sell or otherwise dispose of property in the ordinary course of business,
provided such sales do not include all or substantially all of the assets of
such Loan Party.
7.12 Limitation on Liens on Collateral. Each Loan Party shall defend
---------------------------------
the Collateral against, and will take such other action as is necessary to
remove, any Lien, security interest or claim on or to the Collateral, other than
the security interests created under this Loan Agreement, and each Loan Party
shall defend the right, title and interest of the Lender in and to any of the
Collateral against the claims and demands of all persons whomsoever.
7.13 Limitation on Sale or Other Disposition of Collateral. Neither
-----------------------------------------------------
Loan Party shall lease, transfer, assign, sell or otherwise dispose of any
Collateral without the prior written consent of the Lender.
7.14 Limitation on Transactions with Affiliates. Neither Loan Party
------------------------------------------
nor their respective Subsidiaries shall enter into any transaction, including,
without limitation, any purchase, sale, lease or exchange of property or the
rendering of any service, with any Affiliate unless such transaction is (a) not
otherwise prohibited under this Loan Agreement, (b) in the ordinary course of
34
<PAGE>
such Loan Party's business and (c) upon fair and reasonable terms no less
favorable to such Loan Party, as the case may be, than it would obtain in a
comparable arm's length transaction with a Person which is not an Affiliate.
7.15 Underwriting Guidelines. Without prior written consent of the
-----------------------
Lender, the Borrower shall not amend or otherwise modify the Underwriting
Guidelines.
7.16 Limitations on Modifications; Waivers and Extensions of Mortgage
----------------------------------------------------------------
Loans. The Borrower will not, nor will it permit or allow others to, amend,
- - -----
modify, terminate or waive any provision of any Mortgage Loan to which the
Borrower is a party in any manner which should reasonably be expected to
materially and adversely affect the value of such Mortgage Loan as Collateral.
7.17 Servicing. The Borrower shall not permit any Person other than
---------
the Servicer to service Mortgage Loans without the prior written consent of the
Lender.
7.18 Limitation on Distributions. After the occurrence and during the
---------------------------
continuation of any Event of Default, neither Loan Party shall make any payment
on account of, or set apart assets for, a sinking or other analogous fund for
the purchase, redemption, defeasance, retirement or other acquisition of any
equity or partnership interest of such Loan Party, whether now or hereafter
outstanding, or make any other distribution in respect thereof, either directly
or indirectly, whether in cash or property or in obligations of such Loan Party.
7.19 Use of Proceeds. The Borrower will use the proceeds of the
---------------
Advances solely to originate, acquire, fund, manage and service Mortgage Loans.
7.20 Restricted Payments. Neither Loan Party shall make any
-------------------
Restricted Payments.
SECTION 8 Events of Default. Each of the following events shall
-----------------
constitute an event of default (as "Event of Default") hereunder:
----------------
(a) Borrower Default in the Payment of any Advance. The Borrower
----------------------------------------------
shall default in the payment of any principal of or interest on any Advance
when due (whether at stated maturity, upon acceleration or at mandatory or
optional prepayment); or
(b) Borrower Default in the Payment of Other Amount. Any Loan Party
-----------------------------------------------
shall default in the payment of any other amount payable by it hereunder or
under any other Loan Document, and such default shall have continued
unremedied for three (3) Business Days; or
(c) Failure of Representation or Warranty. Any representation,
-------------------------------------
warranty or certification made or deemed made by the Borrower herein (other
than those in Schedule 1 hereto) or by any Loan Party in any other Loan
Document or any certificate furnished to the Lender pursuant to the
provisions thereof, shall prove to have been false or misleading in any
material respect as of the time made or furnished; or
(d) Default of Covenant. Any Loan Party shall:
-------------------
(i) fail to comply with the requirements of Section 7 hereof
(other than Section 7.01, 7.02(b), 7.02(d), 7.03, or 7.08),
<PAGE>
(ii) fail to comply with the requirements of Sections 7.01, 7.02(b),
7.02(d), 7.03, or 7.08 and such default shall continue unremedied for a period
of five (5) Business Days; or
(iii) fail to observe or perform any other covenant, condition or
agreement contained in this Loan Agreement or any other Loan Document and such
failure to observe or perform shall continue unremedied for a period of seven
(7) Business Days; or
(e) Cross Default. Any Loan Party or its respective Subsidiaries shall:
-------------
(i) default in any payment of principal of or interest on any
Indebtedness (other than the Advances) or in the payment of any Guarantee
Obligation, beyond the period of grace (not to exceed 30 days), if any, provided
in the instrument or agreement under which such Indebtedness or Guarantee
Obligation was created, if the aggregate amount of the Indebtedness and/or
Guarantee Obligations in respect of which such default or defaults shall have
occurred is $200,000 or more; or
(ii) default in the observance or performance of any other agreement
or condition relating to any Indebtedness (other than the Advances) or Guarantee
Obligation or contained in any instrument or agreement evidencing, securing or
relating thereto, in each case beyond the period of grace (not to exceed 30
days), if any, provided in the instrument or agreement under which such
Indebtedness or Guarantee Obligation was created; or
(iii) permit any other event to occur or condition exist; or
(iv) a default of any other agreement between either Loan Party or
any of its respective Affiliates, on the one hand, and the Lender or any of its
Affiliates on the other hand, which has not been waived by the Lender,
the effect of which default or other event or condition is to cause,
or give the holder or holders of such Indebtedness or the beneficiary or
beneficiaries of such Guarantee Obligation (or a trustee or agent on behalf of
such holder or holders or beneficiary or beneficiaries) the immediate right to
cause, with the giving of notice if required, such Indebtedness to become due
prior to its stated maturity or such Guarantee Obligation to become payable; or
(f) Unsatisfied Judgment. One or more judgments or decrees shall be
--------------------
entered against either Loan Party or any of its respective Subsidiaries
involving in the aggregate a liability (not paid or fully covered by insurance)
of $200,000 or more, and all such judgments or decrees shall not have been
vacated, discharged, stayed or bonded pending appeal within 60 days from the
entry thereof; or
(g) Inability to Pay Debts. Either Loan Party shall admit in writing its
----------------------
inability to pay its debts as such debts become due; or
(h) Voluntary Bankruptcy Event. Either Loan Party or any of its respective
--------------------------
Subsidiaries shall (i) apply for or consent to the appointment of, or the taking
of possession by, a receiver, custodian, trustee, examiner or liquidator or
itself or of all or a substantial part of its property, (ii) make a general
assignment for the benefit of its creditors, (iii) commence a voluntary case
under the Bankruptcy Code, (iv) file a petition seeking to take advantage of any
36
<PAGE>
other law relating to bankruptcy, insolvency, reorganization, liquidation,
dissolution, arrangement or winding-up, or composition or readjustment of
debts, (v) fail to controvert in a timely and appropriate manner, or
acquiesce in writing to, any petition filed against it in an involuntary
case under the Bankruptcy Code or (vi) take any corporate or other action
for the purpose of effecting any of the foregoing; or
(i) Involuntary Bankruptcy Event. A proceeding or case shall be
----------------------------
commenced, without the application or consent of either Loan Party or any
of its respective Subsidiaries, in any court of competent jurisdiction,
seeking (i) its reorganization, liquidation, dissolution, arrangement or
winding-up, or the composition or readjustment of its debts, (ii) the
appointment of a receiver, custodian, trustee, examiner, liquidator or the
like of the Loan Party or any such Subsidiary or of all or any substantial
part of its property, or (iii) similar relief in respect of the Loan Party
or any such Subsidiary under any law relating to bankruptcy, insolvency,
reorganization, winding-up, or composition or adjustment of debts, and such
proceeding or case shall continue undismissed, or an order, judgment or
decree approving or ordering any of the foregoing shall be entered and
continue unstayed and in effect, for a period of 60 or more days; or an
order for relief against the Loan Party or the Subsidiary shall be entered
in an involuntary case under the Bankruptcy Code; or
(j) Termination of Loan Documents. The Custodial Agreement, or any
-----------------------------
other Loan Document, shall for whatever reason be terminated or cease to be
in full force and effect, or the enforceability thereof shall be contested
by any party thereto; or
(k) ERISA Default. (i) any Person shall engage in any "prohibited
-------------
transaction" (as defined in Section 406 of ERISA or Section 4975 of the
Code) involving any Plan, (ii) any "accumulated funding deficiency" (as
defined in Section 302 of ERISA), whether or not waived, shall exist with
respect to any Plan or any Lien in favor of the PBGC or a Plan shall arise
on the assets of either Loan Party or any Commonly Controlled Entity, (iii)
a Reportable Event shall occur with respect to, or proceedings shall
commence to have a trustee appointed, or a trustee shall be appointed, to
administer or to terminate, any Single Employer Plan, which Reportable
Event or commencement of proceedings or appointment of a trustee is, in the
reasonable opinion of the Lenders, likely to result in the termination of
such Plan for purposes of Title IV of ERISA, (iv) any Single Employer Plan
shall terminate for purposes of Title IV of ERISA, (v) either Loan Party or
any Commonly Controlled Entity shall, or in the reasonable opinion of the
Lenders is likely to, incur any liability in connection with a withdrawal
from, or the insolvency or reorganization of, a Multiemployer Plan or (vi)
any other event or condition shall occur or exist with respect to a Plan;
and in each case in clauses (i) through (vi) above, such event or
condition, together with all other such events or conditions, if any, could
reasonably be expected to have a Material Adverse Effect; or
(l) Material Adverse Effect. Any other event shall occur which, in the
-----------------------
sole good faith discretion of the Lender, may have a Material Adverse
Effect;
(m) Change of Control. Any Change of Control shall have occurred; or
-----------------
(n) Pre-Existing Condition. The discovery by the Lender during its
----------------------
continuing due diligence of the Borrower of a condition or event which
existed at or prior to the execution hereof and which the Lender, in its
sole reasonable discretion, determines materially and adversely affects:
(i) the condition (financial or otherwise) of the Borrower, its
Subsidiaries or Affiliates; or
37
<PAGE>
(ii) the ability of either the Borrower or the Lender to fulfill its
respective obligations under this Agreement; or
(o) Other Liens. The Borrower shall grant, or suffer to exist, any
-----------
Lien on any Collateral except the Liens contemplated hereby; or the Liens
contemplated hereby shall cease to be first priority perfected Liens on the
Collateral in favor of the Lender or shall be Liens in favor of any Person
other than the Lender; or
(p) Failure to Answer. The Lender shall reasonably request, specifying
-----------------
the reasons for such request, information, and/or written responses to such
requests, regarding the financial well-being of the Borrower and such
information and/or responses shall not have been provided within three
Business Days of such request.
SECTION 9 Remedies Upon Default.
---------------------
(a) Upon the occurrence of one or more Events of Default other than
those referred to in Sections 8(h) or (i), and in addition to the remedies
provided in Section 4.07 hereof and otherwise provided in this Loan Agreement,
the Lender may immediately declare the principal amount of the Advances then
outstanding under the Note to be immediately due and payable, together with all
interest thereon and fees and expenses accruing under this Loan Agreement. Upon
the occurrence of an Event of Default referred to in Sections 8(h) or (i), and
in addition to the remedies provided in Section 4.07 hereof and otherwise
provided in this Loan Agreement, such amounts shall immediately and
automatically become due and payable without any further action by any Person.
Upon such declaration or such automatic acceleration, the balance then
outstanding on the Note shall become immediately due and payable, without
presentment, demand, protest or other formalities of any kind, all of which are
hereby expressly waived by the Borrower.
(b) Upon the occurrence of one or more Events of Default, and in
addition to the remedies provided in Section 4.07 hereof and otherwise provided
in this Loan Agreement, the Lender shall have the right to obtain physical
possession of the Servicing Records and all other files of the Borrower relating
to the Collateral and all documents relating to the Collateral which are then or
may thereafter come in to the possession of the Borrower or any third party
acting for the Borrower and the Borrower shall deliver to the Lender such
assignments as the Lender shall request. The Borrower shall be responsible for
paying any fees of any Servicer resulting from the termination of a Service due
to an Event of Default. The Lender shall be entitled to specific performance of
all agreements of the Borrower contained in this Loan Agreement.
SECTION 10 No Duty of Lender. The powers conferred on the Lender
-----------------
hereunder are solely to protect the Lender's interests in the Collateral and
shall not impose any duty upon it to exercise any such powers. The Lender shall
be accountable only for amounts that it actually receives as a result of the
exercise of such powers, and neither it nor any of its officers, directors,
employees or agents shall be responsible to the Borrower for any act or failure
to act hereunder, except for its or their own gross negligence or willful
misconduct.
SECTION 11 Miscellaneous.
-------------
11.01 Waiver. No failure on the part of the Lender to exercise and no
------
delay in exercising, and no course of dealing with respect to, any right, power
or privilege under any Loan Document shall operate as a waiver thereof, nor
shall any single or partial exercise of any right, power
38
<PAGE>
or privilege under any Loan Document preclude any other or further exercise
thereof or the exercise of any other right, power or privilege. The remedies
provided herein are cumulative and not exclusive of any remedies provided by
law.
11.02 Notices. Except as otherwise expressly permitted by this Loan
-------
Agreement, all notices, requests and other communications provided for herein
and under the Custodial Agreement (including without limitation any
modifications of, or waivers, requests or consents under, this Loan Agreement)
shall be given or made in writing (including without limitation by telex or
telecopy) delivered to the intended recipient at the "Address for Notices"
specified below its name on the signature pages hereof or thereof); or, as to
any party, at such other address as shall be designated by such party in a
written notice to each other party. Except as otherwise provided in this Loan
Agreement and except for notices given under Section 2 (which shall be effective
only on receipt), all such communications shall be deemed to have been duly
given when transmitted by telex or telecopy or personally delivered or, in the
case of a mailed notice, upon receipt, in each case given or addressed as
aforesaid.
11.03 Indemnification and Expenses.
----------------------------
(a) The Borrower agrees to hold the Lender and each of its
officers, directors, agents and employees (each, an "Indemnified Party")
-----------------
harmless from and indemnify each Idemnified Party against all liabilities,
losses, damages, judgments, costs and expenses of any kind which may be imposed
on, incurred by or asserted against such Indemnified Party in any suit, action,
claim or proceeding relating to or arising out of this Loan Agreement, the Note,
any other Loan Document or any transaction contemplated hereby or thereby, or
any amendment, supplement or modification of, or any waiver or consent under or
in respect of, this Loan Agreement, the Note, any other Loan Document or any
transaction contemplated hereby or thereby, except, in each case, to the extent
arising from such Indemnified Party's gross negligence or willful misconduct. In
any suit, proceeding or action brought by the Lender in connection with any
Mortgage Loan for any sum owing thereunder, or to enforce any provisions of any
such Mortgage Loan, the Borrower will save, indemnify and hold the Lender
harmless from and against all expense, loss or damage suffered by reason of any
defense, set-off, counterclaim, recoupment or reduction or liability whatsoever
of the account debtor or obligor thereunder, arising out of a breach by the
Borrower of any obligation thereunder or arising out of any other agreement,
indebtedness or liability at any time owing to or in favor of such account
debtor or obligor or its successors from the Borrower. The Borrower also agrees
to reimburse the Lender as and when billed by the Lender for all the Lender's
costs and expenses incurred in connection with the enforcement or the
preservation of the Lender's rights under this Loan Agreement, the Note, any
other Loan Document or any transaction contemplated hereby or thereby, including
without limitation the fees and disbursements of its counsel (including all fees
and disbursements incurred in any action or proceeding between the Borrower and
an Indemnified Party or between an Indemnified Party any third party relating
hereto). The Borrower hereby acknowledges that, notwithstanding the fact that
the Note is secured by the Collateral, the obligation of the Borrower under the
Note is a recourse obligation of the Borrower.
(b) The Borrower agrees to pay as and when billed by the Lender all
of the out-of-pocket costs and expenses incurred by the Lender in connection
with the development, preparation and execution of, and any amendment,
supplement or modification to, this Loan Agreement, the Note, any other Loan
Document or any other documents prepared in connection herewith or therewith,
and the consummation and administration of the transactions contemplated hereby
and thereby, including
39
<PAGE>
without limitation (i) all the reasonable fees, disbursements and expenses of
counsel to the Lender and (ii) all the due diligence, inspection, testing and
review costs and expenses incurred by the Lender with respect to Collateral
under this Loan Agreement as set forth in Section 11.16 hereof.
11.04 Amendments. Except as otherwise expressly provided in this
----------
Loan Agreement, any provision of this Loan Agreement may be modified or
supplemented only by an instrument in writing signed by the Borrower and the
Lender and any provision of this Loan Agreement may be waived by the Lender.
11.05 Successors and Assigns. This Loan Agreement shall be binding
----------------------
upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
11.06 Survival. The obligations of the Borrower under Section 11.03
--------
hereof shall survive the repayment of the Advances and the termination of this
Loan Agreement. In addition, each representation and warranty made or deemed to
be made by a request for a borrowing herein or pursuant hereto shall survive the
making of such representation and warranty, and the Lender shall not be deemed
to have waived, by reason of making any Advance, any Default that may arise
because any such representation or warranty shall have proved to be false or
misleading, notwithstanding that the Lender may have had notice or knowledge or
reason to believe that such representation or warranty was false or misleading
at the time such Advance was made.
11.07 Captions. The table of contents and captions and section
--------
headings appearing herein are included solely for convenience of reference and
are not intended to affect the interpretation of any provision of this Loan
Agreement.
11.08 Counterparts. This Loan Agreement may be executed in any
------------
number of counterparts, all of which taken together shall constitute one and the
same instrument, and any of the parties hereto may execute this Loan Agreement
by signing any such counterpart.
11.09 GOVERNING LAW: ETC. THIS LOAN AGREEMENT SHALL BE GOVERNED BY
------------------
THE LAW OF THE STATE OF NEW YORK WITHOUT REFERENCE TO CHOICE OF LAW DOCTRINE
(BUT WITH REFERENCE TO SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW,
WHICH BY ITS TERMS APPLIES TO THIS LOAN AGREEMENT), AND SHALL CONSTITUTE A
SECURITY AGREEMENT WITHIN THE MEANING OF THE UNIFORM COMMERCIAL CODE.
11.10 SUBMISSION TO JURISDICTION: WAIVERS. THE BORROWER HEREBY
-----------------------------------
IRREVOCABLY AND UNCONDITIONALLY:
(A) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR
PROCEEDING RELATING TO THIS LOAN AGREEMENT, THE NOTE AND THE OTHER LOAN
DOCUMENTS, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT
THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE
STATE OF NEW YORK, THE FEDERAL COURTS OF THE UNITED STATES OF AMERICA FOR
THE SOUTHERN DISTRICT OF NEW YORK, AND APPELLATE COURTS FROM ANY THEREOF;
40
<PAGE>
(B) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN
SUCH COURTS AND, TO THE EXTENT PERMITTED BY LAW, WAIVES ANY OBJECTION THAT
IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING
IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN
INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME;
(C) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING
MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL
(OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO ITS
ADDRESS SET FORTH UNDER ITS SIGNATURE BELOW OR AT SUCH OTHER ADDRESS OF
WHICH THE LENDER SHALL HAVE BEEN NOTIFIED; AND
(D) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT
SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE
RIGHT TO SUE IN ANY OTHER JURISDICTION.
11.11 WAIVER OF JURY TRIAL. EACH OF THE BORROWER AND THE LENDER
--------------------
HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW,
ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR
RELATING TO THIS LOAN AGREEMENT, ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS
CONTEMPLATED HEREBY OR THEREBY.
11.12 Acknowledgments. The Borrower hereby acknowledges that:
---------------
(a) it has been advised by counsel in the negotiation, execution
and delivery of this Loan Agreement, the Note and the other Loan Documents;
(b) the Lender has no fiduciary relationship to the Borrower, and
the relationship between the Borrower and the Lender is solely that of
debtor and creditor; and
(c) no joint venture exists between the Lender and the Borrower.
11.13 Hypothecation and Pledge of Collateral. The Lender shall have
--------------------------------------
free and unrestricted use of all Collateral and nothing in this Loan Agreement
shall preclude the Lender from engaging in repurchase transactions with the
Collateral or otherwise pledging, repledging, transferring, hypothecating, or
rehypotecating the Collateral. Nothing contained in this Loan Agreement shall
obligate the Lender to segregate any collateral delivered to the Lender by the
Borrower.
11.14 Assignments; Participations.
---------------------------
(a) The Borrower may assign any of its rights or obligations
hereunder or under the Note with the prior written consent of the Lender. The
Lender may assign or transfer to any bank or other financial institution that
makes or invests in loans or any affiliate of the Lender all or any of its
rights or obligations under this Loan Agreements and the other Loan Documents.
41
<PAGE>
(b) The Lender may, in accordance with applicable law, at any time
sell to one or more lenders or other entities ("Participants") participating
------------
interests in any Advance, the Note, its commitment to make Advances,or any other
interest of the Lender hereunder and under the other Loan Documents. In the
event of any such sale by the Lender of participating interests to a
Participant, the Lender's obligations under this Loan Agreement to the Borrower
shall remain unchanged, the Lender shall remain solely responsible for the
performance thereof, the Lender shall remain the holder of the Note for all
purposes under this Loan Agreement and the other Loan Documents, and the
Borrower and the Lender shall continue to deal solely and directly with the
Lender in connection with the Lender's rights and obligations under this Loan
Agreement and the other Loan Documents. The Borrower agrees that if amounts
outstanding under this Loan Agreement and the Note are due or unpaid, or shall
have been declared or shall have become due and payable upon the occurrence of
an Event of Default, each Participant shall be deemed to have the right of
set-off in respect of its participating interest in amounts owing under this
Loan Agreement and the Note to the same extent as if the amount of its
participating interest were owning directly to it as a Lender under this Loan
Agreement or the Note; provided, that such Participant shall only be entitled to
--------
such right of set-off if it shall have agreed in the agreement pursuant to which
it shall have acquired its participating interest to share with the Lender the
proceeds thereof. The Lender also agrees that each Participant shall be entitled
to the benefits of Sections 2.08 and 11.03 with respect to its participation in
the Advances outstanding from time to time; provided, that the Lender and all
--------
Participants shall be entitled to received no greater amount in the aggregate
pursuant to such Sections than the Lender would have been entitled to receive
had no such transfer occurred.
(c) The Lender may furnish any information concerning the Borrower
or any of its Subsidiaries in the possession of such Lender from time to time to
assignees and participants (including prospective assignees and participants).
(d) The Borrower agrees to cooperate with the Lender in connection
with any such assignment and/or participation, to execute and deliver such
replacement notes, and to enter into such restatements of, and amendments,
supplements and other modifications to, this Loan Agreement and the other Loan
Documents in order to give effect to such assignment and/or participation. The
Borrower further agrees to furnish to any Participant identified by the Lender
to the Borrower copies of all reports and certificates to be delivered by the
Borrower to the Lender hereunder, as and when delivered to the Lender.
11.15 Servicing.
---------
(a) The Borrower covenants to maintain or cause the servicing of
the Mortgage Loans to be maintained in conformity with accepted customary and
prudent servicing practices in the industry for the same type of mortgage loans
as the Mortgage Loans and in a manner at least equal in quality to the servicing
the Borrower provides for Mortgage Loans which it owns ("Accepted Servicing
------------------
Practices"). In the event that the preceding language is interpreted as
- - ---------
constituting one or more servicing contracts, each such servicing contract shall
terminate automatically upon the earlier of (i) an Event of Default, or (ii)
the Termination Date.
(b) The Borrower agrees that the Lender is the collateral assignee
of all servicing records, including but not limited to any and all servicing
agreements, files, documents, records, data bases, computer tapes, copies of
computer tapes, proof of insurance coverage, insurance policies, appraisals,
other closing documentation, payment history records, and any other records
relating to or evidencing the servicing of Mortgage Loans (the "Servicing
---------
Records"), and (ii) the Borrower grants
- - -------
42
<PAGE>
the Lender a security interest in all of the Borrower's rights relating to the
Mortgage Loans and all Servicing Records to secure the obligation of the
Borrower or its designee to service in conformity with this Section and any
other obligation of the Borrower to the Lender. The Borrower covenants to
safeguard such Servicing Records and to deliver them promptly to the Lender or
its designee (including the Custodian) at the Lender's request.
(c) After the Funding Date, until the pledge of any Mortgage Loan
is relinquished by the Custodian, the Borrower will have no right to modify or
alter the terms of such Mortgage Loan except with prior written consent of the
Lender, and the Borrower will have no obligation or right to repossess such
Mortgage Loan or substitute another Mortgage Loan, except as provided in the
Custodial Agreement; provided, that the Borrower may enter into forbearance
agreements or plans with Mortgagors consistent with its collection activities as
servicer of the Mortgage Loans and in conformity with Accepted Servicing
Practices.
(d) The Borrower shall permit the Lender to inspect the Borrower's
or its Affiliate's servicing facilities, as the case may be, for the purpose of
satisfying the Lender that the Borrower or its Affiliate, as the case may be,
has the ability to service the Mortgage Loans as provided in this Loan
Agreement.
11.16 Periodic Due Diligence Review. The Borrower acknowledges that
-----------------------------
the Lender has the right to perform continuing due diligence reviews with
respect to the Mortgage Loans, for purposes of verifying compliance with the
representations, warranties and specifications made hereunder, or otherwise, and
the Borrower agrees that upon reasonable (but no less than one (1) Business
Day's) prior notice to the Borrower (which prior notice shall not be required
after the occurrence and during the continuation of a Default), the Lender or
its authorized representatives will be permitted during normal business hours to
examine, inspect, and make copies and extracts of, the Mortgage Files and any
and all documents, records, agreements, instruments or information relating to
such Mortgage Loans in the possession or under the control of the Borrower
and/or the Custodian. The Borrower also shall make available to the Lender a
knowledgeable financial or accounting officer for the purpose of answering
questions respecting the Mortgage Files and the Mortgage Loans. Without limiting
the generality of the foregoing, the Borrower acknowledges that the Lender may
make Advances to the Borrower based solely upon the information provided by the
Borrower to Lender and the representations, warranties and covenants contained
herein, and that the Lender, at its option, has the right at any time to conduct
a partial or complete due diligence review on some or all of the Mortgage Loans
securing such Advance, including without limitation ordering new credit reports
and new appraisals on the related Mortgaged Properties and otherwise re-
generating the information used to originate such Mortgage Loan. The Lender may
underwrite such Mortgage Loans itself or engage a mutually agreed upon third
party underwriter to perform such underwriting. The Borrower agrees to cooperate
with the Lender and any third party underwriter in connection with such
underwriting, including, but not limited to, providing the Lender and any third
party underwriter with access to any and all documents, records, agreements,
instruments or information relating to such Mortgage Loans in the possession, or
under the control, of the Borrower. In addition, the Lender has the right to
perform continuing Due Diligence Reviews of the Borrower, the Guarantor, and
their respective Affiliates, directors, officers, employees and significant
shareholders. The Borrower and Lender further agree that all out-of-pocket costs
and expenses incurred by the Lender in connection with the Lender's activities
pursuant to this Section 11.16, shall be paid for as agreed by such parties.
43
<PAGE>
11.17 Set-Off. In addition to any rights and remedies of the Lender
-------
provided by this Loan Agreement and by law, the Lender shall have the right,
without prior notice to the Borrower, any such notice being expressly waived by
the Borrower to the extent permitted by applicable law, upon any amount becoming
due and payable by the Borrower hereunder (whether at the stated maturity, by
acceleration or otherwise) to set-off and appropriate and apply against such
amount any and deposits (general or special, time or demand, provisional or
final), in any all currency, and any other credits, indebtedness or claims, in
any currency, in each case whether direct or indirect, absolute or contingent,
matured or unmatured, at any time held or owing by the Lender or any Affiliate
thereof to or for the credit or the account of the Borrower. The Lender agrees
promptly to notify the Borrower after any such set-off and application made by
the Lender; provided that the failure to give such notice shall not affect the
--------
validity of such set-off and application.
[SIGNATURE PAGE FOLLOWS)
44
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement
to be duly executed and delivered as of the day and year first above written.
BORROWER
--------
NEW CENTURY MORTGAGE CORPORATION
By _______________________________
Name:
Title:
Address for Notices:
-------------------
New Century Mortgage Corporation
18400 Von Karman
Suite 1000
Irvine, California 92612
Attention: _______________________
Telecopier No.: (714) 440-7033
Telephone No.: (714) 440-7030
LENDER
------
GREENWICH CAPITAL FINANCIAL
PRODUCTS, INC.
By /s/ Peter McMullin
--------------------------------
Name: Peter McMullin
Title: Vice President
Address for Notices:
-------------------
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: Joseph Bartolotta
Telecopier No.: (203) 629-2666
Telephone No.: (203) 625-6675
<PAGE>
With a copy to:
Attention: General Counsel
Telecopier No.: (203) 629-5718
Telephone No.: (203) 625-2700
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Loan Agreement
to be duly executed and delivered as of the day and year first above written.
BORROWER
--------
NEW CENTURY MORTGAGE CORPORATION
By /s/ Brad A. Morrice
-----------------------------
Name: Brad A. Morrice
Title: Chief Executive Officer
Address for Notices:
-------------------
New Century Mortgage Corporation
18400 Von Karman
Suite 1000
Irvine, California 92612
Attention: /s/ Brad A. Morrice
----------------------
Telecopier No.: (714) 440-7033
Telephone No.: (714) 440-7030
LENDER
------
GREENWICH CAPITAL FINANCIAL
PRODUCTS, INC.
By _______________________________
Name:
Title:
Address for Notices:
-------------------
600 Steamboat Road
Greenwich, Connecticut 06830
Attention: Joseph Bartolotta
Telecopier No.: (2O3) 629-2666
Telephone No.: (203) 625-6675
<PAGE>
With a copy to:
Attention: General Counsel
Telecopier No.: (203) 629-5718
Telephone No.: (203) 625-2700
<PAGE>
SCHEDULE 1
REPRESENTATIONS AND WARRANTIES RE: MORTGAGE LOANS
Part I. Eligible Mortgage Loans
-----------------------
As to each Mortgage Loan included in the Borrowing Base on a Funding
Date (and the related Mortgaged Property), the Borrower shall be deemed to make
the following representations and warranties to the Lender on and as of such
Funding Date and at all times thereafter while such Mortgage Loan is included in
the Borrowing Base (with respect to any representations and warranties made to
the best of the Borrower's knowledge, in the event that it is discovered that
the circumstances with respect to the related Mortgage Loan are not accurately
reflected in such representation and warranty notwithstanding the knowledge or
lack of knowledge of the Borrower, then, notwithstanding that such
representation and warranty is made to the best of the Borrower's knowledge,
such Mortgage Loan shall be assigned a Collateral Value in accordance with the
definition thereof in the Loan Agreement):
(a) Mortgage Loans as Described. The information set forth in the
---------------------------
Mortgage Loan Schedule accompanying the related Notice of Borrowing and Pledge
is true and correct;
(b) Payments Current. On the applicable Funding Date, and all other
----------------
times:
(i) such Mortgage Loan (other than a Subsequent Non-Conforming
Mortgage Loan) is not thirty (30) days or more past due in respect of the
first Monthly Payment; provided that, under no circumstances shall any Non-
Conforming Mortgage Loan be thirty (30) days or more past due in respect of
the first Monthly Payment as of the applicable Funding Date.
(ii) such Mortgage Loan (other than a Subsequent Non-Conforming
Mortgage Loan) is not fifty-nine (59) days or more delinquent in respect of
any Monthly Payment.
(c) No Outstanding Charges. There are no defaults in complying with
----------------------
the terms of the Mortgage, and all taxes, governmental assessments, insurance
premiums, water, sewer and municipal charges, leasehold payments or ground
rents which previously became due and owing have been paid, or an escrow of
funds has been established in an amount sufficient to pay for every such item
which remains unpaid and which has been assessed but is not yet due and payable.
The Borrower has not advanced funds, or induced, solicited or knowingly received
any advance of funds by a party other than the Mortgagor, directly or
indirectly, for the payment of any amount required under the Mortgage Loan,
except for interest accruing from the date of the Mortgage Note or date of
disbursement of the Mortgage Loan proceeds, whichever is more recent, to the day
which precedes by one month the Due Date of the first installment of principal
and interest;
Schedule 1
1
<PAGE>
(d) Original Terms Unmodified. The terms of the Mortgage Note and
-------------------------
Mortgage have not been impaired, waived, altered or modified in any respect,
except by a written instrument which has been recorded, if necessary to protect
the interests of the Lender and which has been delivered to the Custodian. The
substance of any such waiver, alteration or modification has been approved by
the title insurer, to the extent required by the policy, and its terms are
reflected on the Mortgage Loan Schedule. No Mortgagor has been released, in
whole or in part, except in connection with an asssumption agreement approved by
the title insurer, to the extent required by the policy, and which assumption
agreement is part of the Mortgage File delivered to the Custodian and the terms
of which are reflected in the Mortgage Loan Schedule;
(e) No Defenses. The Mortgage Loan is not subject to any right of
-----------
rescission, set-off, counterclaim or defense, including without limitation the
defense of usury, nor will the operation of any of the terms of the Mortgage
Note or the Mortgage, or the exercise of any right thereunder, render either the
Mortgage Note or the Mortgage unenforceable, in whole or in part, and no such
right of recission, set-off, counterclaim or defense has been asserted with
respect thereto; and no Mortgagor was a debtor in any state or federal
bankruptcy or insolvency proceeding at the time the Mortgage Loan was
originated;
(f) Hazard Insurance. Pursuant to the terms of the Mortgage, all
----------------
buildings or other improvements upon the Mortgaged Property are insured by an
insurer who meets Fannie Mae and/or Freddie Mac guidelines against loss by fire,
hazards of extended coverage and such other hazards as are customary in the area
where the Mortgaged Property is located pursuant to insurance policies
conforming to the requirements of the Underwriting Guidelines. If upon
origination of the Mortgage Loan, the Mortgaged Property was in an area
identified in the Federal Register by the Federal Emergency Management Agency as
having special flood hazards (and such flood insurance was required by federal
regulation and such flood insurance has been made available) a flood insurance
policy meeting the requirements of the current guidelines of the Federal
Insurance Administration is in effect. All individual insurance policies contain
a standard mortgagee clause naming the loan originator or the Borrower and its
respective successors and assigns as mortgagee, and all premiums thereon have
been paid. The Mortgage obligates the Mortgagor thereunder to maintain the
hazard insurance policy at the Mortgagor's cost and expense, and on the
Mortgagor's failure to do so, authorizes the holder of the Mortgage to obtain
and maintain such insurance at such Mortgagor's cost and expense, and to seek
reimbursement therefor from the Mortgagor. Where required by state law or
regulation, the Mortgagor has been given an opportunity to choose the carrier of
the required hazard insurance, provided the policy is not a "master" or
"blanket" hazard insurance policy covering a condominum, or any hazard insurance
policy covering the common facilities of a planned unit development. The hazard
insurance policy is the valid and binding obligation of the insurer, is in full
force and effect, and will be in full force and effect and inure to the benefit
of the Lender upon the consummation of the transactions contemplated by this
Loan Agreement. The Borrower has not engaged in, and has no knowledge of the
Mortgagor's having engaged in, any act or omission which would impair the
coverage of any such policy, the benefits of the endorsement provided for
herein, or the validity and binding effect of either including, without
limitation, no unlawful fee, commission, kickback or other unlawful compensation
or value of any kind has been or will be received, retained or realized by an
attorney, firm or other person or entity and no such unlawful items have been
received, retained or realized by the Borrower;
Schedule 1
2
<PAGE>
(g) Compliance with Applicable Laws. Any and all requirements of any
-------------------------------
federal, state or local law including, without limitation, usury, truth-in-
lending, real estate settlement procedures, consumer credit protection, equal
credit opportunity or disclosure laws applicable to the Mortgage Loan have been
complied with in all material respects, the consummation by Borrower of the
transactions contemplated hereby will not involve the violation of any such laws
or regulations, and the Borrower shall maintain in its possession, available for
the Lender's inspection, to the extent required by law, and shall deliver to the
Lender upon demand, evidence of compliance with all such requirements;
(h) No Satisfaction of Mortgage. The Mortgage has not been satisfied,
---------------------------
canceled, subordinated (other than, if a Second Lien Mortgage Loan, as expressly
set forth in paragraph (j) of this Schedule 1) or rescinded, in whole or in
part, and the Mortgaged Property has not been released from the lien of the
Mortgage, in whole or in part, nor has any instrument been executed that would
effect any such release, cancellation, subordination (other than, if a Second
Lien Mortgage Loan, in connection with the first lien referenced in paragraph
(j) of this Schedule 1) or rescission. The Borrower has not waived the
performance by the Mortgagor of any action, if the Mortgagor's failure to
perform such action would cause the Mortgage Loan to be in default, nor has the
Borrower waived any default resulting from any acting or inaction by the
Mortgagor;
(i) Location and Type of Mortgaged Property. The Mortgaged Property
---------------------------------------
is located in the state identified in the Mortgage Loan Schedule and consists of
a parcel of real property with a detached single family residence erected
thereon, or a two-to four-family dwelling, or an individual condominium unit in
a low-rise condominium project, or an individual unit in a planned unit
development or a de minimis planned unit development, provided, however, that no
residence or dwelling is a mobile home or a manufactured dwelling. No portion of
the Mortgaged Property is used for commercial purposes;
(j) Valid First or Second Lien. The Mortgage is a valid, subsisting,
--------------------------
enforceable, and perfected first or second lien on the Mortgaged Property,
including all buildings on the Mortgaged Property and all installations and
mechanical, electrical, plumbing, heating and air conditioning systems located
in or annexed to such buildings, and all additions, alterations and replacements
made at any time with respect to the foregoing. The lien of the Mortgage is
subject only to: (i) the lien of current real property taxes and assessments not
yet due and payable; (ii) covenants, conditions and restrictions, rights of way,
easements and other matters of the public record as of the date of recording
acceptable to mortgage lending institutions generally and specifically referred
to in the lender's title insurance policy delivered to the originator of the
Mortgage Loan and (A) referred to or to otherwise considered in the appraisal
(if any) made for the originator of the Mortgage Loan or (B) which do not
adversely affect the appraised value of the Mortgaged Property set forth in such
appraisal; (iii) other matters to which like properties are commonly subject
which do not materially interfere with the benefits of the security intended to
be provided by the Mortgage or the use, enjoyment, value or marketability of the
related Mortgaged Property; and (iv) in the case of a Second Lien Mortgage Loan,
a First Lien on the Mortgaged Property. Any security agreement, chattel mortgage
or equivalent document related to and delivered in connection with the Mortgage
Loan establishes and creates a valid, subsisting and enforceable first or second
lien and first or second priority security interest on the property described
therein and the Borrower has full right to sell and assign the same to the
Lender. The Mortgaged Property was not, as of the date of origination of the
Mortgage Loan, subject to a
Schedule 1
3
<PAGE>
mortgage, deed of trust, deed to secure debt or other security instrument
creating a lien subordinate to the lien of the Mortgage;
(k) Validity of Mortgage Documents. The Mortgage Note, the Mortgage
------------------------------
and any other agreement executed and delivered by a Mortgagor in connection with
a Mortgage Loan are genuine, and each is the legal, valid and binding obligation
of the maker thereof enforceable in accordance with its terms. All parties to
the Mortgage Note, the Mortgage and any other related agreement had legal
capacity to enter into the Mortgage Loan and to execute and deliver the Mortgage
Note, the Mortgage and any such agreement, and the Mortgage Note, the Mortgage,
and any other such related agreement have been duly and properly executed by
such parties. The Borrower has reviewed all of the documents constituting the
Mortgage File and has made such inquiries as it deems necessary to make and
confirm the acccuracy of the representations set forth herein;
(l) Full Disbursement of Proceeds. The proceeds of the Mortgage Loan
-----------------------------
have been fully disbursed and there is no requirement for future advances and
any and all requirements as to completion of any on-site or off-site improvement
and as to disbursements of any escrow funds therefor have been complied with.
All costs, fees and expenses incurred in making or closing the Mortgage Loan and
the recording of the Mortgage were paid, and the Mortgagor is not entitled to
any refund of any amounts paid or due under the Mortgage Note or Mortgage;
(m) Ownership. The Borrower is the sole owner of record and holder
---------
of the Mortgage Loan; the Mortgage Loan is not assigned or pledged (other than
as contemplated under the Loan Agreement), and the Borrower has good
indefeasible and marketable title thereto, and has full right to transfer and
pledge the Mortgage Loan therein to the Lender free and clear of any
encumbrance, equity, participation interest, lien, pledge, charge, claim or
security interest, and has full right and authority subject to no interest or
participation of, or agreement with, any other party, to pledge and assign each
Mortgage Loan pursuant to this Loan Agreement;
(n) Doing Business. All parties which have had any interest in the
--------------
Mortgage Loan, whether as mortgagee, assignee, pledgee or otherwise, are (or,
during the period in which they held and disposed of such interest, were) (i) in
compliance with any and all applicable licensing requirements of the laws of the
state wherein the Mortgaged Property is located, and (ii) (A) organized under
the laws of such state, or (B) qualified to do business in such state, or (C) a
federal savings and loan association, savings bank or a national bank having its
principal office in such state, or (D) not doing business in such state;
(o) LTV. As of the date of origination of the Mortgage Loan, the LTV
---
and CLTV are as identified in the applicable Mortgage Loan Schedule;
(p) Title Insurance. The Mortgage Loan is covered by a limited
---------------
liability lender's title insurance policy or such other form of policy of
insurance acceptable to Fannie Mae or Freddie Mac for loans similar to the
Mortgage Loans issued by a title insurer qualified to do business in the
jurisdiction where the Mortgaged Property is located, insuring the Borrower, its
successors and assigns, as to the priority of its lien of the Mortgage in the
original principal amount of the Mortgage Loan, and subject only to the
exceptions contained in clauses (1), (2), (3) and (4) of paragraph (j) above.
Where required by state law or regulation, the Mortgagor has been given the
opportunity to choose the carrier of the required mortgage title insurance.
Immediately prior to the sale of the Mortgage Loan to the Lender under the
terms of this Loan Agreement, the Borrower, its successors
Schedule 1
4
<PAGE>
and assigns were the sole insureds of such lender's title insurance policy. Such
lender's title insurance policy is in full force and effect and will be in force
and effect upon the consummation of the transactions contemplated by this Loan
Agreement. No claims have been made under such lender's title insurance policy,
and no prior holder of the Mortgage, including the Borrower, has done, by act or
omission, anything which should reasonably be expected to impair the coverage of
such lender's title insurance policy. In connection with the issuance of such
lender's title insurance policy, no unlawful fee, commission, kickback or other
unlawful compensation or value of any kind has been or will be received,
retained or realized by any attorney, firm or other persons or entity, and no
such unlawful items have been received, retained or realized by the Company;
(q) First Lien Consent. With respect to each Mortgage Loan which is a
------------------
Second Lien Mortgage Loan if the related First Lien provides for negative
amortization, the LTV was calculated at the maximum principal balance of such
First Lien that could result upon application of such negative amortization
feature;
(r) No Defaults; Right to Cure; No Failure to Cure. If a First Lien
----------------------------------------------
Mortgage Loan, there is no default, breach, violation or event of acceleration
existing under the Mortgage or the Mortgage Note and no event which, with the
passage of time or with notice and the expiration of any grace or cure period,
would constitute a default, breach, violation or event of acceleration (other
than those payment delinquencies permitted by paragraph (a) of this Schedule 1),
and neither the Borrower nor its predecessors have waived any default, breach,
violation or event of acceleration. If a Second Lien Mortgage Loan, (a) to the
best of the Borrower's knowledge the First Lien is in full force and effect,
(b) there is no default, breach, violation or event of acceleration existing
under such First Lien mortgage or the related-mortgage note, and (c) there has
occurred no event which, with the passage of time or with notice and the
expiration of any grace or cure period, would constitute a default, breach,
violation or event of acceleration thereunder acceleration (other than those
payment delinquencies permitted by paragraph (a) of this Schedule 1). If a
Second Lien Mortgage Loan, either (i) the First Lien mortgage contains a
provision which allows or (ii) applicable law requires, the mortgagee under the
second lien Mortgage Loan to receive notice of, and affords such mortgagee an
opportunity to cure any default under the First Lien mortgage, and the Borrower
has not received notice of any such default which has not been cured;
(s) No Mechanics' Liens. There are no mechanics' or similar liens or
-------------------
claims which have been filed for work, labor or material (and no rights are
outstanding that under the law could give rise to such liens) affecting the
related Mortgaged Property which are or may be liens prior to, or equal or
coordinate with, the lien of the related Mortgage;
(t) Location of Improvements; No Encroachments. All improvements
------------------------------------------
which were considered in determining the Appraised Value of the Mortgaged
Property lay wholly within the boundaries and building restriction lines of the
Mortgaged Property and no improvements on adjoining properties encroach upon the
Mortgaged Property. No improvement located on or being part of the Mortgaged
Property is in violation of any applicable zoning law or regulation;
(u) Origination; Payment Terms. Principal payments on the Mortgage
--------------------------
Loan commenced no more than sixty (60) days after funds were disbursed in
connection with the Mortgage Loan. The documents, instruments and agreements
submitted for loan underwriting were not falsified
Schedule 1
5
<PAGE>
and contain no untrue statement of material fact or omit to state a material
fact required to be stated therein. The Mortgage Note has the terms identified
in the applicable Mortgage Loan Schedule;
(v) Customary Provisions. The Mortgage Note has a stated maturity.
--------------------
The Mortgage contains customary and enforceable provisions such as to render the
rights and remedies of the holder thereof adequate for the realization against
the Mortgaged Property of the benefits of the security provided thereby,
including, (i) in the case of a Mortgage designated as a deed of trust, by
trustee's sale, and (ii) otherwise by judicial foreclosure. Upon default by a
Mortgagor on a Mortgage Loan and foreclosure on, or trustee's sale of, the
Mortgaged Property pursuant to the proper procedures, the holder of the Mortgage
Loan will be able to deliver good and marketable title to the the Mortgaged
Property. There is no homestead or other exemption available to a Mortgagor
which would interfere with the right to sell the Mortgaged Property at a
trustee's sale or the right to foreclose the Mortgage;
(w) Conformance with Underwriting Guidelines. The Mortgage Loan
----------------------------------------
was underwritten in accordance with, and the Mortgage Loan and Mortgaged
Property conform to, the Borrower's applicable Underwriting Guidelines;
(x) Occupancy of the Mortgaged Property. The Mortgaged Property is
-----------------------------------
lawfully occupied under applicable law. All inspections, licenses and
certificates required to be made or issued with respect to all occupied portions
of the Mortgaged Property and, with respect to the use and occupancy of the
same, including but not limited to certificates of occupancy and fire
underwriting certificates, have been made or obtained from the appropriate
authorities. Except to the extent the Mortgaged Property is non-owner occupied
as permitted by the Underwriting Guidelines, the Mortgagor represented at the
time of origination of the Mortgage Loan that the Mortgagor would occupy the
Mortgaged Property as the Mortgagor's primary residence;
(y) No Additional Collateral. The Mortgage Note is not and has not
------------------------
been secured by any collateral except the lien of the corresponding Mortgage and
the security interest of any applicable security agreement or chattel mortgage
referred to in (j) above;
(z) Deeds of Trust. In the event the Mortgage constitutes a deed
--------------
of trust, a trustee, duly qualified under applicable law to serve as such, has
been properly designated and currently so serves and is named in the Mortgage,
and no fees or expenses are or will become payable by the Lenders to the trustee
under the deed of trust, except in connection with a trustee's sale after
default by the Mortgagor;
(aa) Acceptable Investment. No specific circumstances or
---------------------
conditions exist with respect to the Mortgage, the Mortgaged Property, the
Mortgagor or the Mortgagor's credit standing that should reasonably be expected
to (i) cause private institutional investors which invest in Mortgage Loans
similar to the Mortgage Loan to regard the Mortgage Loan as an unacceptable
investment, (ii) cause the Mortgage Loan to be more likely to become past due in
comparison to similar Mortgage Loans, or (iii) adversely affect the value or
marketability of the Mortgage Loan in comparison to similar Mortgage Loans;
(bb) Delivery of Mortgage Documents. The Mortgage Note, the
------------------------------
Mortgage, the Assignment of Mortgage and any other documents required to be
delivered for the Mortgage Loan by
Schedule 1
6
<PAGE>
the Borrower under the Custodial Agreement have been delivered to the Custodian
at or prior to the time specified for delivery in the Custodial Agreement.
(cc) Assignment of Mortgage. The Assignment of Mortgage is in
----------------------
recordable form and is acceptable for recording under the laws of the
jurisdiction in which the Mortgaged Property is located;
(dd) Due on Sale. The Mortgage contains an enforceable provision
-----------
for the acceleration of the payment of the unpaid principal balance of the
Mortgage Loan in the event that the Mortgaged Property is sold or transferred
without the prior written consent of the mortgagee thereunder;
(ee) No Buydown Provisions: No Graduated Payments or Contingent
----------------------------------------------------------
Interests. The Mortgage Loan does not contain provisions pursuant to which
- - ---------
Monthly Payments are paid or partially paid with funds deposited in any separate
account established by the Borrower, the Mortgagor or anyone on behalf of the
Mortgagor, or paid by any source other than the Mortgagor nor does it contain
any other similar provisions currently in effect which may constitute a
"buydown" provision. The Mortgage Loan is not a graduated payment Mortgage Loan
and the Mortgage Loan does not have a shared appreciation or other contingent
interest feature;
(ff) Consolidation of Future Advances. Any future advances made
--------------------------------
after origination of the Mortgage Loan have been consolidated with the
outstanding principal amount secured by the Mortgage, and the secured principal
amount, as consolidated, bears a single interest rate and single repayment term.
The lien of the Mortgage securing the consolidated principal amount is expressly
insured as having second lien priority by a title insurance policy, an
endorsement to the policy insuring the mortgagee's consolidated interest or by
other title evidence satisfying paragraph (p) above. The consolidated principal
amount does not exceed the original principal amount of the Mortgage Loan;
(gg) Mortgaged Property Undamaged: Condemnation. The Mortgaged
------------------------------------------
Property is undamaged by waste, fire, earthquake or earth movement, windstorm,
flood, tornado or other caualty so as to adversely affect the value of the
Mortgaged Property as security for the Mortgage Loan or the use for which the
premises were intended and each Mortgaged Property is in good repair. There have
not been any condemnation proceedings with respect to the Mortgaged Property and
the Borrower has no knowledge of any such proceedings in the future;
(hh) Collection Practices; Escrow Deposits. The origination and
-------------------------------------
collection practices used with respect to the Mortgage Loan have been in all
respects in compliance with Accepted Servicing Practices, applicable laws and
regulations, and have been in all respects legal and proper and consistent with
industry standards for mortgage loans of the same type as the Mortgage Loan.
With respect to escrow deposits and Escrow Payments, if any, in the case of
Second Lien Mortgage Loans to the extent such Escrow Payments are not collected
by the mortgagee or its designee under the First Lien, all such payments are in
the possession of, or under control of, the Borrower and there exist no
deficiencies in connection therewith for which customary arrangements for
repayment thereof have not been made. All Escrow Payments, if any, have been
collected in full compliance with state and federal law. An escrow of funds is
not prohibited by applicable law and, to the extent such Escrow Payments are not
collected by the mortgagee or its designee under the First Lien, any escrow that
has been established is in an amount sufficient to pay for every item that
remains unpaid and has been assessed but is not yet due and payable. No escrow
deposits or Escrow Payments or other charges or payments
Schedule I
7
<PAGE>
due the Borrower have been capitalized under the Mortgage or the Mortgage Note.
Any interest required to be paid pursuant to state and local law has been
properly paid and credited;
(ii) Appraisal. The Mortgage File contains an appraisal of the
---------
related Mortgaged Property signed prior to the approval of the Mortgage Loan
application by a qualified appraiser, duly appointed by the Borrower, who had no
interest, direct or indirect in the Mortgaged Property or in any loan made on
the security thereof, and whose compensation is not affected by the approval or
disapproval of the Mortgage Loan, and the appraisal and appraiser both satisfy
the requirements of Title XI of the Federal Institutions Reform, Recovery and
Enforcement Act of 1989, as amended, and the regulations promulgated
thereunder, as in effect on the date the Mortgage Loan was originated;
(jj) Soldiers' and Sailors' Relief Act. The Mortgagor has not
---------------------------------
notified the Borrower, and the Borrower has no knowledge of any relief requested
or allowed to the Mortgagor under the Soldiers' and Sailors' Civil Relief Act of
1940;
(kk) Environmental Matters. To the Borrower's actual knowledge,
---------------------
the Mortgaged Property is free from any and all toxic or hazardous substances
and there exists no violation of any local, state or federal environmental law,
rule or regulation;
(ll) Construction or Rehabilitation of Mortgaged Property. No
----------------------------------------------------
Mortgage Loan was made in connection with the construction or rehabilitation of
a Mortgaged Property or facilitating the trade-in or exchange of a Mortgaged
Property;
(mm) Ground Lease. With respect to each ground lease to which the
------------
Mortgaged Property is subject (a "Ground Lease"): the Mortgagor is the owner of
------------
a valid and subsisting interest as tenant under the Ground Lease; (ii) the
Ground Lease is in full force and effect, unmodified and not supplemented by any
writing or otherwise; (iii) all rent, additional rent and other charges reserved
therein have been paid to the extent they are payable to the date hereof; (iv)
the Mortgagor enjoys the quiet and peaceful possession of the estate demised
thereby, subject to any sublease; (v) the Mortgagor is not in default under any
of the terms thereof and there are no circumstances which, with the passage of
time or the giving of notice or both, would constitute an event of default
thereunder; (vii) the lessor under the Ground Lease is not in default under any
of the terms or provisions thereof on the part of the lessor to be observed or
performed; (vii) the lessor under the Ground Lease has satisfied all of its
repair or construction obligations, if any, to date pursuant to the terms of the
Ground Lease; and (ix) the execution, delivery and performance of the Mortgage
do not require the consent (other than those consents which have been obtained
and are in full force and effect) under, and will not contravene any provision
of or cause a default under, the Ground Lease.
(nn) No Defense to Insurance Coverage. No action has been taken
--------------------------------
or failed to be taken, no event has occurred and no state of facts exists or has
existed (whether or not known to the Borrower on or prior to such date) which
has resulted or will result in an exclusion from, denial of, or defense to
coverage under any applicable pool policy, special hazard insurance policy, or
bankruptcy bond (including, without limitation, any exclusions, denials or
defenses which would limit or reduce the availability of the timely payment of
the full amount of the loss otherwise due thereunder to the insured), whether
arising out of actions, representations, errors,, omissions, negligence, or
fraud of the Borrower, the related Mortgagor or any party involved in the
application for such insurance or coverage, including the appraisal, plans and
specifications and other exhibits or documents submitted therewith to the
insurer or under any such insurance policy, or for any other mason under such
Schedule I
8
<PAGE>
coverage, but not including the failure of the insurer to pay by reason of the
insurer's breach of the insurance policy or the insurer's financial inability to
pay. In connection with the placement of any insurance or coverage, no
commission, fee or other compensation has been or will be received by the
Borrower or by any officer, director, or employee of the Borrower or any
designee of the Borrower or any corporation in which the Borrower or any
officer, director or employee had a financial interest at the time of placement
of such insurance;
(oo) Value of Mortgage Property. The Borrower has no knowledge of
--------------------------
any circumstances existing that should reasonably be expected to adversely
affect the value or the marketability of the Mortgaged Property or the Mortgage
Loan or to cause the Mortgage Loan to prepay during any period materially faster
or slower that the Mortgage Loans originated by the Borrower generally;
(pp) Section 32 Mortgage; Overages. The Borrower has provided
-----------------------------
the related Mortgagor with all disclosure materials required by Section 226.32
of the Federal Reserve Board Regulation Z with respect to any Mortgage Loans
subject to such Section of the Federal Reserve Board Regulation Z. The Borrower
has not made or caused to be made any payment in the nature of an "overage" or
"yield spread premium" to a mortgage broker or like Person which has not been
fully disclosed to the Mortgagor;
Part II Defined Terms
-------------
In addition to terms defined elsewhere in the Loan Agreement, the
following terms shall have the following meanings when used in this Schedule 1:
"Appraised Value" shall mean the value set forth in an appraisal
---------------
made in connection with the origination of the related Mortgage Loan as the
value of the Mortgaged Property.
"Assignment of Mortgage" shall mean an assignment of the Mortgage,
----------------------
notice of transfer or equivalent instrument in recordable form, sufficient under
the laws of the jurisdiction wherein the related Mortgaged Property is located
to reflect the transfer of the Mortgage.
"Combined LTV or CLTV" shall mean with respect to any Mortgage
--------------------
Loan, the ratio of (a) the Par Amount, as of the date of calculation, of (i) the
Mortgage Loan plus (ii) the Mortgage Loan constituting the First Lien to (b) the
----
Appraisal Value of the Mortgaged Property.
"Due Date" means the day of the month on which the Monthly Payment
--------
is due on a Mortgage Loan, exclusive of any days of grace.
"Escrow Payments" shall mean with respect to any Mortgage Loan,
---------------
the amounts constituting ground rents, taxes, assessments, water rates, sewer
rents, municipal charges, fire and hazard insurance premiums, condominium
charges, and any other payments required to be escrowed by the Mortgagor with
the mortgagee pursuant to the Mortgage or any other related document.
"First Lien" shall mean with respect to each Mortgaged Property,
----------
the lien of the mortgage, deed of trust or other instrument securing a mortgage
note which creates a first lien on the Mortgaged Property.
Schedule 1
9
<PAGE>
"Loan-to-Value Ratio" or "LTV" shall mean with respect to any
----------------------------
Mortgage Loan, the ratio of (a) the Par Amount of the Mortgage Loan as of the
date of origination (unless otherwise indicated) to (b) the Appraisal Value of
the Mortgaged Property or if the Mortgage Loan was made in connection with the
purchase of the related Mortgaged Property, the lesser of the Appraised Value
and the sales price of such property.
"Stated Principal Balance" shall mean as to each Mortgage Loan,
------------------------
the principal balance of the Mortgage Loan at the date of determination.
Schedule 1
10
<PAGE>
EXHIBIT 10.27
SALOMON BROTHERS REALTY CORP.
SEVEN WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
August 27, 1997
New Century Mortgage Corporation
18400 Von Karman, Suite 1000
Irvine, California 92612
Attention: Mr. Brad Morrice
President & General Counsel
Ladies and Gentlemen:
This letter agreement (the "Letter Agreement") confirms the
understanding and agreements between New Century Mortgage Corporation ("New
Century") and Salomon Brothers Realty Corp. ("Salomon"), under the terms set
forth herein, regarding (i) New Century's agreement to securitize certain
adjustable rate, one-to-four family, first lien mortgages (the "Mortgage Loans")
either (a) using Salomon Brothers Mortgage Securities VII Inc. or (b) pursuant
to a shelf registration filing of New Century in connection with pass-through
transfers with respect to which Salomon or one of its affiliates is the sole
underwriter and (ii) Salomon's agreement to provide an aggregation line to New
Century in connection with certain mortgage loans that are originated by New
Century.
1. Mortgage Loans.
--------------
(a) In General. New Century hereby agrees to securitize Mortgage
----------
Loans with an unpaid principal balance, as of the date of securitization, of not
less than $750,000,000 between September 1, 1997 and June 30, 1998, securitized
through a program of securitizations (the "Securitizations") of AAA and Aaa-
rated mortgage-backed securities (the "Securities") either (i) using Salomon
Brothers Mortgage Securities VII Inc. or (ii) pursuant to a shelf registration
filing of New Century in connection with pass-through transfers with respect to
which Salomon or one of its affiliates is the sole underwriter.
(b) Servicing of the Mortgage Loans. Unless otherwise agreed to
-------------------------------
between Salomon and New Century, New Century shall service the Mortgage Loans
through Comerica or such other sub-servicer which Salomon has accepted in
writing, as the sub-servicer (the "Sub-Servicer"); provided that, Salomon shall
have the right to perform due diligence on any entity appointed as servicer or
sub-servicer of the Mortgage Loans (including Comerica) and may require New
Century to select another servicer or sub-servicer to the extent that Salomon is
not satisfied with the results of such due diligence. The Mortgage Loans shall
be serviced pursuant to the terms of the Mortgage Loan Purchase and Servicing
Agreement currently in effect between
<PAGE>
New Century Mortgage Corporation
August 27, 1997 Page 2.
Salomon and New Century. New Century or the Sub-Servicer shall remit payments of
principal and interest to Salomon on a date prior to the 25th day of each month
beginning with the month after the Settlement Date (as defined in Section 3(a))
to permit remittances to certificateholders on the 25th day of each month in
connection with a securitization, shall enforce "due-on-sale" provisions to the
extent permitted by law, shall administer all escrow/impound deposits, shall pay
compensating interest on principal prepayments in any month up to the amount of
its servicing compensation in such month, and shall make all servicing advances
on any Mortgage Loan (including advances of delinquent principal and interest
payments) on the Mortgage Loans. New Century or the Sub-Servicer shall be
required to make advances in respect of delinquent payments of principal and
interest on the Mortgage Loans through foreclosure and in connection with any
properties acquired by the related trustee in any securitization transaction
through liquidation of such properties, subject to New Century's or the Sub-
Servicer's determination regarding recoverability. The Mortgage Loans shall be
serviced for a servicing fee equal to .50% per annum payable monthly on the
then-outstanding principal balance of each Mortgage Loan (the "Servicing Fee").
Any fee payable to the Sub-Servicer shall be paid by New Century without any
right of reimbursement by Salomon.
(c) Conditions Precedent to Mortgage Loan Purchases. Salomon's
-----------------------------------------------
obligation to purchase any Mortgage Loans which it accepts for its Aggregation
Line (as defined in Section 3(a)) shall be subject to each of the following
conditions:
(i) there shall have been delivered to Salomon a Trust Receipt
issued by First Bank National Association ("First Bank")
with a mortgage loan schedule attached thereto and an
exception report which is acceptable to Salomon in its sole
discretion;
(ii) Salomon shall have had an opportunity to perform a due
diligence review of each Mortgage Loan and shall have
arranged for reappraisals of value with respect to each
Mortgage Loan if desired by Salomon; and
(iii) New Century shall have provided to Salomon such other
documents which are then required to have been delivered
under the Purchase and Sale Agreement (as defined in
Section 3(a)) or which are reasonably requested by Salomon,
which other documents may include UCC financing statements,
a favorable opinion or opinions of counsel with respect to
matters which are reasonably requested by Salomon, and/or
an officer's or secretary's certificate.
2. Securitizations.
---------------
(a) In General. As noted above, New Century shall meet its commitment
----------
to Salomon with respect to not less than $750,000,000 in Mortgage Loans between
September 1,
<PAGE>
New Century Mortgage Corporation
August 27, 1997 Page 3.
1997 and June 30, 1998 by using Salomon Brothers Mortgage Securities VII Inc. or
a shelf registration statement of New Century pursuant to transactions in which
Salomon or an affiliate shall act as the sole underwriter. In connection with
any such offering, New Century shall appoint Salomon as New Century's exclusive
underwriter of New Century's mortgage loan securitization transactions. New
Century will pay to Salomon promptly upon the closing of each Securitization an
underwriting discount equal to the product of (i) the applicable Underwriting
Fee Percentage (as defined herein) multiplied by (ii) the aggregate unpaid
principal balance of the Mortgage Loans subject to such Securitization (the
"Underwriting Fee"). The "Underwriting Fee Percentage" with respect to each
Securitization shall be one-fourth of one percent (0.25%). If in any given
period commencing with the period from September 1, 1997 through December 31,
1997, and thereafter on a quarterly basis, New Century fails to pay Salomon a
cumulative Underwriting Fee of at least $500,000, New Century shall pay to
Salomon on the last business day of such period an amount equal to (i) $500,000
less (ii) the cumulative Underwriting Fee for such period; provided, however,
that any Underwriting Fees paid by New Century in any quarter in excess of
$500,000 shall be carried forward and applied toward New Century's Underwriting
Fee commitment hereunder; provided, further, that the minimum quarterly
Underwriting Fee commitment shall not apply in any quarter in which New Century
utilizes Salomon or an affiliate as the exclusive underwriter for all adjustable
rate securitizations completed by New Century during such quarter. In addition,
if on June 30, 1998 (or August 31, 1998 in the event that this Letter Agreement
is extended pursuant to Section 5(c) hereof), New Century has not paid to
Salomon a cumulative Underwriting Fee of at least $1,875,000, New Century shall
pay to Salomon on the last business day of such period an amount equal to (i)
$1,875,000 less (ii) the cumulative Underwriting Fee.
(b) Expenses. New Century shall pay all reasonable costs and expenses
--------
arising from the preparation for and execution of the Securitizations, including
but not limited to, the fees and disbursements of legal counsel (including
investor's counsel in any private placement, if retained), rating agency fees,
credit enhancement fees, SEC registration fees (or equivalent ratable fees of a
Salomon affiliate in lieu thereof if such affiliate's shelf registration is
utilized), auditors' fees, due diligence expenses (other than Salomon's), costs
of preparing and printing any offering documents and trustee fees, etc. Salomon
shall be responsible for the fees and disbursements of its own legal counsel and
any due diligence expenses incurred by Salomon. It is understood and agreed that
New Century may require that the parties incurring or charging such costs and
expenses agree in advance that they are payable or reimbursable by New Century
only to a specified reasonable extent or cap.
(c) Information. New Century will furnish Salomon with all financial and
-----------
other information concerning New Century as Salomon deems reasonably appropriate
in connection with the performance of the services contemplated by this letter
and in that connection will provide Salomon with reasonable access during normal
business hours to New Century's officers, directors, employees, accountants, and
other representatives. New Century acknowledges and confirms that Salomon (i)
will rely on such information in the performance of the services contemplated by
this letter without independently investigating or verifying any of it and (ii)
assumes no responsibility for the accuracy or completeness of such information.
<PAGE>
New Century Mortgage Corporation
August 27, 1997 Page 4.
(d) Offering Documents. In connection with each Securitization, New
------------------
Century will be solely responsible for the contents of any private placement
memorandum, prospectus supplement or other offering document used in connection
with the placement of the Securities (as such documents may be amended or
supplemented and including any information incorporated therein by reference,
the "Offering Document") and any and all other written communications provided
by, or authorized to be provided on behalf of, New Century to any actual or
prospective purchaser of the Securities except to the extent such contents of
the Offering Document are provided by Salomon in writing expressly for use in
the Offering Document and provided that any statistical, tabular or similar
information, including computer runs, initially prepared by or on behalf of
Salomon (but as to which Salomon is not taking responsibility in the Offering
Document) shall have been verified by New Century's independent public
accountants. New Century shall represent and warrant that the Offering Document
and such other written communications will not, as of the date of the offer or
sale of the Securities or the closing date of any such sale, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. Such
representation and warranty will not cover information provided in writing by
Salomon for use specifically in such Offering Document. New Century shall
authorize Salomon to provide the Offering Document to prospective purchasers of
the Securities. If at any time prior to the completion of the offer and sale of
the Securities an event occurs as a result of which the Offering Document (as
then supplemented or amended) would include any untrue statement of a material
fact or omit to state any material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading, New Century will promptly notify Salomon of such event and
Salomon will suspend solicitations of prospective purchasers of the Securities
until such time as New Century shall prepare (and New Century agrees that, if it
shall have notified Salomon to suspend solicitations after orders have been
accepted from prospective purchasers, it will promptly prepare) a supplement or
amendment to the Offering Document which corrects such statement or omission.
(e) Indemnification. New Century agrees to indemnify and hold harmless
---------------
Salomon and each person who controls Salomon within the meaning of either the
Securities Act of 1933, as amended (the "Act") or the Securities Exchange Act of
1934, as amended (the "Exchange Act") against any and all losses, claims,
damages or liabilities, joint or several, suffered or incurred which arise out
of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the Offering Document or in any revision or amendment
thereof or supplement thereof or arise out of or are based upon the omission or
alleged omission to state in the Offering Document or in any revision or
amendment thereof or supplement thereto a material fact required to be stated
therein or the omission or alleged omission to state a material fact in any
Offering Document or in any revision or amendment thereof or supplement thereto
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading, and agrees to reimburse each such
indemnified party for any legal or other expenses reasonably incurred by it or
him in connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however that New Century shall not be liable to
-------- -------
Salomon or any person who controls Salomon to the extent that any misstatement
or alleged misstatement or
<PAGE>
New Century Mortgage Corporation
August 27, 1997 Page 5.
omission or alleged omission was made in reliance upon and in conformity with
the information provided in writing to New Century by Salomon specifically for
inclusion in the Offering Document. This indemnity agreement will be in addition
to any liability which New Century may otherwise have.
In order to provide for just and equitable contribution in circumstances
in which the indemnification provided for in this Section 2(e) is due in
accordance with its terms but is for any reason held by a court to be
unavailable on grounds of policy or otherwise, the parties entitled to
indemnification thereunder shall be entitled to contribution for the aggregate
losses, claims, damages and liabilities (including legal and other expenses
reasonably incurred in connection with investigating or defending same) to which
it or they may be subject, except that no person guilty of fraudulent
misrepresentation shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. In determining the amount of
contribution to which the respective parties are entitled, consideration shall
be given to the relative benefits and also the relative fault of the party in
connection with the statements or omissions that resulted in losses, the
parties' relative knowledge and access to information concerning the matter with
respect to which the claim was asserted, the opportunity to correct and/or
prevent the breach, and any other equitable considerations appropriate under the
circumstances. For purposes of this Section 2(e), each person who controls
Salomon within the meaning of either the Act or the Exchange Act shall have the
same rights to contribution as Salomon. Any party entitled to contribution will,
promptly after receipt of notice of commencement of any action, suit or
proceeding against such party in respect of which a claim for contribution may
be made against New Century under this Section 2(e), notify New Century, but the
omission to so notify New Century shall not relieve New Century from any other
obligation it may have hereunder or otherwise than under this Section 2(e).
(f) All financial data and other documentation prepared by Salomon in
connection with the transactions contemplated hereby (including, without
limitation, any computer models, cash flow analyses, and any documentation
prepared by counsel for Salomon) shall be proprietary to Salomon. Except as
otherwise required by law, neither New Century, any New Century affiliate, nor
any person acting on behalf of any of them (including, without limitation,
counsel and the independent accountants to New Century) shall disseminate,
distribute, or otherwise make available such data or documentation without
Salomon's prior written consent (other than New Century making such data
available to any New Century affiliate, its counsel or its independent
accountants, in each case on a need-to-know basis).
This Section 2 shall survive the termination of this Letter Agreement.
3. Aggregation Line.
----------------
(a) In General. In addition to the rights provided to Salomon pursuant
----------
to Sections 1 and 2 of this Letter Agreement, Salomon shall make available to
New Century an aggregation line (the "Aggregation Line") pursuant to which
Salomon shall simultaneously purchase from, and
<PAGE>
New Century Mortgage Corporation
August 27, 1997 Page 6.
sign a forward commitment to resell to, New Century adjustable rate Mortgage
Loans that are deemed acceptable for such Aggregation Line as set forth below.
For purposes of the Aggregation Line, Mortgage Loans shall be deemed to be
adjustable rate Mortgage Loans if they do not include any period of more than
three years during which the related mortgage interest rate thereunder will not
be subject to adjustment. Only Mortgage Loans which are deemed to be adjustable
rate Mortgage Loans by Salomon in its sole discretion shall be eligible for
inclusion under the Aggregation Line. Notwithstanding the foregoing, New
Century shall have until September 30, 1997 to remove from the Aggregation Line
any fixed rate Mortgage Loans currently subject to the Aggregation Line. Such
Mortgage Loans shall be removed from the Aggregation Line upon three Business
Day's prior notice to Salomon but in no event later than September 30, 1997.
The Aggregation Cost (as defined below) for such Mortgage Loans shall equal One
Month LIBOR plus 1.25%. In the event that any such fixed rate Mortgage Loan
has not been removed from the Aggregation Line on or before September 30, 1997,
Salomon may, in its sole discretion permit such fixed rate Mortgage Loan to
remain subject to the terms of the Aggregation Line at an Aggregation Cost (as
defined below) equal to One Month LIBOR plus 2.00%. It is understood and agreed
that in connection with the resale of the Mortgage Loans by Salomon to New
Century pursuant to the prior sentence, Salomon shall not make any
representations and warranties regarding the Mortgage Loans and the Mortgage
Loans will not be subject to due diligence review by New Century. The
Aggregation Line shall be more fully documented pursuant to the Mortgage Loan
Purchase and Sale Agreement (the "Purchase and Sale Agreement") to be entered
into between New Century and Salomon, which shall be substantially similar in
form to the Mortgage Loan Purchase and Sale Agreement dated November 4, 1996
between New Century and Salomon. Under the Purchase and Sale Agreement, New
Century will make standard secondary market corporate representations and
warranties as of the date such Purchase and Sale Agreement is executed and as of
any settlement date for the purchase and sale of any Mortgage Loans pursuant to
such Purchase and Sale Agreement (each such date, a "Settlement Date") and New
Century shall make standard secondary market representations and warranties with
respect to each Mortgage Loan as of the Settlement Date on which such Mortgage
Loan is sold to Salomon. In the event that New Century satisfies its
obligations under the terms of this Letter Agreement, the Aggregation Line shall
terminate on the last day of the calendar quarter in which New Century satisfies
its obligations to Salomon pursuant to Section 1(a) of this Letter Agreement.
The Purchase Price with respect to each Mortgage Loan which conforms to
the Underwriting Standards of New Century which were most recently reviewed and
approved by Salomon and which is not a Problem Mortgage Loan (as defined in
Section 3(b) or a Non-Standard Mortgage Loan (as defined in Section 3(c) (a
"Standard Mortgage Loan") shall be equal to the market value of such Mortgage
Loan, as determined by Salomon acting in good faith. The Purchase Price for
each Non-Standard Mortgage Loan shall be equal to the lesser of (i) the market
value of such Mortgage Loan as determined by Salomon acting in good faith or
(ii) the amount determined in accordance with the provisions of Section 3(c)(ii)
of this Letter Agreement. Unless Salomon provides notice to New Century and
First Bank, the Purchase Price for each Standard Mortgage Loan shall be equal to
at least 103% of the unpaid principal balance of such Standard
<PAGE>
New Century Mortgage Corporation
August 27, 1997 Page 7.
Mortgage Loan and the Purchase Price with respect to each Non-Standard Mortgage
Loan shall be equal to at least 100% of the unpaid principal balance of such
Non-Standard Mortgage Loan.
The repurchase price shall reflect the agreed upon return to Salomon for
providing the Aggregation Line (the "Aggregation Cost"). With respect to any
Mortgage Loan which is a Standard Mortgage Loan, the Aggregation Cost shall
equal One Month LIBOR plus 1.25%. With respect to any Problem Mortgage Loan or
Non-Standard Mortgage Loan, or in the event that New Century sells any Mortgage
Loan which is subject to the Aggregation Line to a party other than Salomon, the
Aggregation Cost shall equal One Month LIBOR plus 2.00%. In the event that a
Mortgage Loan is sold to a party other than Salomon, the Mortgage Loan shall be
subject to the foregoing increased rate from the day such Mortgage Loan became
subject to the Aggregation Line until the date of the sale to such third party.
A copy of the letter with the terms to the sale to such third party shall be
delivered to Salomon. New Century shall retain principal and interest on any
Mortgage Loans subject to the Aggregation Line.
The Aggregation Line, inclusive of any Problem Mortgage Loans and Non-
Standard Mortgage Loans, at any one time shall be limited to $335 million in
amount of Mortgage Loans and shall have a term of one month; provided that,
Salomon may, in its sole discretion, increase the maximum amount of the
Aggregation Line to an amount not in excess of $400 million to the extent
requested by New Century to accumulate adjustable rate Mortgage Loans which New
Century has committed to securitize using Salomon as the sole underwriter. The
maximum amount of Problem Mortgage Loans and Non-Standard Mortgage Loans in the
Aggregation Line shall not exceed $35 million at any one time.
New Century shall have the right to add Mortgage Loans to the Aggregation
Line up to four times each month. Standard Loans may be removed from the
Aggregation Line once a month on the roll date. Problem Mortgage Loans and Non-
Standard Mortgage Loans may be removed from the Aggregation Line with two weeks
prior written notice by New Century to Salomon.
Salomon shall provide not less than twenty eight days' prior notice to
New Century and First Bank (or such other warehouse lender as directed by New
Century) in the event that Salomon elects to not renew the Aggregation Line for
any month.
(b) Problem Mortgage Loans. Salomon, in its sole discretion, may
----------------------
determine that a Mortgage Loan is (x) of insufficient quality to be financed or
purchased, (y) missing documentation or other information and such problem is
not cured by New Century in sixty days or (z) a loan which is delinquent at the
time of financing by Salomon, which becomes delinquent during such financing by
Salomon or was more than thirty days delinquent on one or more occasions in the
prior twelve months (each such Mortgage Loan, a "Problem Mortgage Loan").
Problem Mortgage Loans shall be subject to the following qualifications with
respect to the Aggregation Line:
<PAGE>
New Century Mortgage Corporation
August 27, 1997 Page 8.
(i) the maximum Aggregation Line with respect to Problem
Mortgage Loans shall equal $10 million as of any trade date
on which there was formal notification of a trade by a
confirmation letter or trade ticket; and
(ii) the Purchase Price shall be equal to (A) for the first
ninety-day period after purchase, 80% of the unpaid
principal balance of the Problem Mortgage Loan as of the
date of purchase and (B) thereafter, 80% of the unpaid
principal balance of the Problem Mortgage Loan, minus 20%
of the unpaid principal balance of such Problem Mortgage
Loan for each additional month after the initial ninety-day
period.
In the event that Salomon determines in its sole discretion that any Problem
Mortgage Loan has ceased to be a Problem Mortgage Loan, such Mortgage Loan shall
be treated as a Standard Loan or a Non-Standard Mortgage Loan, as the case may
be, as of the first day of the month following such determination.
(c) Non~Standard Mortgage Loans. "Non-Standard Mortgage Loans" are
---------------------------
defined as any Mortgage Loan (x) with an unpaid principal balance in excess of
$1,000,000; or (y) that has a loan-to-value ratio in excess of 85.00% (up to a
maximum of 90.00%); provided, however, at its option, Salomon may deem a
Mortgage Loan with an unpaid principal balance of no more than $1,500,000 to be
a Standard Loan. In addition, if (i) Mortgage Loans with a loan-to-value ratio
greater than 80% (but not more than 85%) have an aggregate unpaid principal
balance in excess of $30 million and (ii) Mortgage Loans with unpaid principal
balances greater than $500,000 and less than or equal to $1,500,000 have an
aggregate unpaid principal balance in excess of $10 million, such excess amounts
shall be deemed "Non-Standard Mortgage Loans". No Mortgage Loan shall be subject
to the terms of the Aggregation Line if the unpaid principal balance of such
Mortgage Loan exceeds $1,500,000 or if such Mortgage Loan is not a first lien.
Non-Standard Mortgage Loans shall be subject to the following qualifications
with respect to the Aggregation Line:
(i) the maximum Aggregation Line with respect to Non-Standard
Mortgage Loans shall equal $30 million (of which no more
than $5 million shall have unpaid principal balances greater
than $500,000 (including any Problem Loans with unpaid
principal balances greater than $500,000) and no more than
$15 million shall be Mortgage Loans with a loan-to-value
ratio in excess of 85.00% (up to a maximum of 90.00%)), as
of any trade date on which there was formal notification of
a trade by a confirmation letter or trade ticket; and
<PAGE>
New Century Mortgage Corporation
August 27, 1997 Page 9.
(ii) the maximum Purchase Price for the first sixty days shall be
par and thereafter, the maximum Purchase Price shall be
calculated pursuant to Section 3(b)(ii) above.
(d) Mortgage Loan Schedule. No Mortgage Loan shall be included in the
----------------------
Aggregation Line unless New Century shall have delivered to Salomon at least 72
hours prior to such inclusion, a magnetic tape, in a format acceptable to
Salomon, consisting of the loan characteristics agreed upon by Salomon and New
Century with respect to each Mortgage Loan.
(e) Marketing of Mortgage Loans. Salomon may market the Problem
---------------------------
Mortgage Loans and Non-Standard Mortgage Loans on New Century's behalf for a
purchase price acceptable to New Century and shall provide New Century with a
copy of a trade ticket or letter of intent with respect to any commitment to
sell such Mortgage Loans. New Century must advise Salomon within sixty days
after inclusion of each Mortgage Loan in the Aggregation Line of the course of
action it intends to take with respect to such Mortgage Loan (i.e.,
securitization, whole loan sale, etc.).
4. Financing of CE Bonds. Salomon shall provide financing for the CE
---------------------
bonds (the "CE Bonds") created by the asset-backed structure on any New Century
securitizations which Salomon has acted as the sole underwriter pursuant to this
Letter Agreement. Such financing shall be performed at a rate equal to 75% of
the present value of the CE Bonds, as determined by Salomon. The CE Bonds shall
be financed by Salomon at a financing fee equal to One Month LIBOR plus 1.50%
and will be subject to standard provisions of the PSA master repurchase
agreement. In addition, at the option of New Century, Salomon may, but is not
obligated to, provide the financing of CE Bonds created by asset-backed
structures on securitizations for which Salomon is not acting as sole
underwriter.
5. Termination.
-----------
(a) New Century shall have the right to terminate its obligations
hereunder upon (i) any material default by Salomon of its obligations under this
Letter Agreement which is not cured within 30 days following written notice of
such default to Salomon by New Century or (ii) the payment by New Century to
Salomon of a termination fee equal to 0.25% times the unfulfilled volume
commitment hereunder.
(b) Salomon shall have the right to terminate this Letter Agreement upon
the occurrence of any of the following events (each, a "Termination Event"):
(i) the judgment by Salomon in good faith that a material
adverse change has occurred with respect to the business,
properties, assets or condition (financial or otherwise) of
New Century;
<PAGE>
New Century Mortgage Corporation
August 27, 1997 Page 10.
(ii) Salomon shall reasonably request, specifying the reasons for
such request, information, and/or written responses to such
requests, regarding the financial well-being of New Century and
such information and/or responses shall not have been provided
within three business days of such request;
(iii) Either (A) a change in control of New Century shall have
occurred other than in connection with and as a result of the
issuance and sale by New Century of registered, publicly
offered common stock; or (B) Salomon determines in its sole
discretion that any material adverse change has occurred in the
management of New Century;
(iv) There is (A) a material breach by New Century of any
representation and warranty contained in the Purchase and Sale
Agreement, other than a representation or warranty relating to
particular Mortgage Loans, and Salomon has reason to believe in
good faith either that such breach is not curable within 30
days or that such breach may not have been cured in all
material respects at the expiration of 30 days following
discovery thereof by New Century or (B) a failure by New
--
Century to make any payment payable by it under the Purchase
and Sale Agreement or (C) any other failure by New Century to
--
observe and perform in any material respect its material
covenants, agreements and obligations with Salomon, including
without limitation those contained in the Purchase and Sale
Agreement, and Salomon has reason to believe in good faith that
such failure may not have been cured in all material respects
at the expiration of 30 days following discovery thereof by New
Century;
(v) There shall have occurred any outbreak or material escalation
of hostilities, declaration by the United States of a national
emergency or war or other calamity or crisis, the effect of
which on the financial markets is such as to make it, in the
judgment of Salomon, impracticable to continue the commitment;
or
(vi) New Century fails to provide written notification to Salomon of
any change in its loan origination, acquisition or appraisal
guidelines or practices, or New Century, without the prior
consent of Salomon (which shall not be unreasonably withheld),
amends in any material respect its loan origination,
acquisition or appraisal guidelines or practices;
<PAGE>
New Century Mortgage Corporation
August 27, 1997 Page 11.
provided, that Salomon shall have the right to dispose of any collateral held by
Salomon pursuant to this Letter Agreement or pursuant to the CE Facility in
order to remedy any default based upon a Termination Event occurring hereunder
or under the CE Facility.
(c) Subject to the provisions of Paragrah 3 of this Letter Agreement, this
Letter Agreement shall terminate upon the earlier of (i) satisfaction of the
$750,000,000 commitment and (ii) June 30, 1998; provided that the CE Financing
provided for in Section 4 shall continue under its terms; provided further that,
in the event that New Century has not effected the securitization of any
adjustable rate Mortgage Loans during the term of this Letter Agreement with any
underwriter other than Salomon, then Salomon, in its sole discretion may extend
the term of this Letter Agreement to August 31, 1998.
Notwithstanding any other provision of this Section 5, any grace or
notice period provided herein in respect of a notice to be given or action to be
taken by Salomon may be shortened or eliminated by Salomon if, in its sole good
faith discretion, it is unreasonable to do so under the circumstances, taking
into consideration, among other things, the volatility of the market for the
Mortgage Loans or other Securities involved, the extent and nature of any
Termination Event (or events which with the giving of such notice and passage of
time would constitute Termination Events) and the risks inherent in deferring
the exercise of remedies for the otherwise applicable grace or notice period.
6. General Provisions.
------------------
(a) Salomon's Discretion. It is understood that Salomon shall have
--------------------
absolute discretion in determining whether to accept or reject any proposed
offer or proposal to securitize any Mortgage Loan. Notwithstanding the
foregoing, however, subject to New Century's representations, warranties and
covenants as set forth herein and in any related agreements, all Standard
Mortgage Loans, Non-Standard Mortgage Loans and Problem Mortgage Loans
originated by New Century in accordance with the underwriting standards of New
Century which were most recently approved by Salomon shall be eligible for
financing under the Aggregation Line in accordance with the terms hereof;
provided, however, Salomon shall have no obligation to finance any Mortgage Loan
that New Century intends to sell to a party other than Salomon. It is further
understood that Salomon shall have absolute discretion in determining whether
any Mortgage Loan is a Standard Mortgage Loan, Non-Standard Mortgage Loan or
Problem Mortgage Loan.
(b) Governing Law. This Letter Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of New York (without regard
to its conflicts of laws principles).
(c) Amendment or Waiver. This Letter Agreement may not be amended or
-------------------
modified except in writing signed by each of the parties hereto.
<PAGE>
New Century Mortgage Corporation
August 27, 1997 Page 12.
(d) Counterparts. This Letter Agreement may be executed
------------
simultaneously in any number of counterparts. Each counterpart shall be deemed
to be an original, and all such counterparts shall constitute one and the same
instrument.
(e) Severability Clause. Any part, provision, representation or
-------------------
warranty of this Letter Agreement which is prohibited or which is held to be
void or unenforceable shall be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof. Any part,
provision, representation or warranty of this Letter Agreement which is
prohibited or unenforceable or is held to be void or unenforceable in any
jurisdiction shall be ineffective, as to such jurisdiction, to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof. To the extent permitted by applicable law, the parties hereto
waive any provision of law which prohibits or renders void or unenforceable any
provision hereof. If the invalidity of any part, provision, representation or
warranty of this Letter Agreement shall deprive any party of the economic
benefit intended to be conferred by this Letter Agreement, the parties shall
negotiate, in good-faith, to develop a structure the economic effect of which is
nearly as possible the same as the economic effect of this Letter Agreement
without regard to such invalidity.
(f) No Partnership. Nothing herein contained shall be deemed or
--------------
construed to create a co-partnership or joint venture between the parties
hereto.
(g) Further Agreements. New Century and Salomon each agree to execute
------------------
and deliver to the other such reasonable and appropriate additional documents,
instruments or agreements as may be necessary or appropriate to effectuate the
purposes of this Letter Agreement.
<PAGE>
Please confirm that the foregoing is in accordance with your
understanding by signing this letter of agreement and two enclosed copies and
returning to us the enclosed copies. The letter signed by you shall constitute a
binding agreement between us as of the date first above written.
Yours sincerely,
SALOMON BROTHERS REALTY CORP.
By: /s/ Gregory P. Petroski
----------------------------
Name: Gregory P. Petroski
--------------------------
Title: Authorized Agent
-------------------------
ACCEPTED AND AGREED TO
AS OF THE DATE FIRST ABOVE WRITTEN:
NEW CENTURY MORTGAGE CORPORATION
By: /s/ Brad A. Morrice
--------------------------------
Name: Brad A. Morrice
------------------------------
Title: CEO
-----------------------------
<PAGE>
EXHIBIT A
MORTGAGE LOAN SCHEDULE
<PAGE>
EXHIBIT 10.28
MASTER LEASE AGREEMENT
THIS MASTER LEASE AGREEMENT, dated as of Oct. 24, 1997 ("Agreement"), between
General Electric Capital Corporation, with an office at 7700 Irvine Center Drive
Suite 400, Irvine, CA 92718 (hereinafter called, together with its successors
and assigns, if any, "Lessor"), and New Century Mortgage Corporation, a
corporation organized and existing under the laws of the state of California
with its mailing address and chief place of business at 18400 Von Karman, Suite
1000, Irvine, CA 92612 (hereinafter called "Lessee").
WITNESSETH:
I. LEASING:
(a) Subject to the terms and conditions set forth below, Lessor agrees to
lease to Lessee, and Lessee agrees to lease from Lessor, the equipment
("Equipment") described in Annex A to any schedule hereto ("Schedule") or, if
applicable, to Section A of any Schedule. Terms defined in a Schedule and not
otherwise defined herein shall have the meanings ascribed to them in such
Schedule.
(b) The obligation of Lessor to purchase Equipment from the manufacturer or
supplier thereof ("Supplier") and to lease the same to Lessee under any
Schedule shall be subject to receipt by Lessor, prior to the Lease Commencement
Date (with respect to such Equipment), of each of the following documents in
form and substance satisfactory to Lessor: (i) a Schedule relating to the
Equipment then to be leased hereunder, (ii) a Purchase Order Assignment and
Consent in the form of Annex B to the applicable Schedule, unless Lessor shall
have delivered its purchase order for such Equipment, (iii) evidence of
insurance which complies with the requirements of Section X, and (iv) such other
documents as Lessor may reasonably request. As a further condition to such
obligations of Lessor, Lessee shall, upon delivery of such Equipment (but not
later than the Last Delivery Date specified in the applicable Schedule) execute
and deliver to Lessor a Certificate of Acceptance (which may be in the form of
Annex C to the applicable Schedule) covering such Equipment, and, if requested
by Lessor, deliver to Lessor a bill of sale therefor (in form and substance
satisfactory to Lessor). Lessor hereby appoints Lessee its agent for inspection
and acceptance of the Equipment from the Supplier. Upon execution by Lessee of
any Certificate of Acceptance, the Equipment described thereon shall be deemed
to have been delivered to, and irrevocably accepted by, Lessee for lease
hereunder.
II. TERM, RENT AND PAYMENT:
(a) The rent payable hereunder and Lessee's right to use the Equipment shall
commence on the date of execution by Lessee of the Certificate of Acceptance for
such Equipment ("Lease Commencement Date"). The term of this Agreement shall
be the period specified in the applicable Schedule. If any term is extended, the
word "term" shall be deemed to refer to all extended terms, and all provisions
of this Agreement shall apply during any extended terms, except as may be
otherwise specifically provided in writing.
(b) Rent shall be paid to Lessor at its address stated above, except as
otherwise directed by Lessor. Payments of rent shall be in the amount set forth
in, and due in accordance with, the provisions of the applicable Schedule. If
one or more Advance Rents are payable, such Advance Rent shall be (i) set forth
on the applicable Schedule, (ii) due upon acceptance by Lessor of such Schedule,
and (iii) when received by Lessor, applied to the first rent payment and the
balance, if any, to the final rental payment(s) under such Schedule. In no event
shall any Advance Rent or any other rent payments be refunded to Lessee. If rent
is not paid within ten days of its due date, Lessee agrees to pay a late charge
of five cents ($.05) per dollar on, and in addition to, the amount of such rent
but not exceeding the lawful maximum, if any.
III. RENT ADJUSTMENT:
(a) The periodic rent payments in each Schedule have been calculated on the
assumption (which, as between Lessor and Lessee, is mutual) that the maximum
effective corporate income tax rate (exclusive of any minimum tax rate) for
calendar-year taxpayers ("Effective Rate") will be thirty-five percent (35%)
each year during the lease term.
(b) If, solely as a result of Congressional enactment of any law (including,
without limitation, any modification of, or amendment or addition to, the
Internal Revenue Code of 1986, as amended, (the "Code")), the Effective Rate is
higher than thirty-five percent (35%) for any year during the lease term, then
Lessor shall have the right to increase such rent payments by requiring payment
of a single additional sum equal to the product of (i) the Effective Rate
(expressed as a decimal) for such year less .35 (or, in the event that any
adjustment has been made hereunder for any previous year, the Effective Rate
(expressed as a decimal) used in calculating the next previous adjustment) times
(ii) the adjusted Termination Value, divided by (iii) the difference between the
new Effective Tax Rate (expressed as a decimal) and one (1). The adjusted
Termination Value shall be the Termination Value (calculated as of the first
rental due in the year for which such adjustment is being made) less the Tax
Benefits that would be allowable under Section 168 of the Code (as of the first
day of the year for which such adjustment is being made and all subsequent years
of the lease term). Lessee shall pay to Lessor the full amount of the
additional rent payment on the later of (i) receipt of notice or (ii) the first
day of the year for which such adjustment is being made.
(c) Lessee's obligations under this Section III shall survive any expiration
or termination of this Agreement.
IV. TAXES: Except as provided in Sections III and XV(c), Lessee shall have no
liability for taxes imposed by the United States of America or any State or
political subdivision thereof which are on or measured by the net income of
Lessor. Lessee shall report (to the extent that it is legally permissible) and
pay promptly all other taxes, fees and assessments due, imposed, assessed or
levied against any Equipment (or the purchase, ownership, delivery, leasing,
possession, use or operation thereof), this Agreement (or any rentals or
receipts hereunder), any Schedule, Lessor or Lessee by any foreign, federal,
state or local government or taxing authority during or related to the term of
this Agreement, including, without limitation, all license and registration
fees, and all sales, use, personal property, excise, gross receipts, franchise,
stamp or other taxes, imposts, duties and charges, together with any penalties,
fines or interest thereon (all hereinafter called, "Taxes"). Lessee shall (i)
reimburse Lessor upon receipt of written request for reimbursement for any Taxes
charged to or assessed against Lessor, (ii) on request of Lessor submit to
Lessor written evidence of Lessee's payment of Taxes, (iii) on all reports or
returns show the ownership of the Equipment by Lessor, and (iv) send a copy
thereof to Lessor.
INITIALS: BAM
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<PAGE>
V. REPORTS:
(a) Lessee will notify Lessor in writing, within ten (10) days after any tax
or other lien shall attach to any Equipment, of the full particulars thereof and
of the location of such Equipment on the date of such notification.
(b) Lessee will within ninety (90) days of the close of each fiscal year of
Lessee, deliver to Lessor, Lessee's balance sheet and profit and loss statement,
certified by a recognized firm of certified public accountants. Upon request
Lessee will deliver to Lessor quarterly, within ninety (90) days of the close of
each fiscal quarter of Lessee, in reasonable detail, copies of Lessee's
quarterly financial report certified by the chief financial officer of Lessee.
(c) Lessee will permit Lessor to inspect any Equipment during normal business
hours.
(d) Lessee will keep the Equipment at the Equipment Location (specified in the
applicable Schedule) and will promptly notify Lessor of any relocation of
Equipment. Upon the written request of Lessor, Lessee will notify Lessor
forthwith in writing of the location of any Equipment as of the date of such
notification.
(e) Lessee will promptly and fully report to Lessor in writing if any
Equipment is lost or damaged (where the estimated repair costs would exceed ten
percent (10%) of its then fair market value), or is otherwise involved in an
accident causing personal injury or property damage.
(f) Within sixty (60) days after any request by Lessor, Lessee will furnish a
certificate of an authorized officer of Lessee stating that he has reviewed the
activities of Lessee and that, to the best of his knowledge, there exists no
default (as described in Section XII) or event which with notice or lapse of
time (or both) would become such a default.
VI. DELIVERY, USE AND OPERATION:
(a) All Equipment shall be shipped directly from the Supplier to Lessee.
(b) Lessee agrees that the Equipment will be used by Lessee solely in the
conduct of its business and in a manner complying with all applicable federal,
state, and local laws and regulations.
(c) LESSEE SHALL NOT ASSIGN, MORTGAGE, SUBLET OR HYPOTHECATE ANY EQUIPMENT, OR
THE INTEREST OF LESSEE HEREUNDER, NOR SHALL LESSEE REMOVE ANY EQUIPMENT FROM THE
CONTINENTAL UNITED STATES, WITHOUT THE PRIOR WRITTEN CONSENT OF THE LESSOR.
(d) Lessee will keep the Equipment free and clear of all liens and
encumbrances other than those which result from acts of Lessor.
VII. SERVICE:
(a) Lessee will, at its sole expense, maintain each unit of Equipment in good
operating order, repair, condition and appearance in accordance with
manufacturer's recommendations, normal wear and tear excepted. Lessee shall, if
at any time requested by Lessor, affix in a prominent position on each unit of
Equipment plates, tags or other identifying labels showing ownership thereof by
Lessor.
(b) Lessee will not, without the prior consent of Lessor, affix or install any
accessory, equipment or device on any Equipment if such addition will impair the
originally intended function or use of such Equipment. All additions, repairs,
parts, supplies, accessories, equipment, and devices furnished, attached or
affixed to any Equipment which are not readily removable shall be made only in
compliance with applicable law, including Internal Revenue Service guidelines,
and shall become the property of Lessor. Lessee will not, without the prior
written consent of Lessor and subject to such conditions as Lessor may impose
for its protection, affix or install any Equipment to or in any other personal
or real property.
(c) Any alterations or modifications to the Equipment that may, at any time
during the term of this Agreement, be required to comply with any
applicable law, rule or regulation shall be made at the expense of Lessee.
VIII. STIPULATED LOSS VALUE: Lessee shall promptly and fully notify Lessor in
writing if any unit of Equipment shall be or become worn out, lost, stolen,
destroyed, irreparably damaged in the reasonable determination of Lessee, or
permanently rendered unfit for use from any cause whatsoever (such occurrences
being hereinafter called "Casualty Occurrences"). On the rental payment date
next succeeding a Casualty Occurrence (the "Payment Date"), Lessee shall pay
Lessor the sum of (x) the Stipulated Loss Value of such unit calculated as of
the rental next preceding such Casualty Occurrence ("Calculation Date"); and (y)
all rental and other amounts which are due hereunder as of the Payment Date.
Upon payment of all sums due hereunder, the term of this lease as to such unit
shall terminate and (except in the case of the loss, theft or complete
destruction of such unit) Lessor shall be entitled to recover possession of such
unit.
IX. LOSS OR DAMAGE: Lessee hereby assumes and shall bear the entire risk of
any loss, theft, damage to, or destruction of, any unit of Equipment from any
cause whatsoever from the time the Equipment is shipped to Lessee.
X. INSURANCE: Lessee agrees, at its own expense, to keep all Equipment insured
for such amounts and against such hazards as Lessor may require, including, but
not limited to, insurance for damage to or loss of such Equipment and liability
coverage for personal injuries, death or property damage, with Lessor named as
additional insured and with a loss payable clause in favor of Lessor, as its
interest may appear, irrespective of any breach of warranty or other act or
omission of Lessee. The insurance shall provide (i) liability coverage in an
amount equal to at least ONE MILLION U.S. DOLLARS ($1,000,000.00) total
liability per occurrence, unless otherwise stated in any Schedule, and (ii)
casualty/property damage coverage in an amount equal to the higher of the
Stipulated Loss Value or the full replacement cost of the Equipment; or at
such other amounts as may be required by Lessor. All such policies shall be with
companies, and on terms, satisfactory to Lessor. Lessee agrees to deliver to
Lessor evidence of insurance satisfactory to Lessor. No insurance shall be
subject to any co-insurance clause. *Lessee hereby appoints Lessor as Lessee's
attorney-in-fact to make proof of loss and claim for insurance, and to make
adjustments with insurers and to receive payment of and execute or endorse all
documents, checks or drafts in connection with payments made as a result of such
insurance policies. Any expense of Lessor in adjusting or collecting insurance
shall be borne by Lessee. Lessee will not make adjustments with insurers except
(i) with respect to claims for damage to any unit of Equipment where the repair
costs do not exceed ten percent (10%) of such unit's fair market value, or (ii)
with Lessor's written consent. Said policies shall provide that the insurance
may not be altered or canceled by the insurer until after thirty (30) days
written notice to Lessor. Lessor may, at its option, apply proceeds of
insurance, in whole or in part, to (i) repair or replace Equipment or any
portion thereof, or (ii) satisfy any obligation of Lessee to Lessor hereunder.
*In the event of default, BAM
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<PAGE>
XI. RETURN OF EQUIPMENT:
(a) Upon any expiration or termination of this Agreement or any Schedule,
Lessee shall promptly, at its own cost and expense: (i) perform any testing and
repairs required to place the affected units of Equipment in the same condition
and appearance as when received by Lessee (reasonable wear and tear excepted)
and in good working order for their originally intended purpose; (ii) if
deinstallation, disassembly or crating is required, cause such units to be
deinstalled, disassembled and crated by an authorized manufacturer's
representative or such other service person as is satisfactory to Lessor; and
(iii) return such units to a location within the continental United States as
Lessor shall direct; (iv) ensure all Lessee installed markings which are not
necessary for the operation, maintenance or repair of the Equipment are
properly removed; (v) provide that all Equipment will be cleaned and
cosmetically acceptable, and in such condition as to be immediately installed
and put into use in a similar environment for which the Equipment was originally
intended to be used; (vi) remove all waste material and fluid from the Equipment
and dispose of in accordance with then current waste disposal laws; and (vii)
obtain and pay for a policy of transit insurance for the redelivery period in an
amount equal to the replacement value of the Equipment, and name Lessor as the
loss payee on all such policies of insurance.
(b) Until Lessee has fully complied with the requirements of Section XI(a)
above, Lessee's rent payment obligation and all other obligations under this
Agreement shall continue from month to month notwithstanding any expiration or
termination of the lease term. Lessor may terminate such continued leasehold
interest upon ten (10) days notice to Lessee.
(c) At least ninety (90) days and not more than one hundred twenty (120) days
prior to lease termination, Lessee shall: (i) provide to Lessor a detailed
inventory of all components of the Equipment including model and serial
numbers; and (ii) provide an up-to-date copy of all documentation pertaining to
the Equipment including, but not limited to service manuals, blue prints,
process flow diagrams, operating manuals and maintenance records.
(d) At least one hundred twenty (120) days prior to and continuing up to lease
termination, Lessee shall, upon receiving reasonable notice from Lessor, make
the Equipment available for on-site operational inspections by potential
purchasers. Lessee shall provide personnel, power and other requirements
necessary to demonstrate electrical, hydraulic and mechanical systems for each
item of Equipment.
XII. DEFAULT:
(a) Lessor may in writing declare this Agreement in default if: Lessee
breaches its obligation to pay rent or any other sum when due and fails to cure
the breach within ten (10) days; Lessee breaches any of its insurance
obligations under Section X; Lessee breaches any of its other obligations and
fails to cure that breach within thirty (30) days after written notice thereof;
any representation or warranty made by Lessee in connection with this Agreement
shall be false or misleading in any material respect; Lessee becomes insolvent
or ceases to do business as a going concern; any Equipment is illegally used; or
a petition is filed by or against Lessee or any Guarantor of Lessee's
obligations to Lessor under any bankruptcy or insolvency laws. Such declaration
shall apply to all Schedules except as specifically excepted by Lessor.
(b) After default, at the request of Lessor, Lessee shall comply with the
provisions of Section XI(a). Lessee hereby authorizes Lessor to enter, with or
without legal process, any premises where any Equipment is believed to be and
take possession thereof. Lessee shall, without further demand, forthwith pay to
Lessor (i) as liquidated damages for loss of a bargain and not as a penalty, the
Stipulated Loss Value of the Equipment (calculated as of the rental next
preceding the declaration of default), and (ii) all rentals and other sums then
due hereunder. Lessor may, but shall not be required to, sell Equipment at
private or public sale, in bulk or in parcels, with or without notice, and
without having the Equipment present at the place of sale; or Lessor may, but
shall not be required to, lease, otherwise dispose of or keep idle all or part
of the Equipment; and Lessor may use Lessee's premises for any or all of the
foregoing without liability for rent, costs, damages or otherwise. The proceeds
of sale, lease or other disposition, if any, shall be applied in the following
order of priorities: (l) to pay all of Lessor's costs, charges and expenses
incurred in taking, removing, holding, repairing and selling, leasing or
otherwise disposing of Equipment; then, (2) to the extent not previously paid by
Lessee, to pay Lessor all sums due from Lessee hereunder; then (3) to reimburse
to Lessee any sums previously paid by Lessee as liquidated damages; and (4)
any surplus shall be retained by Lessor. Lessee shall pay any deficiency in (1)
and (2) forthwith.
(c) The foregoing remedies are cumulative, and any or all thereof may be
exercised in lieu of or in addition to each other or any remedies at law, in
equity, or under statute. Lessee waives notice of sale or other disposition (and
the time and place thereof), and the manner and place of any advertising. Lessee
shall pay Lessor's actual attorney's fees incurred in connection with the
enforcement, assertion, defense or preservation of Lessor's rights and remedies
hereunder, or if prohibited by law, such lesser sum as may be permitted. Waiver
of any default shall not be a waiver of any other or subsequent default.
(d) Any default under the terms of this or any other agreement between Lessor
and Lessee may be declared by Lessor a default under this and any such
other agreement.
XIII. ASSIGNMENT: Lessor may, without the consent of Lessee, assign this
Agreement or any Schedule. Lessee agrees that if Lessee receives written notice
of an assignment from Lessor, Lessee will pay all rent and all other amounts
payable under any assigned Equipment Schedule to such assignee or as instructed
by Lessor. Lessee further agrees to confirm in writing receipt of the notice of
assignment as may be reasonably requested by assignee. Lessee hereby waives and
agrees not to assert against any such assignee any defense, set-off, recoupment
claim or counterclaim which Lessee has or may at any time have against Lessor
for any reason whatsoever.
XIV. NET LEASE; NO SET-OFF, ETC: This Agreement is a net lease. Lessee's
obligation to pay rent and other amounts due hereunder shall be absolute and
unconditional. Lessee shall not be entitled to any abatement or reductions of,
or set-offs against, said rent or other amounts, including, without limitation,
those arising or allegedly arising out of claims (present or future, alleged or
actual, and including claims arising out of strict tort or negligence of Lessor)
of Lessee against Lessor under this Agreement or otherwise. Nor shall this
Agreement terminate or the obligations of Lessee be affected by reason of any
defect in or damage to, or loss of possession, use or destruction of, any
Equipment from whatsoever cause. It is the intention of the parties that rents
and other amounts due hereunder shall continue to be payable in all events in
the manner and at the times set forth herein unless the obligation to do so
shall have been terminated pursuant to the express terms hereof.
XV. INDEMNIFICATION:
(a) Lessee hereby agrees to indemnify, save and keep harmless Lessor, its
agents, employees, successors and assigns from and against any and all losses,
damages, penalties, injuries, claims, actions and suits, including legal
expenses, of whatsoever kind and nature, in contract or tort, whether caused by
the active or passive negligence of Lessor or otherwise, and including, but not
limited to, Lessor's strict liability in tort rising out of (i) the selection,
INITIALS: BAM
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<PAGE>
manufacture, purchase, acceptance or rejection of Equipment, the ownership of
Equipment during term of this Agreement, and the delivery, lease, possession,
maintenance, uses, condition, return or operation of Equipment (including,
without limitation, latent and other defects, whether or not discoverable by
Lessor or Lessee and any claim for patent, trademark or copyright infringement
or environmental damage) or (ii) the condition of Equipment sold or disposed of
after use by Lessee, any sublessee or employees of Lessee. Lessee shall, upon
request, defend any actions based on, or arising out of, any of the foregoing.
(b) Lessee hereby represents, warrants and covenants that (i) on the Lease
Commencement Date for any unit of Equipment, such unit will qualify for all of
the items of deduction and credit specified in Section C of the applicable
Schedule ("Tax Benefits") in the hands of Lessor (all references to Lessor in
this Section XV include Lessor and the consolidated taxpayer group of which
Lessor is a member), and (ii) at no time during the term of this Agreement will
Lessee take or omit to take, nor will it permit any sublessee or assignee to
take or omit to take, any action (whether or not such act or omission is
otherwise permitted by Lessor or the terms of this Agreement), which will result
in the disqualification of any Equipment for, or recapture of, all or any
portion of such Tax Benefits.
(c) If as a result of a breach of any representation, warranty or covenant of
the Lessee contained in this Agreement or any Schedule (x) tax counsel of Lessor
shall determine that Lessor is not entitled to claim on its Federal income tax
return all or any portion of the Tax Benefits with respect to any Equipment, or
(y) any such Tax Benefit claimed on the Federal income tax return of Lessor is
disallowed or adjusted by the Internal Revenue Service, or (z) any such Tax
Benefit is recomputed or recaptured (any such determination, disallowance,
adjustment, recomputation or recapture being hereinafter called a "Loss"), then
Lessee shall pay to Lessor, as an indemnity and as additional rent, such amount
as shall, in the reasonable opinion of Lessor, cause Lessor's after-tax economic
yields and cash flows, computed on the same assumptions, including tax rates
(unless any adjustment has been made under Section III hereof, in which case the
Effective Rate used in the next preceding adjustment shall be substituted), as
were utilized by Lessor in originally evaluating the transaction (such yields
and flows being hereinafter called the "Net Economic Return") to equal the Net
Economic Return that would have been realized by Lessor if such Loss had not
occurred. Such amount shall be payable upon demand accompanied by a statement
describing in reasonable detail such Loss and the computation of such amount.
(d) All of Lessor's rights, privileges and indemnities contained in this
Section XV shall survive the expiration or other termination of this Agreement
and the rights, privileges and indemnities contained herein are expressly made
for the benefit of, and shall be enforceable by Lessor, its successors and
assigns.
XVI. DISCLAIMER: LESSEE ACKNOWLEDGES THAT IT HAS SELECTED THE EQUIPMENT WITHOUT
ANY ASSISTANCE FROM LESSOR, ITS AGENTS OR EMPLOYEES. LESSOR DOES NOT MAKE,
HAS NOT MADE, NOR SHALL BE DEEMED TO MAKE OR HAVE MADE, ANY WARRANTY OR
REPRESENTATION, EITHER EXPRESS OR IMPLIED, WRITTEN OR ORAL, WITH RESPECT TO
THE EQUIPMENT LEASED HEREUNDER OR ANY COMPONENT THEREOF, INCLUDING, WITHOUT
LIMITATION, ANY WARRANTY AS TO DESIGN, COMPLIANCE WITH SPECIFICATIONS, QUALITY
OF MATERIALS OR WORKMANSHIP, MERCHANTABILITY, FITNESS FOR ANY PURPOSE, USE OR
OPERATION, SAFETY, PATENT, TRADEMARK OR COPYRIGHT INFRINGEMENT, OR TITLE. All
such risks, as between Lessor and Lessee, are to be borne by Lessee. Without
limiting the foregoing, Lessor shall have no responsibility or liability to
Lessee or any other person with respect to any of the following, regardless of
any negligence of Lessor (i) any liability, loss or damage caused or alleged to
be caused directly or indirectly by any Equipment, any inadequacy thereof, any
deficiency or defect (latent or otherwise) therein, or any other circumstance in
connection therewith; (ii) the use, operation or performance of any Equipment or
any risks relating thereto; (iii) any interruption of service, loss of business
or anticipated profits or consequential damages; or (iv) the delivery,
operation, servicing, maintenance, repair, improvement or replacement of any
Equipment. If, and so long as, no default exists under this Lease, Lessee shall
be, and hereby is, authorized during the term of this Lease to assert and
enforce, at Lessee's sole cost and expense, from time to time, in the name of
and for the account of Lessor and/or Lessee, as their interests may appear,
whatever claims and rights lessor may have against any Supplier of the
Equipment.
XVII. REPRESENTATIONS AND WARRANTIES OF LESSEE: Lessee hereby represents and
warrants to Lessor that on the date hereof and on the date of execution of each
Schedule:
(a) Lessee has adequate power and capacity to enter into, and perform under,
this Agreement and all related documents (together, the "Documents") and
is duly qualified to do business wherever necessary to carry on its present
business and operations, including the jurisdiction(s) where the Equipment is or
is to be located.
(b) The Documents have been duly authorized, executed and delivered by Lessee
and constitute valid, legal and binding agreements, enforceable in accordance
with their terms, except to the extent that the enforcement of remedies therein
provided may be limited under applicable bankruptcy and insolvency laws.
(c) No approval, consent or withholding of objections is requited from any
governmental authority or instrumentality with respect to the entry into or
performance by Lessee of the Documents except such as have already been
obtained.
(d) The entry into and performance by Lessee of the Documents will not: (i)
violate any judgment, order, law or regulation applicable to Lessee or any
provision of Lessee's Certificate of Incorporation or By-Laws; or (ii) result in
any breach of, constitute a default under or result in the creation of any lien,
charge, security interest or other encumbrance upon any Equipment pursuant to
any indenture, mortgage, deed of trust, bank loan or credit agreement or other
instrument (other than this Agreement) to which Lessee is a party.
(e) There are no suits or proceedings pending or threatened in court or before
any commission, board or other administrative agency against or affecting
Lessee, which will have a material adverse effect on the ability of Lessee to
fulfill its obligations under this Agreement.
(f) The Equipment accepted under any Certificate of Acceptance is and will
remain tangible personal property.
(g) Each Balance Sheet and Statement of Income delivered to Lessor has been
prepared in accordance with generally accepted accounting principles, and
since the date of the most recent such Balance Sheet and Statement of Income,
there has been no material adverse change.
(h) Lessee is and will be at all times validly existing and in good standing
under the laws of the State of its incorporation (specified in the first
sentence of this Agreement).
(i) The Equipment will at all times be used for commercial or business
purposes.
<PAGE>
XVIII. EARLY TERMINATION:
(a) On or after the First Termination Date (specified in the applicable
Schedule). Lessee may, so long as no default exists hereunder, terminate this
Agreement as to all (but not less than all) of the Equipment on such Schedule as
of a rent payment date ("Termination Date") upon at least ninety (90) days prior
written notice to Lessor.
(b) Lessee shall, and Lessor may, solicit cash bids for the Equipment on an AS
IS, WHERE IS BASIS without recourse to or warranty from Lessor, express or
implied ("AS IS BASIS"). Prior to the Termination Date, Lessee shall (i)
certify to Lessor any bids received by Lessee and (ii) pay to Lessor (A) the
Termination Value (calculated as of the rental due on the Termination Date) for
the Equipment, and (B) all rent and other sums due and unpaid as of the
Termination Date.
(c) Provided that all amounts due hereunder have been paid on the Termination
Date, Lessor shall (i) sell the Equipment on an AS IS BASIS for cash to the
highest bidder and (ii) refund the proceeds of such sale (net of any related
expenses) to Lessee up to the amount of the Termination Value. If such sale is
not consummated, no termination shall occur and Lessor shall refund the
Termination Value (less any expenses incurred by Lessor) to Lessee.
(d) Notwithstanding the foregoing, Lessor may elect by written notice, at any
time prior to the Termination Date, not to sell the Equipment. In that event,
on the Termination Date Lessee shal1 (i) return the Equipment (in accordance
with Section XI) and (ii) pay to Lessor all amounts required under Section
XVIII(b) less the amount of the highest bid certified by Lessee to Lessor.
XIX. PURCHASE OPTION:
(a) So long as no default exists hereunder and the lease has not been earlier
terminated, Lessee may at lease expiration, upon at least one hundred eighty
(180) days prior written notice to Lessor, purchase all (but not less than all)
of the Equipment in any Schedule on an AS IS WHERE IS BASIS, without recourse
to or warranty from Lessor, express or implied, for cash equal to its then Fair
Market Value (plus all applicable sales taxes).
(b) "Fair Market Value" shall mean the price which a willing buyer (who is
neither a lessee in possession nor a used equipment dealer) would pay for the
Equipment in an arm's-length transaction to a willing seller under no
compulsion to sell; provided , however, that in such determination: (i) the
Equipment shall be assumed to be in the condition in which it is required to be
maintained and returned under this Agreement; (ii) in the case of any installed
Equipment, that Equipment shall be valued on an installed basis; and (iii) costs
of removal from current location shall not be a deduction from such valuation.
If Lessor and Lessee are unable to agree on the Fair Market Value at least one
hundred thirty-five (135) days before lease expiration, Lessor shall appoint an
independent appraiser (reasonably acceptable to Lessee) to determine Fair Market
Value, and that determination shall be final, binding and conclusive. Lessee
shall bear all costs associated with any such appraisal.
(c) Lessee shall be deemed to have waived this option unless it provides
Lessor with written notice of its irrevocable election to exercise the same
within fifteen (15) days after Fair Market Value is determined (by agreement or
appraisal).
XX. MISCELLANEOUS:
(a) LESSEE HEREBY UNCONDITIONALLY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY
CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF, DIRECTLY OR INDIRECTLY,
THIS LEASE, ANY OF THE RELATED DOCUMENTS, ANY DEALINGS BETWEEN LESSEE AND LESSOR
RELATING TO THE SUBJECT MATTER OF THIS TRANSACTION OR ANY RELATED TRANSACTIONS,
AND/OR THE RELATIONSHIP THAT IS BEING ESTABLISHED BETWEEN LESSEE AND LESSOR.
THE SCOPE OF THIS WAIVER IS INTENDED TO BE ALL ENCOMPASSING OF ANY AND ALL
DISPUTES THAT MAY BE FILED IN ANY COURT (INCLUDING, WITHOUT LIMITATION, CONTRACT
CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW AND
STATUTORY CLAIMS). THIS WAIVER IS IRREVOCABLE MEANING THAT IT MAY NOT BE
MODIFIED EITHER ORALLY OR IN WRITING, AND THE WAIVER SHALL APPLY TO ANY
SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS TO THIS LEASE, ANY
RELATED DOCUMENTS, OR TO ANY OTHER DOCUMENTS OR AGREEMENTS RELATING TO THIS
TRANSACTION OR ANY RELATED TRANSACTION. IN THE EVENT OF LITIGATION, THIS LEASE
MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
(b) Unless and until Lessee exercises its rights under Section XIX above,
nothing herein contained shall give or convey to Lessee any right, title or
interest in and to any Equipment except as a lessee. Any cancellation or
termination by Lessor, pursuant to the provision of this Agreement, any
Schedule, supplement or amendment hereto, or the lease of any Equipment
hereunder, shall not release Lessee from any then outstanding obligations to
Lessor hereunder. All Equipment shall at all times remain personal property of
Lessor regardless of the degree of its annexation to any real property and shall
not by reason of any installation in, or affixation to, real or personal
property become a part thereof.
(c) Time is of the essence of this Agreement. Lessor's failure at any time to
require strict performance by Lessee of any of the provisions hereof shall not
waive or diminish Lessor's right thereafter to demand strict compliance
therewith. Lessee agrees, upon Lessor's request, to execute any instrument
necessary or expedient for filing, recording or perfecting the interest of
Lessor. All notices required to be given hereunder shall be deemed adequately
given if sent by registered or certified mail to the addressee at its address
stated herein, or at such other place as such addressee may have designated in
writing. This Agreement and any Schedule and Annexes thereto constitute the
entire agreement of the parties with respect to the subject matter hereof. NO
VARIATION OR MODIFICATION OF THIS AGREEMENT OR ANY WAIVER OF ANY OF ITS
PROVISIONS OR CONDITIONS, SHALL BE VALID UNLESS IN WRITING AND SIGNED BY AN
AUTHORIZED REPRESENTATIVE OF THE PARTIES HERETO.
(d) In case of a failure of Lessee to comply with any provision of this
Agreement, Lessor shall have the right, but shall not be obligated, to effect
such compliance, in whole or in part; and all moneys spent and expenses and
obligations incurred or assumed by Lessor in effecting such compliance shall
constitute additional rent due to Lessor within five days after the date Lessor
sends notice to Lessee requesting payment. Lessor's effecting such compliance
shall not be a waiver of Lessee's default.
(e) Any rent or other amount not paid to Lessor when due hereunder shall bear
interest, both before and after any judgment or termination hereof, at the
lesser of eighteen percent (18%) per annum or the maximum rate allowed by law.
Any provisions in this Agreement and any Schedule which are in conflict with any
statute, law or applicable rule shall be deemed omitted, modified or altered to
conform thereto.
(f) Adjustment to Capitalized Lessor's Cost. Lessee hereby irrevocably
authorizes Lessor to adjust the Capitalized Lessor's Cost up or down by no more
than ten percent (10%) within each Schedule to account for equipment change
orders, equipment returns, invoicing errors, and similar matters. Lessee
acknowledges and agrees that the Rent shall be adjusted as a result of such
change in the Capitalized Lessor's Cost. Lessor shall send Lessee a written
notice stating the final Capitalized Lessor's Cost, if different from that
disclosed on the Schedule.
<PAGE>
IN WITNESS WHEREOF, Lessee and Lessor have caused this Agreement to be
executed by their duly authorized representatives as of the date first above
written.
LESSOR: LESSEE:
General Electric Capital Corporation New Century Mortgage Corporation
By: /s/ Michelle H. Steinberg By: /s/ Brad A. Morrice
--------------------------------- ---------------------------------
Name: MICHELLE H. STEINBERG Name: BRAD A. MORRICE
------------------------------- -------------------------------
Title: REGION CREDIT MANAGER Title: CEO
------------------------------ ------------------------------
<PAGE>
EQUIPMENT SCHEDULE
SCHEDULE NO. 1
DATED THIS OCT. 24, 1997
-------------
TO MASTER LEASE AGREEMENT
DATED AS OF OCT. 24, 1997
-------------
Lessor & Mailing Address: Lessee & Mailing Address:
- - ------------------------ ------------------------
General Electric Capital Corporation New Century Mortgage Corporation
7700 Irvine Center Drive Suite 400 18400 Von Karman, Suite 1000
Irvine, CA 92718 Irvine, CA 92612
Capitalized terms not defined herein shall have the meanings assigned to them
in the Master Lease Agreement identified above ("AGREEMENT"; the Agreement as it
relates to this Schedule, together with this Schedule being collectively
referred to as "LEASE").
A. EQUIPMENT: Subject to the terms and conditions of the Lease, Lessor agrees to
Lease to Lessee the Equipment described below (the "EQUIPMENT").
<TABLE>
<CAPTION>
Number Capitalized Lessors
of Units Cost Per Unit Manufacturer Serial Numbers Model and Type of Equipment
- - -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Various Office Furniture, Fixtures and
Equipment all more completely described
on Schedule 'A' which is attached hereto
and made a part hereof and the Vendor
invoices.
Together with all other attachments,
accessories, additions, replacements and
substitutions now or hereafter attached
hereto and made a part thereof.
</TABLE>
B. FINANCIAL TERMS
<TABLE>
<CAPTION>
<S> <C>
1. Advance Rent (if any): $42,479.98 plus tax. 5. Basic Term Commencement Date: Nov. 1, 1997.
--------------
2. Capitalized Lessor's Cost: $1,460,797.27. 6. Lessee Federal Tax ID No.: 93-1195257.
3. Basic Term (No. of Months): 34 Months. 7. Last Delivery Date: December 31, 1997.
4. Basic Term Lease Rate Factor. 2.90800%. 8. Daily Lease Rate Factor: .09693%.
</TABLE>
9. First Termination Date: Thirty-six (36) months after the Basic Term
Commencement Date.
10. Interim Rent: For the period from and including the Lease Commencement
Date to the Basic Term Commencement Date ("Interim Period"), Lessee shall
pay as rent ("Interim Rent") for each unit of Equipment, the product of
the Daily Lease Rate Factor times the Capitalized Lessor's Cost of such
unit times the number of days in the Interim Period. Interim Rent shall
be due on Oct. 24, 1997.
-------------
11. Basic Term Rent. Commencing on Nov. 1, 1997 and on the same day of each
------------
month thereafter (each, a "Rent Payment Date") during the Basic Term,
Lessee shall pay as rent ("Basic Term Rent") the product of the Basic
Term Lease Rate Factor times the Capitalized Lessor's Cost of all
Equipment on this Schedule.
12. Secondary Term Rent. Unless the Schedule has been earlier terminated as
provided therein, commencing on ________________ (the "Secondary Term
Commencement Date") and on the same day of each month thereafter (each, a
"Rent Payment Date") for 6 months (the "Secondary Term"), Lessee shall pay
as rent ("Secondary Term Rent") the product of 3.486% (the "Secondary Term
Lease Rate Factor") times the Capitalized Lessor's Cost of all Equipment
on this Schedule.
C. TAX BENEFITS Depreciation Deductions:
INITIALS: BAM
---
<PAGE>
1. Depreciation method is the 200% declining balance method, switching to
straight line method for the 1st taxable year for which using the straight
line method with respect to the adjusted basis as of the beginning of such
year will yield a larger allowance.
2. Recovery Period: Five (5) Years.
3. Basis: 100% of Capitalized Lessors Cost.
D. PROPERTY TAX
APPLICABLE TO EQUIPMENT LOCATED IN GEORGIA AND CALIFORNIA: Lessee agrees that it
will (a) list all such Equipment, (b) report all property taxes assessed
against such Equipment and (c) pay all such taxes when due directly to the
appropriate taxing authority until Lessor shall otherwise direct in writing.
Upon request of Lessor, Lessee shall promptly provide proof of filing and
proof of payment to Lessor.
PROPERTY TAX NOT APPLICABLE ON EQUIPMENT LOCATED IN ILLINOIS AND PENNSYLVANIA.
Lessor may notify Lessee (and Lessee agrees to follow such notification)
regarding any changes in property tax reporting and payment responsibilities.
E. ARTICLE 2A NOTICE
IN ACCORDANCE WITH THE REQUIREMENTS OF ARTICLE 2A OF THE UNIFORM COMMERCIAL
CODE AS ADOPTED IN THE APPLICABLE STATE, LESSOR HEREBY MAKES THE FOLLOWING
DISCLOSURES TO LESSEE PRIOR TO EXECUTION OF THE LEASE, (A) THE PERSON(S)
SUPPLYING THE EQUIPMENT IS WESTFALL INTERIORS; FIRST PRIORITY;, LUCENT
TECHNOLOGIES; INTERSERVICE; ADVANCED CABLE AND ENTERPRISE NETWORKING (THE
"SUPPLIER(S)"), (B) LESSEE IS ENTITLED TO THE PROMISES AND WARRANTIES,
INCLUDING THOSE OF ANY THIRD PARTY, PROVIDED TO THE LESSOR BY SUPPLIER(S),
WHICH IS SUPPLYING THE EQUIPMENT IN CONNECTION WITH OR AS PART OF THE
CONTRACT BY WHICH LESSOR ACQUIRED THE EQUIPMENT AND (C) WITH RESPECT TO SUCH
EQUIPMENT, LESSEE MAY COMMUNICATE WITH SUPPLIER(S) AND RECEIVE AN ACCURATE
AND COMPLETE STATEMENT OF SUCH PROMISES AND WARRANTIES, INCLUDING ANY
DISCLAIMERS AND LIMITATIONS OF THEM OR OF REMEDIES. TO THE EXTENT PERMITTED
BY APPLICABLE LAW, LESSEE HEREBY WAIVES ANY AND ALL RIGHTS AND REMEDIES
CONFERRED UPON A LESSEE IN ARTICLE 2A AND ANY RIGHTS NOW OR HEREAFTER
CONFERRED BY STATUTE OR OTHERWISE WHICH MAY LIMIT OR MODIFY ANY OF LESSOR'S
RIGHTS OR REMEDIES UNDER SECTION XII OF THE AGREEMENT.
F. STIPULATED LOSS AND TERMINATION VALUE TABLE*
<TABLE>
<CAPTION>
stipulated
termination loss
# of value value
payments % of cost % of cost
<S> <C> <C>
1 103.555 107.884
2 101.608 106.354
3 99.612 104.774
4 97.591 103.171
5 95.546 101.543
6 93.478 99.891
7 91.387 98.216
8 89.272 96.518
9 87.133 94.796
10 84.969 93.049
11 82.781 91.278
12 80.569 89.482
13 78.331 87.661
14 76.069 85.816
15 73.782 83.946
16 71.470 82.050
17 69.131 80.128
18 66.773 78.187
19 64.421 76.252
20 62.048 74.296
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
21 59.653 72.317
22 57.235 70.316
23 54.793 68.291
24 52.328 66.243
25 49.839 64.170
26 47.326 62.074
27 44.789 59.954
28 42.227 57.809
29 39.641 55.640
30 37.030 53.445
31 34.394 51.226
32 31.732 48.981
33 29.045 46.710
34 26.331 44.414
35 23.587 42.086
36 20.232 39.148
37 16.845 36.177
38 13.425 33.174
39 9.972 30.138
40 6.486 27.069
</TABLE>
*The Stipulated Loss Value or Termination Value for any unit of Equipment shall
be the Capitalized Lessor's Cost of such unit multiplied by the appropriate
percentage derived from the above table. In the event the Lease is for any
reason extended, then the last percentage figure shown above shall control
throughout any such extended term.
G. MODIFICATIONS AND ADDITIONS FOR THIS SCHEDULE ONLY
For purposes of this Schedule only, the Agreement is amended as follows:
1. Section 1(b) of the Agreement is hereby deleted in its entirety and the
following substituted in its stead:
b) The obligation of Lessor to purchase the Equipment from Lessee and to
lease the same to Lessee shall be subject to receipt by Lessor, on or prior
to the earlier of the Lease Commencement Date or Last Delivery Date therefor,
of each of the following documents in form and substance satisfactory to
Lessor: (i) evidence of insurance which complies with the requirements of
Section X, and (ii) such other documents as Lessor may reasonably request.
2. Section VI(a) shall be deleted and the following substituted in its
stead:
The parties acknowledge that this is a sale/leaseback transaction and the
Equipment is in Lessee's possession as of the Lease Commencement Date.
3. BILL OF SALE
Lessee, in consideration of the Lessor's payment of the amount set forth in
B 2. above, which includes any applicable sales taxes (which payment Lessee
acknowledges), hereby grants, sells, assigns, transfers and delivers to Lessor
the Equipment along with whatever claims and rights Seller may have against the
manufacturer and/or Supplier of the Equipment, including but not limited to all
warranties and representations. At Lessors request Lessee will cause Supplier to
deliver to Lessor a written statement wherein the Supplier (i) consents to
the assignment to Lessor of whatever claims and rights Lessee may have against
the Supplier, (ii) agrees not to retain any security interest, lien or other
encumbrance in or upon the Equipment at any time, and to execute such documents
as Lessor may request to evidence the release of any such encumbrance, and
(iii) represents and warrants to Lessor (x) that Supplier has previously
conveyed full title to the Equipment to Lessee, (y) that the Equipment was
delivered to Lessee and installation completed, and (z) that the final purchase
price of the Equipment (or a specified portion of such purchase price) has been
paid by Lessee.
Lessor is purchasing the Equipment for leasing back to Lessee pursuant to
the Lease. Lessee represents and warrants to Lessor that (i) Lessor will acquire
by the terms of this Bill of Sale good title to the Equipment free from all
liens and encumbrances whatsoever; (ii) Lessee has the right to sell the
Equipment; and (iii) the Equipment has been delivered to Lessee in good order
and condition, and conforms to the specifications, requirements and standards
applicable thereto; and (iv) the equipment has been accurately labeled,
consistent with the requirements of 40 CFR part 82 Subpart E, with respect to
products manufactured with a controlled (ozone-depleting) substance.
Lessee agrees to save and hold harmless Lessor from and against any and all
federal, state, municipal and local license fees and taxes of any kind or
nature, including without limiting the generality of the foregoing, any and all
excise, personal property, use and sales taxes, and from and against any and all
liabilities,
INITIALS BAM
---
<PAGE>
obligations, losses, damages, penalties, claims, actions and suits resulting
therefrom and imposed upon, incurred by or asserted against Lessor as a
consequence of the sale of the Equipment to Lessor.
4. ACCEPTANCE
Pursuant to the provisions of the Lease, as it relates to this Schedule,
Lessee hereby certifies and warrants that (i) all Equipment listed above has
been delivered and installed (if applicable); (ii) Lessee has inspected the
Equipment, and all such testing as it deems necessary has been performed by
Lessee, Supplier or the manufacturer; and (iii) Lessee accepts the Equipment for
all purposes of the Lease, the purchase documents and all attendant documents.
Lessee does further certify that as of the date hereof (i) Lessee is not in
default under the Lease; (ii) the representations and warranties made by Lessee
pursuant to or under the Lease are true and correct on the date hereof and (iii)
Lessee has reviewed and approves of the purchase documents for the Equipment, if
any.
5. EQUIPMENT SPECIFIC PROVISIONS
RETURN PROVISIONS: In addition to the provisions provided for in Section XI of
the Lease ("Return of Equipment"), and provided that Lessee has elected not to
exercise its option to purchase the Equipment, Lessee shall, at its expense:
(a) at least ninety (90) days and not more than one hundred twenty (120) days
prior to lease termination: (i) ensure Equipment has been maintained, and is
operating, within manufacturer's specifications; and; (ii) cause manufacturer's
representative or other qualified maintenance provider, acceptable to Lessor, to
perform a physical inspection and test of all the components and capabilities of
the Equipment and provide a full inspection report to Lessor, and that there
shall be no missing screws, bolts, fasteners, etc.; the furniture will be free
from all large scratches, marks, gouges, dents, discoloration or stains; all
drawers, runners, and locks will be in good working condition to include keys;
and there shall be no evidence of extreme use or overloading, i.e. bowed or
sagging shelves; (iii) if during such inspection the Equipment is found not to
be in compliance with the above, then Lessee shall remedy them per the Lease
Agreement and provide a follow-up inspection to verify the Equipment meets the
return provisions.
(b) Upon lease termination, Lessee shall (i) have the manufacturer's
representative or other person acceptable to Lessor de-install all Equipment
including all wire, cable, and mounting hardware; (ii) if applicable, ensure all
necessary permits and labor are obtained to deliver the Equipment; (iii) the
Equipment shall be packed properly and in accordance to the manufacturer's
recommendations; (iv) the Lessee shall provide for the transportation of the
Equipment in a manner consistent with the manufacturer's recommendations and
practices to any locations within the continental United States as Lessor shall
direct; and shall have the Equipment unloaded at such locations; (v) at Lessor's
choice, either (1) allow Lessor, at Lessor's expense, and provided Lessor has
provided reasonable notice to Lessee, to arrange for an on-site auction of the
Equipment which will be conducted in a manner that will not interfere with the
Lessee's business operations, or (2) Lessee shall provide free safe storage for
the Equipment for a period not to exceed sixty (60) days from the Lease
expiration.
RETURN PROVISIONS: In addition to the provisions provided for in Section XI of
the Lease with respect to Computer Equipment only, ("Return of Equipment"), and
provided that Lessee has elected not to exercise its option to purchase the
Equipment, Lessee shall, at its expense:
(a) Upon the request of Lessor, Lessee shall no later than ninety (90) days
prior to the expiration or other termination of the Lease provide:
(i) a detailed inventory of the Equipment (including the model and
serial number of each major component thereof), including, without
limitation, all internal circuit boards, module boards, and software
features;
(ii) a complete and current set of all manuals, equipment configuration,
setup and operation diagrams, maintenance records and other data that may
be reasonably requested by Lessor concerning the configuration and
operation of the Equipment; and
(iii) a certification of the manufacturer or of a maintenance provider
acceptable to Lessor that the Equipment (1) has been tested and is
operating in accordance with manufacturers specifications (together with a
report detailing the condition of the Equipment), the results of such
test(s) and inspection(s) and all repairs that were performed as a result
of such test(s) and inspection(s) and (2) that the Equipment qualifies for
the manufacturers used equipment maintenance program.
(b) Upon the request of Lessor, Lessee shall, no later than sixty (60) days
prior to the expiration or other termination of the Lease, make the Equipment
available for on-site operational inspection by persons designated by the
Lessor, who shall be duly qualified to inspect the Equipment in its operational
environment.
(c) All Equipment shall be cleaned and treated with respect to rust, corrosion
and appearance in accordance with manufacturers recommendations and consistent
with the best practices of dealers in used equipment similar to the Equipment;
shall have no Lessee installed markings or labels which are not necessary for
the operation, maintenance or repair of the Equipment; and shall be in
compliance with all applicable governmental laws, rules and regulations.
<PAGE>
(d) The Equipment shall be deinstalled and packed by or under the supervision
of the manufacturer or such other person acceptable to Lessor in accordance with
manufacturer's recommendations. Without limitation, all internal fluids will
either be drained and disposed of or filled and secured in accordance with
manufacturers recommendations and applicable governmental laws, rules and
regulations.
(e) Provide for transportation of the Equipment in a manner consistent with
the manufacturer's recommendations and practices to any locations within the
continental United States as Lessor shall direct; and shall have the Equipment
unloaded at such locations.
RETURN PROVISIONS: In addition to the provisions provided for in Section XI
- - -----------------
of the Lease with respect to Telecommunications Equipment only, and provided
that Lessee has elected not to exercise its option to purchase the Equipment
Lessee shall, at its expense:
(a) Upon the request of Lessor, Lessee shall no later than ninety (90) days
prior to the expiration or other termination of the Lease provide:
(i) a detailed inventory of the Equipment (including the model and serial
number of each major component thereof), including without limitation, all
internal circuit boards, module boards, and software features;
(ii) a complete and current set of all manuals, equipment configuration
diagrams, maintenance records and other data that may be reasonably
requested by Lessor concerning the configuration and operation of the
Equipment; and
(iii) a certification of the manufacturer or of a maintenance provider
acceptable to Lessor that the Equipment (1) has been tested and is
operating in accordance with manufacturers specifications (together with a
report detailing the condition of the Equipment), the results of such
test(s) and inspection(s) and all repairs that were performed as a result
of such test(s) and inspection(s) and (2) qualifies for the manufacturers
used equipment maintenance program.
(b) Upon the request of Lessor, Lessee shall, no later than sixty (60) days
prior to the expiration or other termination of the Lease, make the Equipment
available for on-site operational inspection by persons designated by the Lessor
who shall be duly qualified to inspect the Equipment in its operational
environment.
(c) All Equipment shall be cleaned and treated with respect to rust, corrosion
and appearance in accordance with manufacturers recommendations and consistent
with the best practices of dealers in used equipment similar to the
Equipment; shall have no Lessee installed markings or labels which are not
necessary for the operation, maintenance or repair of the Equipment; and shall
be in compliance with all applicable governmental laws, rules and regulations.
(d) Provide for the deinstallation, packing, transporting, and certifying of
the Equipment to include, but not limited to, the following:
(i) the manufacturer's representative shall de-install all Equipment
(including all wire, cable and mounting hardware) in accordance with the
specifications of the manufacturer, (ii) each item of Equipment will be
returned with a certificate supplied by the manufacturer's representative
qualifying the Equipment to be in good condition and (where applicable) to
be eligible for the manufacturer's maintenance plan; the certificate of
eligibility shall be transferable to another operator of the Equipment;
(iii) the Equipment shall be packed properly and in accordance to the
manufacturer's recommendations; (iv) Lessee shall provide for the
transportation of the Equipment in a manner consistent with the
manufacturers recommendations and practices to any locations within the
continental United States as Lessor shall direct, and shall have the
Equipment unloaded at such locations, (v) Lessee shall obtain and pay for
a policy of transit insurance for the redelivery period in an amount equal
to the replacement value of the Equipment and Lessor shall be named as the
loss payee on all such policies of insurance; and (vi) Lessee shall
provide insurance and safe, secure storage for the Equipment for thirty
(30) days after expiration or earlier termination of the Lease at an
accessible location satisfactory to Lessor.
6. LEASE TERM OPTIONS
END OF BASIC TERM OPTIONS
At the expiration of the Basic Term (the "Basic Term Expiration Date"), so
long as no default has occurred and is continuing hereunder and this Agreement
has not been earlier terminated, Lessee shall exercise one of the following
options:
(1) EXTENSION OPTION. Lessee may extend the Lease beyond the Basic Term
Expiration Date with respect to all (but not less than all) of the
Equipment covered by this Schedule through the Secondary Term set forth in this
Schedule and Lessee shall pay Secondary Term Rent as set forth in this Schedule.
(2) PURCHASE OPTION. Upon at least one hundred eighty (180) but not more
than two hundred seventy (270) days written notice to Lessor prior to the Basic
Term Expiration Date, Lessee may purchase all (but not less than all) of the
Equipment covered by this Schedule on an AS IS BASIS for cash equal to the
greater of (A) twenty percent (20%) of the Capitalized Lessor's Cost (plus all
applicable sales taxes) or (B) the then Fair Market Value of the Equipment (plus
all applicable sales taxes). On the Basic Term Expiration Date, Lessor shall
receive in cash the full purchase price (plus all applicable sales taxes)
together with any rent or other sums then due under the Lease on such date.
Lessee shall be deemed to have waived its purchase option if it fails to (a)
timely provide Lessor with the required written notice of its election to
exercise the same or (b) provide Lessor with written notice of its irrevocable
election to exercise the same within fifteen (15) days after Fair Market Value
is determined (by agreement or appraisal).
INITIALS:BAM
---
<PAGE>
(3) CANCELLATION OPTION. Upon at least one hundred eighty (180) but not more
than two hundred seventy (270) days written notice to Lessor prior to the Basic
Term Expiration Date (the "Notice Date"), Lessee my cancel the Agreement (the
"Cancellation Option") with respect to all (but not less than all) of the
Equipment on this Schedule. If all of the terms and conditions of this Section
are not fulfilled, this Lease shall continue in full force and effect and
Lessee shall continue to be liable for all obligations thereunder, including,
without limitation, the obligation to continue paying rent. Lessee shall be
deemed to have waived this option if it fails to timely provide Lessor with the
required written notice of its election to exercise the same.
(a) Prior to the Basic Term Expiration Date, Lessee shall
(i) pay to Lessor, as additional rent, ________________ percent (________
%) of the Capitalized Lessor's Cost of the Equipment, plus all rent and all
other sums due and unpaid as of the Basic Term Expiration Date (including, but
not limited to, any rent payment due and payable on the Basic Term Expiration
Date and any sales taxes and property taxes); and
(ii) return the Equipment in full compliance with Section XI of the
Agreement, such compliance being independently verified by an independent
appraiser selected by Lessor (reasonably acceptable to Lessee) to determine that
the Equipment is in such compliance, which determination shall be final, binding
and conclusive. Lessee shall bear all costs associated with such appraiser's
determination and such costs, if any, to cause the Equipment to be in full
compliance with Section XI of the Agreement on or prior to such Basic Term
Expiration Date.
(b) From the applicable Notice Date through the Basic Tenn Expiration Date,
Lessee shall:
(i) continue to comply with all of the terms and conditions of the Lease,
including, but not limited to, Lessee's obligation, to pay rent, and
(ii) make the Equipment available to Lessor in such a manner as to allow
Lessor to market and demonstrate the Equipment to potential purchasers or
lessees from such premises at no cost to Lessor, provided, however, that,
subject to Lessor's right to market and demonstrate the Equipment to potential
purchasers or lessees from time to time, Lessee may still use the Equipment
until the Basic Term Expiration Date.
(c) Lessee shall, from the Basic Term Expiation Date through the earlier of
the date the Equipment is sold by Lessor to a third party or thirty (30) days
following the Basic Term Expiration Date, comply with the following terms and
conditions:
(i) continue to provide insurance for the Equipment, at Lessee's own
expense, in compliance with the terms found in Section X of the Agreement, and
(ii) make the Equipment available to Lessor and/or allow Lessor to store
the Equipment at Lessee's premises, in such a manner as to allow Lessor to
market and demonstrate the Equipment to potential purchasers or lessees from
such premises at no cost to Lessor.
(d) The proceeds of any sale or re-lease of the Equipment after Lessee has
exercised its Cancellation Option shall be for the sole benefit of Lessor and
Lessee shall have no interest in nor any claim upon any of such proceeds.
END OF SECONDARY TERM OPTIONS
Section XIX(a) of the Lease is hereby deleted in its entirety and the
following is substituted therefor:
(a) So long as no default exists hereunder and the Lease has not been
earlier terminated, Lessee may at the expiration of the Secondary Term upon at
least one hundred eighty (180) days but not more than two hundred seventy (270)
days written notice to Lessor prior to the end of the Secondary Term, purchase
all (but not less than all) of the Equipment in this Schedule on an AS IS, WHERE
IS BASIS, without recourse to or warranty from Lessor, express or implied ("AS
IS BASIS") for cash equal to its then Fair Market Value (plus all applicable
sales taxes).
H. PAYMENT AUTHORIZATION
You are hereby irrevocably authorized and directed to deliver and apply the
proceeds due under this Schedule as follows:
<TABLE>
<CAPTION>
COMPANY NAME ADDRESS AMOUNT
------------------------------------------------------------------------------------
<S> <C> <C>
INTERSERVICE $ 126,161.25
WESTFALL INTERIORS $ 183,395.98
DEPARTMENT OF TAXATION - ILLINOIS $ 8,855.42
NEW CENTURY MORTGAGE CORPORATION $1,142,394.62
TOTAL: $1,460,797.27
</TABLE>
<PAGE>
This authorization and direction is given pursuant to the same authority
authorizing the above-mentioned financing.
Except as expressly modified hereby, all terms and provisions of the
Agreement shall remain in full force and effect. This Schedule is not binding or
effective with respect to the Agreement or Equipment until executed on behalf of
Lessor and Lessee by authorized representatives of Lessor and Lessee,
respectively.
IN WITNESS WHEREOF, Lessee and Lessor have caused this Schedule to be
executed by their duly authorized representatives as of the date first above
written.
LESSOR: LESSEE:
GENERAL ELECTRIC CAPITAL CORPORATION NEW CENTURY MORTGAGE CORPORATION
By: /s/ Michelle H. Steinberg By: /s/ Brad A. Morrice
--------------------------------- ----------------------------------
Name: MICHELLE H. STEINBERG Name: Brad A. Morrice
------------------------------- --------------------------------
Title: REGION CREDIT MANAGER Title: CEO
------------------------------ -------------------------------
Attest
By: /s/ William J. Dodge
----------------------------------
Name: William J. Dodge
--------------------------------
<PAGE>
AGENCY AGREEMENT
THIS AGENCY AGREEMENT, dated Oct. 24, 1997 ("Agreement"), between General
Electric Capital Corporation, a New York corporation ("Lessor"), and New Century
Mortgage Corporation, a California corporation (the "Company"). Capitalized
terms not defined herein shall have the meanings assigned to them in the Lease
(as that term is defined below).
RECITALS:
WHEREAS, Lessor and the Company have entered into a Master Lease Agreement
dated Oct. 24, 1997 wherein Lessor, as the lessor, has agreed to lease certain
items of Furniture and other equipment to the Company (the Master Lease
Agreement and all Schedules entered into from time to time thereunder are
hereinafter collectively referred to as the "Lease"; all Furniture and other
equipment leased thereunder are hereinafter collectively referred to as the
"Equipment"); capitalized terms used herein but not otherwise defined shall have
the meanings as provided in the Lease; and
WHEREAS, Lessor desires to appoint the Company its agent to order, receive
and pay for, in the name and on behalf of Lessor, the Equipment;
NOW, THEREFORE, in consideration of the above premises and the mutual
promises contained herein, as well as other good and valuable considerations,
the receipt and sufficiency of which is hereby acknowledged, the parties hereto
hereby agree as follows:
ARTICLE I
GENERAL UNDERTAKING
SECTION 1.01 APPOINTMENT. Lessor hereby appoints the Company, and the Company
hereby agrees to accept such appointment, as the agent of Lessor, without any
fee for acting as such agent, pursuant to the terms and conditions of this
Agreement, for the purpose of: (i) ordering and, subject to the conditions set
forth in Section 2.01 hereof, accepting Equipment on Lessor's behalf for leasing
to the Company under the Lease; and (ii) paying, on behalf of Lessor, any and
all amounts required to purchase such Equipment from the respective suppliers
thereof (each a "Supplier" and collectively, the "Suppliers") ("Purchase
Price"). It is specifically agreed that all of the power and authority vested to
the Company herein shall be subject to any modifications as may from time to
time be made by Lessor.
SECTION 1.02 POWERS. Except as may be otherwise expressly provided in this
Agreement, the Company is hereby granted the authority to act, and hereby agrees
to act, on behalf of Lessor and in the name of Lessor, to the extent necessary
to carry out its duties under this Agreement.
SECTION 1.03 MASTER LEASE. This Agreement is entered into in connection with
and subject to the terms of the Lease and in the event of a conflict between the
terms of this Agreement and the Lease, the Lease shall control. The Company and
Lessor may from time to time hereafter enter into Equipment Schedules to the
Lease, and it is the intent of the parties that this Agreement facilitate the
leasing of Equipment under the Lease. NOTHING IN THIS AGREEMENT SHALL BE OR
SHALL BE DEEMED TO BE, A COMMITMENT ON THE PART OF EITHER THE COMPANY OR LESSOR
TO EXECUTE OR OTHERWISE ENTER INTO ANY EQUIPMENT SCHEDULES AFTER THE DATE OF
THIS AGREEMENT.
ARTICLE H
DUTIES OF AGENT
SECTION 2.01 EQUIPMENT ORDERS. Upon the execution by the Company and Lessor of
each Schedule to the Lease, the Company, pursuant to the agency granted to it by
Lessor in Article I hereof, may order, receive, accept and pay for the
Equipment, to be leased pursuant to each such Schedule. Upon and as of the date
of acceptance of the Equipment by the Company and satisfaction of the conditions
precedent provided for in the Lease: (a) Lessor shall be unconditionally
obligated to purchase such Equipment pursuant to the terms of the applicable
purchase order or purchase agreement ("Purchase Order") and to lease such
Equipment to the Company pursuant to the terms and conditions of the Lease and
the applicable Schedule; and (b) the Company shall be unconditionally obligated
to lease such Equipment from Lessor pursuant to the terms and conditions of the
Lease and the applicable Schedule. Notwithstanding any provision to the contrary
herein, the Company's ability to act as Lessor's agent hereunder, and to
unconditionally obligate Lessor to purchase Equipment pursuant to such agency,
shall be limited by the following: (i) the Company must disclose to all
Suppliers that it is ordering the Equipment as agent for Lessor; (ii) all of the
Equipment ordered and/or accepted hereunder must meet at least one of the
general description categories contained on the applicable Schedule; (iii) the
aggregate Purchase Price for all Equipment purchased in connection with any
Schedule must be less than, or equal to, the Capitalized Lessor's Cost specified
on that Schedule; (iv) the Equipment must be delivered to, and accepted by, the
Company on or before the Last Delivery Date specified in the applicable
Schedule; (v) the Purchase Price of each unit of Equipment must not be more than
the then current Fair Market Value of such Equipment; (vi) each unit of
Equipment must qualify for all the Tax Benefits described in the applicable
Schedule in the hands of Lessor upon the Company's acceptance thereof from the
Supplier and (vii) with respect to any documentation, technical or confidential
business information and/or software relating to the Equipment (collectively,
"Software"), the Purchase Order will grant Lessor a license to use the Software
and will allow Lessor to grant a sublicense to the Company to use such Software
pursuant to the Lease and will allow Lessor to grant a sublicense to a third
party after a termination or the expiration of the Lease in the event the
Company does not elect to exercise any purchase option that may be provided for
in the Lease. The Company additionally agrees that all Purchase Orders executed
by the Company as Lessor's agent hereunder shall: (A) condition Lessor's
obligation to pay for and purchase the Equipment on the Company's acceptance of
such Equipment: (B) not permit passage of title or risk of loss for the
Equipment earlier than such acceptance by the Company; (C) not permit the
Supplier or any other person or entity to retain any security in, or lien on,
any of the Equipment; and (D) otherwise be on terms and conditions acceptable to
Lessor in its sole discretion.
SECTION 2.02 RECEIPT OF AND PAYMENT FOR EQUIPMENT. With respect to any Equipment
ordered by the Company as agent for
<PAGE>
Lessor, the Company agrees to pay and perform all obligations of the purchaser
in the time and manner required by the applicable Purchase Order. Without
limiting the foregoing, upon receipt and acceptance by the Company of any
Equipment, the Company shall, on behalf of Lessor, pay the Purchase Price
thereof to the Supplier in the time and manner required by the Purchase Order.
Receipt and acceptance of any Equipment by the Company from the Supplier shall
be deemed to be an unconditional and irrevocable acceptance or such Equipment by
the Company for all purposes of the Lease and the applicable Schedule.
SECTION 2.03 REIMBURSEMENT OF PURCHASE PRICE. On or before the Lease
Commencement Date for any Schedule, the Company shall present to Lessor
documentation ("Purchase Documentation"), in form and substance satisfactory to
Lessor in its sole discretion, which (i) describes all units of Equipment
ordered, received and accepted by the Company as agent for Lessor in connection
with such Schedule, and (ii) includes evidence of the Purchase Price paid to
Supplier for each such unit of Equipment and of passage of title thereto to
Lessor. Upon the latter or (A) Lessor's receipt of the Purchase Documentation or
(B) the applicable Lease Commencement Date, Lessor shall reimburse the Company
for the aggregate Purchase Price for all Equipment purchased hereunder in
connection with such Schedule.
SECTION 2.04 BOOKS AND RECORDS. The Company shall maintain full and accurate
books and records of all Equipment orders, receipts and payments. All such books
and records shall be maintained in a form acceptable to Lessor in its sole
discretion. Such books and records shall be open for inspection and examination
by Lessor and its respective representatives and/or accountants during the
Company's normal business hours.
ARTICLE III
TERMINATION
SECTION 3.01 TERMINATION.
(a) So long as no default exists and is continuing hereunder or under the
Lease, either party may terminate this Agreement at any time upon Forty-
Five (45) days written notice to the other party.
(b) In the event the Company is in default hereunder or under the Lease, Lessor
may elect to terminate this Agreement immediately, which shall be effective
upon the receipt of written notice thereof by the Company.
(c) Any termination under this Section 3.01 shall automatically result in the
immediate revocation of all authority vested in the Company under this
Agreement to order, accept or pay for any Equipment on behalf of Lessor.
IN WITNESS WHEREOF, the parties hereto have caused their duly authorized
representatives to execute and deliver this Agreement on the date first written.
General Electric Capital Corporation New Century Mortgage Corporation
By: /s/ MICHELLE H. STEINBERG By: /s/ BRAD A. MORRICE
--------------------------- -----------------------------
Title: REGION CREDIT MANAGER Title: CEO
------------------------ --------------------------
<PAGE>
CORPORATE LESSEE'S
BOARD OF DIRECTORS RESOLUTION
The undersigned hereby certifies: (i) that she/he is the Secretary of NEW
CENTURY MORTGAGE CORPORATION; (ii) that the following is a true and
correct copy of resolutions duly adopted at a meeting of the Board of Directors
of said Corporation duly held on the September 26, day of , 1997;
------------ ------------ --
and (iii) that said resolutions have not been amended, rescinded, modified or
revoked, and are in full force and effect:
"RESOLVED, that each of the officers of this Corporation, whose name appears
below:
/s/ BRAD A. MORRICE /s/ E.F. GOTSCHALL
- - ----------------------------- ----------------------------------
President Treasurer
/s/ PATTI M. DODGE /s/ BRAD A. MORRICE
- - ----------------------------- ----------------------------------
Vice President Secretary
or the duly elected or appointed successor in office of any or all of them, be,
and hereby is, authorized and empowered in the name and on behalf of this
Corporation to enter into, execute and deliver a master lease agreement with
General Electric Capital Corporation ("Lessor'") as Lessor, providing for the
leasing to (or sale and leaseback by) this Corporation, from time to time, of
certain equipment, and further providing for this Corporation to indemnify said
Lessor against certain occurrences and against the loss of contemplated tax
treatment; and
FURTHER RESOLVED, that each officer of this Corporation be, and hereby is,
authorized and empowered in the name and on behalf of this Corporation to enter
into, execute and deliver any documents and to do and perform all other acts and
deeds which may be necessary or appropriate to effectuate the lease (or sale and
leaseback) of equipment from Lessor; and
FURTHER RESOLVED, that the Lessor may rely upon the aforesaid resolutions
until receipt by it of written notice of any change.
IN WITNESS WHEREOF, I have set my hand and affixed me seal of said Corporation
this 24th day of October, 1997.
---- ------- --
(CORPORATE SEAL)
/s/ BRAD A. MORRICE
- - -----------------------------------
Secretary
<PAGE>
EXHIBIT 10.29
SUB-SERVICING AGREEMENT
THIS SUB-SERVICING AGREEMENT (the "Agreement") is made as of the 15th day of
September, 1997, by and between NEW CENTURY MORTGAGE CORPORATION, a California
corporation ("New Century" or "Master Servicer") and COMERICA MORTGAGE
CORPORATION, a Michigan corporation ("Comerica" or "Sub-Servicer").
BACKGROUND
- - ----------
New Century has previously entered into, and may in the future enter into:
(A) various pooling and servicing agreements (which, along with referenced,
related and ancillary agreements are herein called, individually, a "Pooling
Agreement" and collectively, the "Pooling Agreements") among various investment
bankers, as depositors, New Century Mortgage Corporation, as master servicer,
and certain entities offering trust services, as trustees. The Pooling
Agreements are identified in the attached Addendum "A", which Addendum "A" shall
be amended and updated from time to time as Pooling Agreements are added to and
deleted from coverage under this Agreement; and
(B) various agreements (individually, a "Servicing Agreement" and collectively
the "Servicing Agreements") by and between New Century and various secondary
market mortgage lenders covering the interim or permanent servicing of mortgage
loans acquired by such secondary market lenders. The Servicing Agreements are
identified in the attached Addendum "A", which Addendum "A" shall be amended and
updated from time to time, in writing signed by both parties, as Servicing
Agreements are added to and deleted from coverage under this Agreement.
Pursuant to the terms of the Pooling Agreements and Servicing Agreements, New
Century, acting directly or through one or more sub-servicers, is to act as
master servicer to service and administer certain mortgage loans in accordance
with the Pooling Agreements and Servicing Agreements.
New Century desires to appoint Comerica to perform certain of New Century's
servicing obligations under the Pooling Agreements and Servicing Agreements.
NOW, THEREFORE, in consideration of the premises and mutual covenants
hereinafter set forth, the parties hereto, intending to be legally bound, hereby
agree as follows:
<PAGE>
1. Appointment of Sub-Servicer.
---------------------------
(a) New Century hereby appoints Comerica, as its agent, to perform
certain of New Century's servicing obligations under the Pooling Agreements
and Servicing Agreements with respect to the mortgage loans (individually, a
"Mortgage Loan" and collectively, the "Mortgage Loans") identified by New
Century. Comerica accepts such appointment and agrees to perform the
servicing duties identified in the list of servicing duties attached hereto
as Addendum "B" (the "Servicing Duties"). The Servicing Duties may be
updated or supplemented from time to time by New Century and Comerica only
by a writing signed by both parties. The Servicing Duties shall be performed
by Comerica with the same care and according to the same standards Comerica
uses in servicing its own mortgage loans.
(b) The Servicing Duties to be performed by Comerica generally include
functions related to cashiering, customer service, taxes, insurance and
investor reporting. Comerica shall not be responsible for functions related
to bankruptcies, default management (including collections) or other non-
delinquency work-out management, foreclosure and management of real estate
acquired through foreclosure or deed in lieu of foreclosure ("REO"), which
servicing functions shall continue to be the obligation of the New Century.
Comerica's subservicing duties under this Agreement shall be limited to the
Servicing Duties and Comerica shall have no duty or obligation to determine
any servicer or sub-servicer duties set forth in the Pooling Agreements or
Servicing Agreements, and shall not be bound by the representations,
warranties and obligations of New Century thereunder with respect to such
duties.
(c) Comerica shall be New Century's exclusive agent with respect to sub-
servicing of the Mortgage Loans, except that:
(i) New Century shall not be required to terminate sub-servicing
arrangements it has respecting mortgage loans existing on the date of
this Agreement;
(ii) New Century shall not be required to use Comerica for sub-
servicing Mortgage Loans covered by a Pooling Agreement or Servicing
Agreement if, under the terms of such Pooling Agreement or Servicing
Agreement, Comerica is not approved to provide such services; and
(iii) Comerica shall not be required to sub-service Mortgage Loan which
are of a type which cannot be processed on its then current servicing
system unless New Century and Comerica mutually agree to the
modification of Comerica's servicing system to accommodate such loans.
2. Compensation. As compensation for the services specified herein, Comerica
------------
shall be entitled to:
2
<PAGE>
(a) retain from each monthly payment due to New Century servicing
fees of the type and in the amount set forth in Exhibit "A", with
respect to each Mortgage Loan serviced as of the first day of the month
in which the first monthly payment becomes due (the "Sub-Servicing
Fee"). The Sub-Servicing Fee, as listed in Exhibit "A", shall be
reviewed by Comerica and New Century no less frequently than annually,
and at the time of any change in the Servicing Duties.
(b) all investment earnings on the accounts established by Comerica
for deposit of all collections of principal, interest and escrow with
respect to the Mortgage Loans (the "Collection Accounts"),
(c) all expenses incurred by Comerica in servicing the Mortgage Loans
as a result of New Century's negligent or intentional actions or
inactions, and
(d) additional servicing compensation consisting of release and
satisfaction fees (to the extent allowed by law), bad check charges,
assumption, modification, conversion and substitution fees, tax service
fees, bi-weekly mortgage payment program fees, fees for statement of
account or pay off of the Mortgage Loan and any other servicing-related
fees to the extent not related to the functions performed by New Century
or otherwise required to be deposited in Collection Accounts, may be
retained by Comerica directly from collections. So long as Comerica
receives investment earnings on the Collection Accounts, any net
investment losses in funds held in the Collection Accounts shall be for
the account of Comerica and promptly upon the realization of such loss
shall be contributed by Comerica to the Collection Accounts.
Each month Comerica shall collect servicing fees and all additional
servicing compensation due New Century under the Pooling Agreements and
Servicing Agreements, as described in the Servicing Duties. These servicing fees
may be subject to offset under the provisions of the Pooling Agreements and
Servicing Agreements. The amount remaining following such offset, as a dollar
amount for any month, is referred to herein as the "Net Servicing Fee". Comerica
shall remit to New Century an amount equal to the Net Servicing Fee collected by
the Comerica less the Sub-Servicing Fee and other items set forth above, to an
account specified in writing by New Century. New Century shall receive all late
payment charges and all prepayment penalties to the extent collected.
Notwithstanding the foregoing, the Sub-Servicing Fee shall not be
reduced hereby and New Century shall make Comerica whole if the total Sub-
Servicing Fee is not available and such unavailability is not due to the
negligent or intentional acts of Comerica. Comerica is hereby authorized to
reduce the Net Servicing Fee in order to offset any such reduction.
3. Representations, Warranties and Covenants of Comerica. Comerica hereby
-----------------------------------------------------
represents and warrants to New Century as follows:
3
<PAGE>
(a) Comerica is a Michigan corporation duly organized, validly
existing and in good standing under the laws of the state of its
incorporation and is in compliance with the laws of each state in which
any Mortgaged Property is located to the extent necessary to enable it
to perform its obligations under the terms of this Agreement; Comerica
has the full corporate power and authority to execute and deliver this
Agreement and to perform in accordance herewith; the execution, delivery
and performance of this Agreement by Comerica and the consummation of
the transactions contemplated hereby have been duly and validly
authorized; this Agreement evidences the valid, binding and enforceable
obligation of Comerica; and all requisite corporate action has been
taken by Comerica to make this Agreement valid and binding upon Comerica
in accordance with its terms;
(b) Neither the execution and delivery of this Agreement, nor the
fulfillment of or compliance with the terms and conditions of this
Agreement, will conflict with or result in a breach of any of the terms,
conditions or provisions of Comerica's charter or by-laws or any legal
restriction or any agreement or instrument to which Comerica is now a
party or by which it is bound, or constitute a default or result in an
acceleration under any of the foregoing, or result in the violation of
any law, rule, regulation, order, judgment or decree to which Comerica
or its property is subject, or impair the ability of Comerica to realize
on the Mortgage Loans, or impair the value of the Mortgage Loans;
(c) Comerica is an approved seller/servicer of conventional
residential mortgage loans for FNMA and FHLMC;
(d) There is no action, suit, proceeding, or investigation pending
or, to the knowledge of Comerica, threatened against Comerica which,
either in any one instance or in the aggregate, may result in any
material adverse change in the business, operations, financial
condition, properties or assets of Comerica, or in any material
impairment of the right or ability of Comerica to carry on its business
substantially as now conducted, or of any action taken or to be taken in
connection with the obligations of Comerica contemplated herein, or
which would materially impair the ability of Comerica to perform under
the terms of this Agreement; and
(e) No consent, approval, authorization or order of any court or
governmental agency or body is required for the execution, delivery and
performance by Comerica of or compliance by Comerica with this Agreement
or the Mortgage Loans or the consummation of the transactions
contemplated by this Agreement, or if required, such approval has been
obtained prior to the date of this Agreement.
Upon discovery by any of New Century, Comerica, a depositor or trustee
under the Pooling Agreements or Servicing Agreements (individually, the
"Depositor" and/or the "Trustee" and collectively the "Depositors" and/or the
"Trustees") or any party having a direct or indirect interest in the Mortgage
Loans (the "Certificateholders") or any party insuring such interest (the
"Certificate Insurers"), of a breach of any of the representations and
warranties set forth in this Paragraph 3
4
<PAGE>
which materially and adversely affects the interests of any party having a
direct or indirect interest in the Mortgage Loans, the party discovering such
breach shall give prompt written notice to the other parties. Within sixty
(60) days of its discovery or its receipt of notice of breach, or such lesser
cure period as may be specified by New Century if such lesser cure period is
required under a Pooling Agreement or Servicing Agreement, Comerica shall cure
such breach in all material respects and, upon Comerica's continued failure to
cure such breach, may thereafter be removed by New Century, a Certificateholder
or a Certificate Insurer pursuant to paragraph 3 hereof; provided, however, that
-----------------
if Comerica can demonstrate to the reasonable satisfaction of New Century that
it is diligently pursuing remedial action, then the cure period may be extended
with the written approval of New Century, which written approval shall not be
unreasonably withheld.
4. Removal, Resignation and Termination of Comerica.
------------------------------------------------
(a) New Century, may remove Comerica upon the occurrence of any of
the following events (each, a "Comerica Event of Default"), which
removal shall be deemed a termination for cause:
(i) any failure by Comerica to remit to a Trustee for
distribution to the Certificateholders any payment required to
be made under the terms of this Agreement which continues
unremedied for a period of one business day after the date upon
which written notice of such failure, requiring the same to be
remedied, shall have been given to Comerica by a Depositor, a
Trustee, a Certificate Insurer, a Certificateholder or New
Century; or
(ii) any failure on the part of Comerica duly to observe or
perform in any material respect any other of the covenants or
agreements on the part of Comerica contained in this Agreement,
or the breach by Comerica of any representation and warranty
contained in paragraph 3 hereof, which continues unremedied for
a period of sixty (60) days (or such shorter period as may be
required under paragraph 3 hereof) after the earlier of (A) the
date on which written notice of such failure, requiring the
same to be remedied, shall have been given to Comerica by a
Depositor, a Trustee, a Certificate Insurer, a
Certificateholder or New Century and (B) actual knowledge of
such failure by an officer of Comerica; or (C) a decree or
order of a court or agency or supervisory authority having
jurisdiction in the premises in an involuntary case under any
present or future federal or state bankruptcy, insolvency or
similar law or the appointment of a conservator or receiver or
liquidator in any insolvency, readjustment of debt, marshaling
of assets and liabilities or similar proceeding, or for the
winding-up or liquidation of its affairs, shall have been
entered against the Comerica and such decree or order shall
have remained in force undischarged or unstayed for a period of
ninety (90) days; or
(iii) Comerica shall consent to the appointment of a
conservator or receiver or liquidator in any insolvency,
readjustment of debt, marshaling of assets and
5
<PAGE>
liabilities or similar proceedings of or relating to it or of
or relating to all or substantially all of its property; or
(iv) Comerica shall admit in writing its inability to pay its
debts generally as they become due, file a petition to take
advantage of any applicable insolvency or reorganization
statute, make an assignment for the benefit of its creditors,
or voluntarily suspend payment of its obligations; or
(v) any change of control of Comerica shall have occurred. A
change in control shall occur if (A) 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 Comerica or a corporation owned directly or
indirectly by the stockholders of Comerica in substantially the
same proportions as their ownership of stock of Comerica,
becomes the "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of securities of
Comerica representing 25% or more of the total voting power
represented by Comerica's then outstanding voting securities,
or (B) during any period of two consecutive years, individuals
who at the beginning of the two year period constitute the
Board of Directors of Comerica and any new director whose
election by the Board of Directors or nomination for election
by Comerica'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 (C) the stockholders of Comerica approve a merger
or consolidation of Comerica with any other corporation, other
than a merger or consolidation which would result in the voting
securities of Comerica 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 Comerica
or the surviving entity outstanding immediately after the
merger or consolidation, or the stockholders of Comerica
approve a plan of complete liquidation of Comerica or an
agreement for the sale or disposition by Comerica (in one
transaction or a series of transactions) of all or
substantially all Comerica's assets.
If a Comerica Event of Default described in clauses (i) through
(v) of this subparagraph shall occur, then, and in each and every such
case, so long as such Comerica Event of Default shall not have been
remedied, New Century shall be entitled to direct costs and expenses
it incurs as a result of the Event of Default and New Century or a
Certificate Insurer may, by notice in writing to Comerica, terminate
all of the rights and obligations of Comerica in its capacity of sub-
servicer under this Agreement,
6
<PAGE>
to the extent permitted by law, and in and to the Mortgage Loans and
the proceeds thereof. On or after the receipt by Comerica of such
written notice, all authority and power of Comerica under this
Agreement or the Mortgage Loans shall pass to and be vested in New
Century pursuant to and under this Section, and, without limitation,
New Century is hereby authorized and empowered, as attorney-in-fact or
otherwise, to execute and deliver, on behalf of and at the expense of
Comerica, any and all documents and other instruments and to do or
accomplish all other acts or things necessary of appropriate to effect
the purposes of such notice of termination, whether to complete the
transfer and endorsement or assignment of the Mortgage Loans and
related documents, or otherwise. Comerica agrees promptly (and in any
event no later than ten (10) business days subsequent to such notice)
to provide New Century with all documents and records requested by it
to enable it to assume the sub-servicer's functions under this
Agreement, and to cooperate with New Century in effecting the
termination of Comerica's responsibilities and rights under this
Agreement, including, without limitation, the transfer within one (1)
business day to New Century for administration by it of all cash
amounts which at the time shall be or should have been credited by
Comerica to a Collection Account held by or on behalf of Comerica
(provided, however, that Comerica shall continue to be entitled to
receive all amounts accrued or owing to it under this Agreement on or
prior to the date of such termination and shall continue to be
entitled to the benefits of paragraph 6 notwithstanding any such
termination).
(b) Comerica shall not resign from the obligations and duties
hereby imposed on it, except by mutual agreement of Comerica and New
Century, with the consent of the appropriate Certificate Insurer, if
applicable, or upon determination that Comerica duties hereunder are
no longer permissible under applicable law or are in material conflict
by reason of applicable law with any other activities carried on by
it, the other activities of Comerica so causing such a conflict being
of a type and nature carried on by Comerica at the date of this
Agreement. Any such determination permitting the resignation of
Comerica shall be evidenced by an opinion of counsel to such effect
which shall be delivered to New Century and the appropriate
Certificate Insurer, if applicable.
(c) New Century may, in any event and without cause, withdraw any
or all Mortgage Loans serviced hereunder upon written demand, made at
least one hundred eighty (180) days prior to date of withdrawal (or
such shorter period as may be required to comply with a servicing
transfer or termination for cause by an investor, trustee or similar
party), except that New Century shall pay Comerica, on the effective
date of termination, a termination fee as set forth in Exhibit "A"
attached hereto.
(d) Any collections received by Comerica after removal, resignation
or termination shall be endorsed by it to New Century and remitted
directly and promptly to New Century.
7
<PAGE>
(e) Upon removal, resignation or termination of Comerica, New
Century shall select a successor sub-servicer.
(f) A successor sub-servicer under this Agreement shall take such
action, consistent with this Agreement, as shall be reasonably
necessary to effectuate any such succession. Comerica agrees to
cooperate with a successor sub-servicer in effecting the termination
of Comerica, servicing responsibilities and rights hereunder and shall
promptly provide such successor servicer all documents and records
reasonably requested by it to enable it to assume Comerica's functions
hereunder and shall promptly also transfer to such successor sub-
servicer all amounts which should have been deposited in the
Collection Account by Comerica or which are thereafter received with
respect to the Mortgage Loans. The successor sub-servicer shall not be
held liable by reason of any failure to make, or any delay in making,
any distribution hereunder or any portion thereof caused by (ii) the
failure of Comerica to deliver, or any delay in delivering, cash,
documents or records to it, or (ii) restrictions imposed by any
regulatory authority having jurisdiction over Comerica.
(g) Any successor sub-servicer shall assume all rights and
obligations of the predecessor sub-servicer under this Agreement,
except those arising before succession.
(h) If an event of default of New Century occurs under a Pooling
Agreement or a Servicing Agreement, and (i) such event of default is
not the result of a Comerica Event of Default, and (ii) as a result of
such event of default New Century is terminated, Comerica may, if it
so chooses and with the consent of the Certificate Insurer, become the
successor master servicer for the Mortgage Loans covered by such
Pooling Agreement or Servicing Agreement.
(i) In the event New Century is terminated pursuant to the terms of
any Pooling Agreement or any Servicing Agreement and (i) Comerica
shall have elected not to become the successor master servicer, or
(ii) if the Certificate Insurer withholds its consent and Comerica is
not approved as the successor master servicer, the Trustee or the
Certificate Insurer may terminate this Agreement, as it relates to
those Mortgage Loans covered by such Pooling Agreement or Servicing
Agreement, subject to any fees required in the attached Exhibit "A."
5. No Assignment. Except as provided herein, neither New Century nor
-------------
Comerica may assign or transfer its rights or obligations under this Agreement
without prior written consent of the parties hereto; provided, however, this
shall not prevent Comerica in its sole judgment from delegating specific
servicing obligations hereunder to, including without limitation, computer
bureaus, credit bureaus, real estate tax service companies, real estate brokers,
or agents, attorneys, trustees and any other determined by Comerica as long as
Comerica remains responsible for any action taken or not taken by such
companies, agents, representatives throughout the term of this Agreement. Merger
of Comerica with its parent, subsidiary or affiliate shall not be deemed an
assignment of this Agreement by Comerica.
8
<PAGE>
6. Limitation on Liability of Comerica and Others.
----------------------------------------------
(a) Comerica and any director, officer, employee or agent of
Comerica may rely in good faith on any document of any kind which,
prima facie, is properly executed and submitted by any person
respecting any matters arising thereunder. Comerica and any director,
officer, employee or agent of Comerica shall be indemnified and held
harmless by New Century against any loss, liability or expense
incurred in connection with any legal action relating to this
Agreement, other than any loss, liability or expense to any specific
Mortgage Loan or Mortgage Loans (except as any such loss, liability or
expense shall be otherwise reimbursable pursuant to this Agreement) or
any loss, liability or expense incurred by reason of willful
misfeasance, bad faith or gross negligence in the performance of
duties hereunder or by reason of disregard of obligations and duties
hereunder.
(b) To the extent that Comerica incurs any loss, liability or
expense arising out of or in connection with this Agreement, New
Century hereby assigns to Comerica New Century's right to
indemnification from the provisions of any Pooling Agreement or
Servicing Agreement; provided, however, that in the event New Century
seeks indemnification pursuant to any Pooling Agreement or Servicing
Agreement for itself, Comerica shall be indemnified pursuant to clause
(a) hereof.
(c) Comerica shall not be under any obligation to appear in,
prosecute or defend any legal action unless such action is related to
its respective duties under this Agreement and, in its opinion, does
not involve it in any expense or liability; provided, however, that
Comerica may in its discretion undertake any such action which it may
deem necessary or desirable with respect to this Agreement and the
rights and duties of the parties hereto and the interests of the
Certificateholders hereunder. In such event, pursuant to clause (b)
above, the legal expenses and costs of such action and any liability
resulting therefrom (except any loss, liability or expense incurred by
reason of willful misfeasance, bad faith or negligence in the
performance of duties hereunder or by reason of disregard of
obligations and duties hereunder) shall be expenses, costs and
liabilities of New Century. In the case of reimbursement from a
Trustee, Comerica shall be entitled to be reimbursed therefor from the
Collection Account as and to the extent provided in the applicable
Pooling Agreement or Servicing Agreement, any such right of
reimbursement being prior to the rights of the Certificateholders to
receive any amount in the Collection Account.
7. Amendment to Sub-Servicing Agreement. This Agreement may be amended
------------------------------------
from time to time by written agreement signed by New Century and Comerica.
8. Annual Statement as to Compliance. Comerica, at its own expense, will
---------------------------------
deliver to New Century, each Trustee and each Certificate Insurer, on or before
90 days following the end of the fiscal year of Comerica, commencing in 1998, an
officer's certificate stating, as to each signer thereof, that
9
<PAGE>
(a) a review of the activities of Comerica during such preceding
calendar year and of performance under this Agreement has been made
under such officer's supervision; and
(b) to the best of such officer's knowledge, based on such review,
Comerica has fulfilled all its obligations under this Agreement for
such year, or, if there has been a default in the fulfillment of all
such obligations, specifying each such default known to such officer
and the nature and status thereof including the steps being taken by
Comerica to remedy such default.
9. Annual Independent Certified Public Accountant's Reports. Not later
--------------------------------------------------------
than 90 days following the end of each fiscal year of Comerica, commencing in
1998, Comerica, at its own expense, shall cause to be delivered to New Century,
the Trustees and the Certificate Insurers a report stating that:
(a) it has obtained a letter of representation regarding certain
matters from the management of Comerica which includes an assertion
that Comerica has complied with certain minimum residential mortgage
loan servicing standards, identified in the Uniform Single Attestation
Program for Mortgage Bankers established by the Mortgage Bankers
Association of America, with respect to the servicing of residential
mortgage loans during the most recently completed fiscal year; and
(b) on the basis of an examination conducted by such firm in
accordance with standards established by the American Institute of
Certified Public Accountants, such representation is fairly stated in
all material respects, subject to such exceptions and other
qualifications that may be appropriate.
10. Access to Certain Documentation and Information Regarding the Mortgage
----------------------------------------------------------------------
Loans. Comerica shall provide to the Office of Thrift Supervision, the FDIC, and
- - -----
any other federal or state banking or insurance regulatory authority that may
exercise authority over any Certificateholder, access to the documentation
regarding the Mortgage Loans required by applicable laws and regulations. Such
access shall be afforded without charge but only upon reasonable request and
during normal business hours at the offices of Comerica designated by it. In
addition, access to the documentation regarding the Mortgage Loans will be
provided to any Certificateholder, any Certificate Insurer and any Trustee upon
reasonable request during normal business hours at the offices of Comerica
designated by it at the expense of the party requesting such access.
11. Miscellaneous.
-------------
(a) Indulgences, Etc. Neither the failure nor any delay on the part
-----------------
of either party to exercise any right, remedy, power or privilege
("Right") under this Agreement shall operate as a waiver thereof, nor
shall any single or partial exercise of any Right
10
<PAGE>
preclude any other or further exercise of the same or of any other
Right, nor shall any waiver of any Right with respect to any
occurrence be construed as a waiver of such Right with respect to any
other occurrence. No waiver shall be effective unless it is in writing
and is signed by the party asserted to have granted such waiver.
(b) Controlling Law. This Agreement and all questions relating to
---------------
its validity, interpretation, performance and enforcement (including,
without limitation, provisions concerning limitations of actions),
shall be governed by and construed in accordance with the laws of the
State of New York, notwithstanding any conflict-of-laws doctrines of
the State of New York or other jurisdictions to the contrary, and
without the aid of any canon, custom or rule of law requiring
construction against the draftsman.
(c) Waiver of Jury Trial. Each of the parties hereby irrevocably
--------------------
waives all right to a trial by jury in any action, proceeding or
counterclaim arising out of or relating to this Agreement, any other
transaction document or any instrument or document delivered hereunder
or thereunder.
(d) Notices. All notices, requests, demands and other
-------
communications required or permitted under this Agreement shall be in
writing and shall be deemed to have been duly given, made and received
only when delivered (personally, by courier service such as Federal
Express, or by other messenger) against receipt or three days after
when deposited in the United States mails, first class postage
prepaid, addressed as set forth below:
(i) If to New Century:
New Century Mortgage Corporation
18400 Von Karman, Suite 1000
Irvine, CA 92612
Attention: Brad A. Morrice
Telephone: (714) 440-7030
Telecopy: (714) 440-7033
(ii) If to Comerica:
Comerica Mortgage Corporation
3551 Hamlin Road
Auburn Hills, Michigan 48326
Attention: Sharon Walsh
Telephone: (248) 371-6555
Telecopy: (248) 371-6533
11
<PAGE>
In addition, notice by mail shall be by air mail if posted
outside of the continental United States. Any party may alter the
address to which communications or copies are to be sent by giving
notice of such change of address in conformity with the provisions of
this paragraph for the giving of notice.
(e) Binding Nature of Agreement. This Agreement shall be binding
---------------------------
upon and inure to the benefit of the parties hereto and their
respective permitted successors and assigns.
(f) Provisions Separable. The provisions of this Agreement are
--------------------
independent of and separate from each other, and no provision shall be
affected or rendered invalid or unenforceable by virtue of the fact
that for any reason any other or others of them may be invalid or
unenforceable in whole or in part.
(g) Counterparts. For the purpose of facilitating the execution of
------------
this Agreement and or other purposes, this Agreement may be executed
simultaneously in any number of counterparts, each of which shall be
deemed to be an original, and together shall constitute and be one and
the same instrument.
(h) Entire Agreement. This Agreement contains the entire
----------------
understanding between the parties hereto with respect to the subject
matter hereof, and supersedes all prior and contemporaneous agreements
and understandings, inducements or conditions, express or implied,
oral or written, except as herein contained. The express terms hereof
control and supersede any course of performance and/or usage of the
trade inconsistent with any of the terms hereof. This Agreement may
not be modified or amended other than by an Agreement in writing.
(i) Paragraph Headings. The paragraph headings in this Agreement
------------------
are for convenience only; they form no part of this Agreement and
shall not affect its interpretation.
(j) Advice from Counsel. The parties understand that this Agreement
-------------------
is a legally binding agreement that may affect such party's rights.
Each party represents to the other that it has received legal advice
from counsel of its choice regarding meaning and legal significance of
this Agreement and that it is satisfied with its legal counsel and the
advice received from it.
(k) Judicial Interpretation. Should any provision of this Agreement
-----------------------
or any of the other transaction documents require judicial
interpretation, it is agreed that a court interpreting or construing
the same shall not apply a presumption that the terms hereof shall be
more strictly construed against any party by reason of the rule of
construction that a document is to be construed more strictly against
the party who itself or through its agent prepared the same, it being
agreed that all parties have participated in the preparation of this
Agreement.
12
<PAGE>
(l) Non-Compete. Notwithstanding anything to the contrary contained
-----------
in this Agreement, Comerica shall not use information it acquires in
the course of sub-servicing the Mortgage Loans to solicit similar
loans for itself, its subsidiaries and affiliates or third-party
lenders competing directly with New Century.
(m) Insurance Solicitation. Each of the parties hereby agrees that
----------------------
no solicitations of the other party's customer for mortgage credit
life and mortgage disability insurances shall be extended unless
mutually agreed upon by both parties.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed and delivered by their proper and duly authorized officers as of the
date first above written.
NEW CENTURY MORTGAGE CORPORATION
By: /s/ Brad A. Morrice
-----------------------------
Brad A. Morrice
Chief Executive Officer
COMERICA MORTGAGE CORPORATION
By: /s/ Sharon Walsh
-----------------------------
Sharon Walsh
First Vice President
13
<PAGE>
ADDENDUM "A"
DATED AS OF--------------------
POOLING AND SERVICING AGREEMENTS
THIS ADDENDUM is attached to and made a part of that certain Sub-Servicing
Agreement (the "Agreement") dated as of September 15, 1997, by and between NEW
CENTURY MORTGAGE CORPORATION ("New Century") and COMERICA MORTGAGE CORPORATION
("Comerica"). This Addendum may be amended from time to time by New Century and
Comerica in accordance with the Agreement.
The following Pooling Agreements (as such term is defined in the Agreement) are
deemed to be covered by the Agreement:
- - -------------------------------------------------------------------------------
DATE INVESTMENT BANKER TRUSTEE
- - -------------------------------------------------------------------------------
None
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
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- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
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- - -------------------------------------------------------------------------------
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- - -------------------------------------------------------------------------------
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- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
1 of 2
<PAGE>
The following Servicing Agreements(as such term is defined in the Agreement) are
deemed to be covered by the Agreement:
- - -------------------------------------------------------------------------------
DATE PURCHASER/INVESTOR
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
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- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------
COMERICA MORTGAGE CORPORATION NEW CENTURY MORTGAGE CORPORATION
By: /s/ Sharon Walsh By: /s/Brad A. Morrice
------------------------- ----------------------------
Sharon Walsh Brad A. Morrice
Its: First Vice President Its: Chief Executive Officer
Page 2 of 2
<PAGE>
ADDENDUM "B"
DATED AS OF: SEPTEMBER 15, 1997
SERVICING DUTIES
THIS ADDENDUM is attached to and made a part of that certain Sub-Servicing
Agreement (the "Agreement") dated as of September 15, 1997, by and between NEW
CENTURY MORTGAGE CORPORATION ("New Century") and COMERICA MORTGAGE CORPORATION
("Comerica"). This Addendum may be amended from time to time by New Century and
Comerica in accordance with the Agreement. This Addendum may be supplemented
from time to by use of one (1) or more attachments in the form of the
"Attachment B-___ " included herewith. To the extent the servicing duties
specified in this Addendum are inconsistent with any Attachment, the servicing
duties specified in the Attachment shall prevail.
Cashiering
- - ----------
. Acceptance and application of mortgagor's payments through Lockbox
processing, ACH or manual processing. Payments applied in following order:
. Required interest
. Required principal
. Deposits for taxes and insurances
. All other fees, charges or penalties
Payment will be applied within 24 hours of receipt. Same day processing for
payments received prior to 3:30 P.M. (EST) unless specified by New Century
through processing stops placed on MSP Servicing System.
. Payments received on Comerica Business Days which fall on the 16th and last
day of the month will be processed until 9:00 P.M. (EST).
. Reversal of payments due to insufficient funds. Reversals will be completed
within 24 hours of notice. Same day reversal for notice received prior to
3:00 P.M. (EST). Notification to New Century by next business day.
Investor Reporting
- - ------------------
. Monthly remittances to New Century within eighteen (18) calendar days
following the last business day of each month. Remittances shall be payable
by wire and shall be net of Comerica's compensation, outstanding advances
and reimbursements.
. Monthly reports will be provided to New Century, along with Investor,
through the Alltel Servicing System. Contracts identified as Actual/Actual
and New Century's Warehouse
1 of 4
<PAGE>
Investor (Inv. 555) will generate hard copy reports using the Actual/Actual
remittance logic with the following reports included:
. Trial Balance
. Collection Report
. Curtailment Report
. Paid-in-Full Report
. Prepaid Report
. Single Debit Reconciliation
. Monthly hard copy reports will be provided to New Century, along with
Investor, through the Alltel Servicing system. Contract identified as
Schedule/Schedule reporting (hereby called 660 reporting) will generate
reports using Schedule/Schedule remittance logic with the following reports
included:
. Trial Balance
. Collection Report
. Curtailment Report
. Paid-in-Full Report
. Prepaid Report
. Loans Added Report
. Private Pool Detail Report
. Remittance to Investor will be as preceding month-end information supplied
by New Century by the eighteenth (18th) calendar day of the following
month.
. Individual investor remittances, dates and reports to be set up based upon
attachments to Addendum B.
. Interest short fall adjustments will be advanced daily by Comerica and
funded by New Century monthly.
. Funds collected will be segregated and held in custodial accounts stating
Comerica as "Custodian" for New Century.
Customer Service
- - ----------------
. Telephone service with customer service representatives Monday through
Thursday 8:30 A.M. to 7:00 P.M. (EST) and Friday 8:30 A.M. to 6:00 P.M.
(EST).
. Telephone service with Voice Response Unit (VRU) Monday through Friday 7:00
A.M. to 11:00 P.M. (EST) and Saturday 7:00 AM. to 6:00 P.M. (EST).
. Written correspondence with responses within three (3) days of receipt.
2 of 4
<PAGE>
. ARM adjustments calculated based upon ARM data supplied by New Century.
. ARM calculation headers provided to New Century for review and approval
prior to individual loan calculations.
. Notice of ARM payment adjustment to customers within regulatory time
frames.
. Monthly billing for all mortgage payments except for mortgagors who
maintain ACH payment.
. Processing of name changes as a result of marriage, death, divorce
according to procedures followed for other loans serviced. Notification to
New Century.
Loan Set Up
- - -----------
. Set up of loan closed according to current matrix (Exhibit C) on Alltel
Servicing System based upon complete loan information provided by New
Century and documented on the New Loan Boarding sheet (Exhibit B).
. Completed boarding sheets will be processed within 48 business hours of
receipt.
. Incomplete or rejected set ups will be returned to New Century within 24
hours of occurrence.
. Data input audit on all manual boardings.
. Loans with escrow/impound accounts and interest due will be funded from the
established New Century deposit account.
. Provide New Century with updates to matrix (Exhibit C) on method of tax
accrual, cushions and tax payments due dates by state.
. Provide daily reports to New Century for balancing loans boarded by units,
principal balance and escrow balances.
Property Tax Maintenance
- - ------------------------
. Payment of property taxes by the penalty date for all loans with an
escrow/impound account, except for taxes due 30 days before closing, which
will be collected and paid at closing.
. Annual property tax searches on all loans without an escrow/impound
account.
. Notification to mortgagors and New Century of all delinquent property
taxes.
3 of 4
<PAGE>
Hazard Insurance Maintenance
- - ----------------------------
. Payment of homeowners and flood premiums by due dates for all loans with an
escrow/impound account except for first year policy to be collected and
paid at closing.
. Notification to mortgagors to obtain required insurances if cancellation
notice is received.
. Forced placement of hazard and flood insurance under Comerica's insurance
carrier on all loans with cancellation or non-renewal.
. Endorsement of all insurance claim reimbursements according to procedures
followed for other loans serviced.
Escrow/Impound Accounts
- - -----------------------
. Interest paid on all escrow/impound accounts according to state law.
. Annual escrow analysis performed in accordance with Comerica's method for
all other loans serviced.
. Notification as required by RESPA to customers of payment changes.
. An escrow analysis may be performed within 60 days if the escrow/impound
account is not closed per RESPA guidelines. The error rate is not to exceed
1% without fee charges.
COMERICA MORTGAGE CORPORATION NEW CENTURY MORTGAGE CORPORATION
By: /s/ Sharon Walsh By: /s/ Brad A. Morrice
------------------------- ----------------------------
Sharon Walsh Brad A. Morrice
First Vice President Chief Executive Officer
4 of 4
<PAGE>
ATTACHMENT B - ____
SPECIAL SERVICING DUTIES
This Attachment is dated as of September 15, 1997, and is attached to Addendum
"B" (the "Addendum") to Sub-Servicing Agreement (the "Agreement") by and between
New Century Mortgage Corporation ("New Century") and Comerica Mortgage
Corporation ("Comerica") and survives any amendment or modification to the
Agreement or the Addendum.
Capitalized terms used in this Attachment shall have the meeting attributed to
them in the Agreement.
This Attachment sets forth the special servicing duties required of Comerica in
regard to Mortgage Loans covered by a certain [Pooling or Servicing] Agreement
dated _______________ by and among New Century, ________________________________
________________________ and ___________________________________________________
The following Servicing Duties shall be applicable to the forgoing Mortgage
Loans and shall be in addition to and/or supersede the servicing duties
specified in the Addendum:
COMERICA MORTGAGE CORPORATION NEW CENTURY MORTGAGE CORPORATION
By: /s/ Sharon Walsh By: /s/ Brad A. Morrice
------------------------- ----------------------------
Sharon Walsh Brad A. Morrice
First Vice President Chief Executive Officer
1 of 1
<PAGE>
EXHIIBIT "A"
FEE SCHEDULE
MONTHLY FEE $ 8.50 per loan
BOARDING FEE
Manual boarding $34.00 per loan
Automated boarding (to be negotiated - not to exceed
$10 per loan)
DEBOARDING FEE
For servicing released loan
$10.00 per loan
For servicing released loans for which
monthly payments are more than five (5)
months delinquent $50.00 per loan
TAX SERVICE FEE $75.00 per loan
(First American Real Estate Tax Service)
(May increase upon ninety (90) day notice)
FLOOD INSURANCE FEE
Certification fee ($ and company to be determined)
Life-of-loan coverage ($ and company to be determined)
SERVICING SYSTEM MODIFICATIONS
In addition to all other fees provided herein, Comerica shall be entitled to
reimbursement for all expenses, both out-of-pocket and internal, it may incur to
modify or make additions to its servicing system at the request of New Century
1 of 2
<PAGE>
TERMINATION FEES
<TABLE>
<CAPTION>
OUT OF POCKET
TERMINATION TRANSFER
REASON FEE REIMBURSEMENT NOTICE
------ --- ------------- ------
<S> <C> <C> <C>
1. Without cause by 1-36 Months All Costs 180 Days
New Century (All 10 x Monthly fee/per
or partial loans) or loan All Costs 180 Days
without 180 day
notice
2. Without cause by 1-36 Months All Costs 180 Days
related Third Party 10 x Monthly fee/per
(investor, insurers, loan All Costs 180 Days
rating agency, etc.)
(All or partial loans)
3. With cause by New Century $10 per loan Negotiated 60 Days after cure
(under reasonable cure expiration
provisions)
4. New Century Terminated 1-36 Months All Costs 90 Days
with/without cause affecting 10 x Monthly fee/per All Costs 90 Days
CMC Servicing Contract loan
</TABLE>
2 of 2
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
-------------------------------
The Board of Directors
New Century Financial Corporation:
We consent to incorporation by reference in the registration statements (Nos.
333-36129 and 333-32709) on Form S-8 of New Century Financial Corporation of our
report dated February 9, 1998, relating to the consolidated balance sheets of
New Century Financial Corporation and Subsidiary as of December 31, 1997 and
1996, and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for the years ended December 31, 1997 and
1996 and the period from November 17, 1995 (inception) through December 31,
1995, which report appears in the December 31, 1997, annual report on Form 10-K
of New Century Financial Corporation.
/s/ KPMG PEAT MARWICK LLP
KPMG PEAT MARWICK LLP
Orange County, California
March 30, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARY FOR THE
TWELVE-MONTH PERIOD ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 12,701,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 276,506,000
<CURRENT-ASSETS> 0
<PP&E> 5,574,000
<DEPRECIATION> 1,285,000
<TOTAL-ASSETS> 398,128,000
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 142,000
<OTHER-SE> 60,694,000
<TOTAL-LIABILITY-AND-EQUITY> 398,128,000
<SALES> 67,939,000
<TOTAL-REVENUES> 98,633,000
<CGS> 0
<TOTAL-COSTS> 47,462,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20,579,000
<INCOME-PRETAX> 30,592,000
<INCOME-TAX> 12,849,000
<INCOME-CONTINUING> 17,743,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,743,000
<EPS-PRIMARY> 2.18
<EPS-DILUTED> 1.40
</TABLE>
