<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
--------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ____________
Commission file number 000-22633
---------
NEW CENTURY FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 33-0683629
- ------------------------------- ----------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
18400 VON KARMAN, SUITE 1000, IRVINE, CALIFORNIA 92612
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (714) 440-7030
-------------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 twelve 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
------- -------
As of April 30, 1997, 14,411,110 shares of common stock of New Century Financial
Corporation were outstanding.
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 1998
INDEX
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C> <C>
Item 1. Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 2. Changes in Securities and Use of Proceeds 17
Item 3. Defaults Upon Senior Securities 17
Item 4. Submission of Matters to a Vote of
Security Holders 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 17
SIGNATURES 18
EXHIBIT INDEX 19
</TABLE>
2
<PAGE>
Certain information included in this Form 10-Q may include "forward-looking"
statements under federal securities laws, and the Company intends that such
forward-looking statements be subject to the safe-harbor created thereby. Such
statements include the expected gradual improvement in the Company's cash flow
and the expectation that the Company's existing credit facilities and capital
resources will be adequate to fund its existing operations and that the Company
will be able to expand its credit facilities to finance increased production.
There are many important factors that could cause the Company's actual results
to differ materially from expected results in the forward-looking statements.
Such factors include, but are not limited to, the Company's limited operating
history, the Company's ability to sustain and manage its rate of growth, the
impact of increasing competition in the subprime mortgage banking industry, the
Company's ability to access funding sources, and other risks identified in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 and
its other filings with the Securities and Exchange Commission.
3
<PAGE>
Item 1. Financial Statements
New Century Financial Corporation and Subsidiaries
Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
March 31, 1998 December 31,1997
----------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents................................................ $ 9,173,000 $ 12,701,000
Loans receivable held for sale, net (notes 2 and 4)...................... 257,094,000 276,506,000
Residual interests in securitizations (note 3)........................... 124,101,000 97,260,000
Accrued interest receivable.............................................. 2,373,000 3,974,000
Office property and equipment............................................ 4,725,000 4,289,000
Prepaid expenses and other assets........................................ 6,983,000 3,398,000
----------------------------------
TOTAL ASSETS $404,449,000 $398,128,000
==================================
LIABILITIES AND STOCKHOLDERS' EQUITY:
Warehouse and aggregation lines of credit (note 4)....................... $236,216,000 $255,363,000
Residual financing....................................................... 71,086,000 53,427,000
Notes payable............................................................ 2,906,000 3,222,000
Income taxes payable..................................................... 1,938,000 1,789,000
Accounts payable and accrued liabilities................................. 12,444,000 15,454,000
Deferred income taxes.................................................... 10,537,000 8,037,000
-----------------------------------
Total liabilities................................................ 335,127,000 337,292,000
Stockholders' equity:
Preferred stock, $.01 par value. Authorized 7,500,000 shares:
0 shares issued and outstanding...................................... - -
Common stock, $.01 par value. Authorized 45,000,000
shares; issued and outstanding 14,402,360 and 14,165,974 shares
at March 31, 1998 and December 31, 1997, respectively................ 144,000 142,000
Additional paid-in capital............................................... 45,314,000 43,486,000
Retained earnings, restricted............................................ 25,229,000 18,996,000
-----------------------------------
70,687,000 62,624,000
Deferred compensation costs.............................................. (1,365,000) (1,788,000)
-----------------------------------
Total stockholders' equity....................................... 69,322,000 60,836,000
----------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $404,449,000 $398,128,000
==================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
4
<PAGE>
New Century Financial Corporation and Subsidiaries
Consolidated Statements of Earnings
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
----------------------------
<S> <C> <C>
Revenues:
Gain on sale of loans.................. $24,319,000 $10,012,000
Interest income........................ 10,193,000 2,271,000
Servicing income....................... 3,936,000 302,000
----------------------------
Total revenues....................... 38,448,000 12,585,000
----------------------------
Expenses:
Personnel.............................. 9,899,000 3,545,000
Interest............................... 8,709,000 1,808,000
General and administrative............. 5,984,000 1,954,000
Advertising and promotion.............. 2,195,000 842,000
Servicing.............................. 571,000 234,000
Professional services.................. 261,000 156,000
----------------------------
Total expenses....................... 27,619,000 8,539,000
Earnings before income taxes............. 10,829,000 4,046,000
Income taxes............................. 4,596,000 1,699,000
----------------------------
Net earnings............................. $ 6,233,000 $ 2,347,000
============================
Basic earnings per share................. $ 0.45 $ 4.44
============================
Diluted earnings per share............... $ 0.42 $ 0.25
============================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
New Century Financial Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
--------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings.................................................................. $ 6,233,000 $ 2,347,000
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization............................................... 901,000 158,000
Deferred income taxes....................................................... 2,500,000 1,631,000
NIR gains................................................................... (23,763,000) (10,398,000)
Initial deposits to over-collateralization accounts......................... (6,201,000) (2,973,000)
Deposits to over-collateralization accounts................................. (7,569,000) (311,000)
Release of cash from over-collateralization accounts........................ 6,149,000 311,000
Amortization of NIRs........................................................ 4,543,000 128,000
Provision for losses........................................................ 1,708,000 495,000
Loans originated or acquired for sale....................................... (654,285,000) (251,652,000)
Loan sales, net............................................................. 661,743,000 194,848,000
Principal payments on loans receivable held for sale........................ 10,246,000 1,257,000
Increase in accrued interest receivable..................................... 1,601,000 422,000
(Increase) decrease in prepaid expenses and other assets.................... (468,000) 122,000
Increase (decrease) in warehouse and aggregation lines of credit............ (19,147,000) 54,875,000
Increase (decrease) in income taxes payable................................. 149,000 (708,000)
Increase (decrease) in accounts payable and other liabilities............... (3,010,000) 1,638,000
--------------------------------
Net cash used in operating activities......................................... (18,670,000) (7,810,000)
--------------------------------
Cash flows from investing activities:
Purchase of office property and equipment................................... (906,000) (525,000)
Acquisition of Primewest.................................................... (1,500,000) -
--------------------------------
Net cash used in investing activities......................................... (2,406,000) (525,000)
Cash flows from financing activities:
Net proceeds from notes payable............................................. (316,000) 1,793,000
Net proceeds from residual financing........................................ 17,659,000 7,248,000
Proceeds from issuance of stock............................................. 205,000 -
--------------------------------
Net cash provided by financing activities..................................... 17,548,000 9,041,000
--------------------------------
Net increase (decrease) in cash and cash equivalents.......................... (3,528,000) 706,000
Cash and cash equivalents, beginning of period................................ 12,701,000 3,041,000
--------------------------------
Cash and cash equivalents, end of period...................................... $ 9,173,000 $ 3,747,000
================================
Supplemental cash flow disclosure:
Interest paid............................................................... $ 9,042,000 $ 1,730,000
Income taxes paid........................................................... $ 1,949,000 $ 776,000
Supplemental non-cash financing activity:
Stock issued in connection with acquisition of Primewest.................... $ 2,000,000 $ -
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
March 31, 1998 and 1997
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three months ended March 31, 1998 are
not necessarily indicative of the results that may be expected for the year
ended December 31, 1998.
Recent Accounting Developments - In February 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards No. 132 (SFAS
132), "Employers' Disclosures about Pension and Other Post-retirement Benefits."
SFAS 132 amends the disclosure requirements of SFAS No. 87, "Employers'
Accounting for Pensions," SFAS No. 88, "Employers' Accounting for Settlements
and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,"
and SFAS No. 106, "Employers' 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. SFAS 132 will
result in disclosure changes only.
Residual interests in securitizations - Residual interests in securitizations
(Residuals) are recorded as a result of the sale of 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 to be maintained at
certain levels.
7
<PAGE>
At the closing of each securitization, the Company removes from its consolidated
balance sheet the mortgage 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 receivable (NIR).
The NIR represents 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 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 Residuals based on the
relative fair values of those portions on the date of 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
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 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,
8
<PAGE>
prepayment penalties to be received by the Company, delinquencies, defaults and
default loss severity as they affect the amount and timing of the estimated cash
flows. The Company uses a 0.45% to 0.73% default rate estimate. The Company's
default rate 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, 3 year or 5 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.
Due to the uncertainty associated with estimating future cash flows caused by
the lack of historical performance data on the collateral and the absence of an
active market for the purchase and sale of Residuals, the Company established a
general valuation allowance of $3.0 million for the Residuals during the year
ended December 31, 1997. 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.
2. Loans Receivable Held for Sale
A summary of loans receivable held for sale, at the lower of cost or market at
March 31, 1998 and December 31, 1997 follows (dollars in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
Mortgage loans receivable............................. $256,502 $275,814
Net deferred origination costs........................ 592 692
-------- --------
$257,094 $276,506
======== ========
</TABLE>
3. Residual Interests in Securitizations
Residual interests in securitizations consist of the following components at
March 31, 1998 and December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
------- -----------
<S> <C> <C>
Overcollateralization amount............................... $ 28,845 $ 21,224
Net interest receivable (NIR).............................. 98,256 79,036
-------- --------
$127,101 $100,260
General valuation allowance................................ (3,000) (3,000)
-------- --------
$124,101 $ 97,260
======== ========
</TABLE>
9
<PAGE>
The following table summarizes activity in the NIR interests at March 31, 1998
and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Balance, beginning of period........................... $79,036 $ ---
NIR gains.............................................. 23,763 10,398
NIR amortization....................................... (4,543) (128)
------- -------
Balance, end of period................................. $98,256 $10,270
======= =======
</TABLE>
4. Warehouse and Aggregation Lines of Credit
Warehouse and aggregation lines of credit consist of the following at March 31,
1998 and December 31, 1997 (dollars in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
<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 (5.69% at
March 31, 1998)........................................ $157,529 $182,280
A $4 million unsecured working capital line
of credit expiring in May 1998, bearing interest
based on the bank's prime rate......................... ---- 2,146
A $600 million master repurchase agreement bearing
interest based on one month LIBOR (5.69% at
March 31, 1998). The agreement may be terminated
by the lender giving 28 days written notice............ 66,319 55,064
A $100 million master repurchase agreement bearing
interest based on one month LIBOR (5.69% at
March 31, 1998). The agreement may be terminated
by the lender giving 28 days written notice............ 5,030 ---
A $250 million master repurchase agreement expiring
in March 1998, bearing interest based on one month
LIBOR (5.69% at March 31, 1998)........................ 7,338 15,873
-------- --------
$236,216 $255,363
======== ========
</TABLE>
The warehouse and aggregation line of credit agreements contain certain
restrictive financial and other covenants which require the Company to, among
other requirements, restrict dividends and maintain certain levels of net worth,
specific liquidity requirements, debt-to-net-worth ratios and compliance with
regulatory and investor requirements. At March 31, 1998, the Company was in
compliance with these financial and other covenants.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
New Century Financial Corporation (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, and has acquired loans through bulk acquisitions. 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, as well as individuals who prefer the prompt
and personalized service provided by the Company.
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 Company has, to date, elected to fund the required OC 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.
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 affect the Company's operating cash flow. For the quarter ended March 31,
1998, $309.7 million, or 46.8%, of the Company's loan sales were in the form of
securitizations.
11
<PAGE>
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.
The following table sets forth loan sales for the periods indicated (dollars in
thousands):
<TABLE>
<CAPTION>
For the Three Months
Ended March 31,
--------------------
1998 1997
--------- --------
<S> <C> <C>
Securitizations.................................... $309,660 $ 99,132
Whole loan sales................................... 352,083 95,716
-------- --------
Total $661,743 $194,848
======== ========
</TABLE>
In the three months ended March 31, 1998, the Company securitized $309.7
million, or 46.8% of total loan sales, excluding approximately $15.0 million in
loans that were securitized through a pre-funding arrangement which settled in
April 1998. During the quarter ended March 31, 1998, the Company repurchased
through arms-length negotiations $12.2 million in loans which it had previously
sold on a whole loan basis, which were immediately securitized.
Results of Operations
The Company began lending operations in February 1996. Since inception, the
Company has been expanding the number of sales offices and markets it serves.
The Company's considerable growth during 1997 has a significant effect on the
comparison of results for the three months ended March 31, 1998 to the three
months ended March 31, 1997.
As of March 31, 1998, the Company's Wholesale Division operated through 41 sales
offices and 4 regional operating centers located in 26 states. The number of
account executives in the Wholesale Division grew to 127 at March 31, 1998, from
46 at March 31, 1997. The Company's Retail Division operated through 87 sales
offices located in 27 states. The number of loan officers grew to 318 at March
31, 1998, from 105 at March 31, 1997. In January 1998, the Company completed
the acquisition of Primewest Funding, a correspondent lender of the Company.
Retail loan originations and purchases reported for the quarter ended March 31,
1998 include loans originated through Primewest Funding subsequent to the
acquisition.
12
<PAGE>
Three Months Ended March 31, 1998 Compared to Three Months Ended March 31, 1997
The Company originated and purchased $655.0 million in loans for the three
months ended March 31, 1998, compared to $250.6 million for the three months
ended March 31, 1997. Loans originated and purchased through the Company's
Wholesale Division were $420.6 million, or 64.2%, of total originations and
purchases for the three months ended March 31, 1998. Loans originated through
the Company's Retail Division were $209.8 million, or 32.0%, of total
originations and purchases for the three month period. Second mortgage loans
originated were $24.6 million, or 3.8%, of total originations and purchases for
the three month period. For the same period in 1997, Wholesale, Retail and
second mortgage originations and purchases totaled $176.2 million, or 70.3%,
$70.3 million, or 28.0%, and $4.1 million, or 1.7%, respectively, of total
originations and purchases.
Total revenues for the three months ended March 31, 1998 increased to $38.4
million, from $12.6 million for the three months ended March 31, 1997. This
increase was due primarily to the increase in loan originations and purchases
and sales in 1998. Gain on sale of loans increased to $24.3 million for the
three months ended March 31, 1998, from $10.0 million for the three months ended
March 31, 1997, due to the increase in loan sales in 1998.
The components of the gain on sale of loans are illustrated in the following
table (dollars in thousands):
<TABLE>
<CAPTION>
Three Months Ended March 31,
1998 1997
-------------- -------------
<S> <C> <C>
Gain from whole loan sale transactions $ 16,182 $ 4,250
Non-cash gain from securitizations 23,763 10,398
Securitization expenses (1,521) (683)
Accrued interest (2,441) (661)
Provision for losses (1,708) (495)
Non-refundable loan fees 10,526 3,311
Premiums paid (7,482) (1,803)
Origination costs (13,000) (4,171)
Hedging gains/losses --- (134)
------- -------
Gain on sale of loans $ 24,319 $10,012
======== =======
</TABLE>
The assumptions used to record the gain on loans securitized in the quarter
ended March 31, 1998 resulted in a weighted average life of 3.55 years and a
cumulative loss estimate of 2.00% of the original principal balance. An
effective discount rate of approximately 12.0% was used to estimate the present
value of the estimated cash flows released from the OC Account.
During the quarter ended March 31, 1998, the Company received $6.1 million in
cash flows, which is $497,000, or approximately 8.8%, in excess of the cash
flows estimated to be received by the Company in this period. For the quarter
ended March 31, 1997, the
13
<PAGE>
Company received $311,000 in cash flows, which was $58,000 in excess of
estimated cash flows.
Whole loan sales increased to $352.0 million for the three months ended March
31, 1998, from $95.7 million for the corresponding period in 1997. This
increase is the result of the increase in loan originations and purchases.
Interest income increased to $10.2 million for the three months ended March 31,
1998, from $2.3 million for the same period in 1997, 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 three months ended
March 31, 1998 is the result of a higher average inventory of loans held for
sale compared to the corresponding period in 1997. The average inventory of
loans held for sale as of March 31, 1998, based on quarter-end balances, was
$266.8 million, compared to $85.6 million for the corresponding period in 1997.
Servicing income increased to $3.9 million for the three months ended March 31,
1998, from $302,000 for the three months ended March 31, 1997. This increase
resulted from the increase in securitizations, pursuant to which the Company
retains ownership of the servicing rights. Servicing income reflects servicing
fees received on loans sold or securitized by the Company, as well as income
recognized on residual cash flows from securitizations. As of March 31, 1998,
the Company had securitized over $1.4 billion in loans and retained the
servicing rights. As of March 31, 1997, the Company had securitized only $99.1
million in loans. In addition, the Company completed its first servicing-
retained whole loan sale totaling $221.2 million in December 1997, which
contributed to the increase in servicing income in the first quarter of 1998.
Total expenses increased to $27.6 million for the three months ended March 31,
1998, from $8.5 million for the three months ended March 31, 1997. Interest
expense increased due to the higher level of loan inventory and corresponding
warehouse and aggregation borrowings. All other expense components increased
from 1997 to 1998 due primarily to (1) higher loan origination volume in the
quarter ended March 31, 1998 compared to the same period in 1997; (2) an
increase in staffing from 462 employees at March 31, 1997 to 1,310 employees at
March 31, 1998; and (3) the addition of 24 wholesale sales offices and 57 retail
sales offices from March 31, 1997 to March 31, 1998.
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. As of March 31, 1998, the Company had a $260.0 million
warehouse line of credit led by U.S. Bank National Association (formerly First
Bank National Association) which expires in May 1998 and bears interest at a
rate equal to the one month LIBOR plus 1.25%. This line of credit was
subsequently increased to $290.0 million in April 1998 under the same terms and
conditions. At March 31, 1998, the balance outstanding under
14
<PAGE>
the warehouse line of credit was $157.5 million. As of March 31, 1998, the
Company also had a $600.0 million aggregation facility with Salomon Brothers,
which is subject to renewal by Salomon on a monthly basis and bears interest at
a rate generally equal to the one month LIBOR plus 1.25%. At March 31, 1998, the
balance outstanding under the aggregation facility was $66.3 million. The
Company's $250.0 million aggregation facility with Greenwich Capital matured on
March 31, 1998 and the Company opted not to renew the facility. At March 31,
1998, the balance outstanding under the Greenwich aggregation facility was $7.3
million, which was repaid in April 1998. As of March 31, 1998, the Company also
had a $100.0 million refinance aggregation facility with Salomon Brothers, which
is subject to renewal by Salomon on a monthly basis and bears interest at a rate
generally equal to the one month LIBOR plus 1.25%. At March 31, 1998, the
balance outstanding under the refinance aggregation facility was $5.0 million.
The Company utilizes the U.S. Bank warehouse line to finance the actual funding
of its loan originations and purchases. After loans are funded by the Company
using the U.S. Bank warehouse line and all loan documentation is complete, the
loans are generally transferred to one of the aggregation facilities. The
aggregation facilities are paid down with the proceeds of loan sales and
securitizations. The Company expects to continue to expand its credit
facilities to finance its increasing levels of loan production.
The Company has residual financing arrangements with the lead underwriters of
its securitizations, whereby the lead underwriters provide financing of the
Company's residual interests in securitizations. The amount of residual
financing provided upon each securitization is determined pursuant to formulas
set forth in the respective agreements and is generally subject to repayment as
a result of changes in the formula used by the lead underwriter to determine the
market value of the residual interest. The facilities bear interest at a rate
based on the one month LIBOR. The Company intends to add new credit facilities,
as well as expand these credit facilities, in order to finance future
securitization transactions. At March 31, 1998, the balance outstanding under
these facilities was $71.1 million.
The Company's business requires substantial cash to support its operating
activities and growth plans. The Company's negative 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: (1) fees paid to
brokers and correspondents in connection with generating loans through wholesale
lending activities; (2) fees and expenses incurred in connection with the
securitization and sale of loans including over-collateralization requirements
for securitization; (3) commissions paid to sales employees to originate loans;
(4) the difference between the amount funded per loan and the amount advanced
under the current warehouse facility; and (5) 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: (1) the
premium advance component of the aggregation facilities; (2) premiums
15
<PAGE>
obtained in whole loan sales; (3) mortgage origination income and fees; (4)
interest income on loans held for sale; (5) excess cash flow from securitization
trusts; and (6) 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.
For the quarter ended March 31, 1998, the Company's operations used
approximately $18.7 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, residual financing is
excluded.
The Company has a discretionary, non-revolving $5.0 million line of credit
with an affiliate of U.S. Bank secured by the Company's furniture and equipment.
Advances under this facility are made periodically at the discretion of the
lender, and bear interest at a fixed rate established at the time of each
advance for a term of three years. As of March 31, 1998, the balance
outstanding under this facility was $2.9 million, and the weighted-average
interest rate was 9.1%.
The Company has established a $4.0 million unsecured line of credit with U.S.
Bank for working capital purposes. In June 1997, the bank issued a letter of
credit in connection with the lease of the Company's corporate offices. This
letter of credit in the amount of $1.2 million reduces the advances available
under the working capital facility. As of March 31, 1998, the balance
outstanding on the working capital line of credit was zero.
In October 1997, the Company established 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. As of March 31, 1998, the Company
had been advanced $4.7 million under this facility.
The Company's business requires substantial cash to support its operating
activities and growth plans. Securitizations of the Company's loans, as well as
continued growth in loan production volume, create negative operating cash flow
primarily as a result of (1) the difference between the cash required to fund
loans and the financing received under the warehouse line of credit, and (2) the
Company's securitization strategy, pursuant to which cash flows are received
over the life of the loans securitized.
The Company anticipates that its current liquidity, credit facilities and
capital resources will be sufficient to fund its operations for the foreseeable
future.
16
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
The Company occasionally becomes involved in litigation arising in the
normal course of business. Management believes that any liability
with respect to such legal actions, individually or in the aggregate,
will not have a material adverse effect on the Company's financial
position or results of operations.
Item 2. Change in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. (a) Exhibits required by Item 601 of Regulation S-K
See "Exhibit Index."
(b) Reports on Form 8-K
The Company filed a Report on Form 8-K with the Securities and
Exchange Commission on January 26, 1998 reporting the Company's
acquisition on January 12, 1998 of PWF Corporation. No financial
statements were required to be filed with the Report.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
NEW CENTURY FINANCIAL CORPORATION
DATE: May 13, 1998 By: /s/ BRAD A. MORRICE
---------------------------
Brad A. Morrice
President
DATE: May 13, 1998 By: /s/ EDWARD F. GOTSCHALL
---------------------------
Edward F. Gotschall
C.O.O. - Finance
(Principal Financial and Accounting Officer)
18
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
Exhibit Description of Sequentially
Number Exhibit Numbered Page
- ------ ------------ -------------
<S> <C> <C>
* 3.1 First Amended and Restated
Certificate of Incorporation
of the Company
* 3.2 First Amended and Restated
Bylaws of the Company
* 4.1 Specimen Stock Certificate
** 10.1 Merger Agreement, dated as of December 17, 1997,
by and among New Century, NC Acquisition Corp.,
PWF, Kirk Redding and Paul Akers
** 10.2 First Amendment to Merger Agreement, dated
January 12, 1998, by and among New Century,
NC Acquisition Corp., PWF, Kirk Redding and
Paul Akers
***10.3 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
10.4 First Amendment to Founding Managers' Incentive
Compensation Plan, dated March 19, 1998 20
10.5 Letter Agreement dated March 31, 1998 among Salomon
Brothers Realty Corp., Salomon Brothers Inc and
New Century Mortgage Corporation 22
11.1 Statement re Computation of Per Share Earnings 38
27.1 Financial Data Schedule 39
</TABLE>
* Incorporated by reference from the Company's Form S-1 Registration
Statement (No. 333-25483) as filed with the SEC on June 3, 1997.
** Incorporated by reference from the Company's Form 8-K as filed with
the SEC on January 26, 1998.
*** Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1997.
19
<PAGE>
EXHIBIT 10.4
------------
FIRST AMENDMENT
TO THE
NEW CENTURY FINANCIAL CORPORATION
FOUNDING MANAGERS' INCENTIVE COMPENSATION PLAN
(Amended and Restated as of May 24, 1997)
WHEREAS, New Century Financial Corporation (the "Company") maintains the
New Century Financial Corporation Founding Managers' Incentive Compensation Plan
(the "Plan") (capitalized terms shall have the meanings assigned to them in the
Plan);
WHEREAS, the Plan currently requires that Incentive Awards be paid to
Participants in cash, and that Special Incentive Awards be paid to Participants
in shares of Restricted Stock;
WHEREAS, the Board of Directors desires to amend the Plan to give the
Committee the discretion to allow a Participant to elect the form or forms of
consideration, cash or Restricted Stock, in which the Participant would receive
an Incentive Award or Special Incentive Award payment under the Plan;
NOW, THEREFORE, the Plan is hereby amended as follows:
1. The following subsection (e) is hereby added to Section 4.2 of the Plan:
"(e) Notwithstanding Sections 4.2(b) and (c), the Committee may, in
its sole discretion, give any Participant the ability to elect,
on such rules as the Committee may from time to time prescribe,
to receive shares of Restricted Stock in lieu of cash for the
amount of any Incentive Award (or portion thereof) to be
distributed pursuant to Section 4.2(b) or (c). The amount of
Restricted Stock to be issued with respect to an Incentive Award
shall equal the portion of such award otherwise payable in cash
that the Participant elects to receive in the form of Restricted
Stock, divided by the Fair Market Value of a share of Common
Stock as the last trading day of the financial accounting period
for which the Incentive Award is being calculated. Restricted
Stock issued or delivered pursuant to this Section 4.2(e) shall
be evidenced and governed by a Restricted Stock Award Agreement
in substantially the form attached hereto as Exhibit A, and shall
be subject to the provisions of Sections 4.3(b) and 4.3(c) of
this Plan. Only whole shares of Restricted Stock shall be
issued; fractional shares shall be settled in cash. If a
Participant who has received Restricted Stock for some or all of
the Incentive Award payments made for a Performance Year under
Section 4.2(c) is required to repay to the Company any amount
pursuant to Section 4.2(d), the Committee may, in its sole
<PAGE>
discretion, give the Participant the ability to elect to forfeit
shares of Incentive Award Restricted Stock as partial or full
payment of such amounts."
2. The following subsection (d) is hereby added to Section 4.3 of the
Plan:
"(d) Notwithstanding Section 4.2(a), the Committee may, in its sole
discretion, give any Participant the ability to elect, on such
rules as the Committee may from time to time prescribe, to
receive cash in lieu of Restricted Stock for the amount of any
Special Incentive Award (or portion thereof) to be distributed
pursuant to Section 4.3(a).
3. The preceding amendments shall be effective immediately, and shall
apply to the 1997 Performance Year.
IN WITNESS WHEREOF, the Company has caused this Amendment to be
executed by its duly authorized officer as of March 19, 1998.
NEW CENTURY FINANCIAL CORPORATION
By: /s/ BRAD A. MORRICE
----------------------------
Brad A. Morrice
Its: President
<PAGE>
EXHIBIT 10.5
------------
SALOMON BROTHERS REALTY CORP.
Seven World Trade Center
New York, New York 10048
March 31, 1998
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 among New Century Mortgage Corporation ("New
Century"), Salomon Brothers Realty Corp. ("Salomon") and Salomon Brothers Inc
("SBI"), under the terms set forth herein, regarding (i) New Century's agreement
to securitize certain fixed and adjustable rate, one-to-four family, first and
second lien mortgages (the "Mortgage Loans") either (a) using Salomon Brothers
Mortgage Securities VII Inc. ("SBMSI") or (b) pursuant to a shelf registration
filing of New Century in connection with pass-through transfers with respect to
which SBI 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 $1,000,000,000 between April 1, 1998 and March 31, 1999 securitized
through a program of securitizations (the "Securitizations") of AAA and Aaa-
rated mortgage-backed securities (the "Securities") either (i) using SBMSI or
(ii) pursuant to a shelf registration filing of New Century in connection with
passthrough 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
itself or subservice 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
subservicer to the extent that Salomon is not satisfied with the results of such
due diligence. The Mortgage Loans shall be serviced in accordance with the
servicing provisions specified in the Pooling and Servicing Agreement, Series
1997-NC5 dated as of November 1, 1997 among U.S.
<PAGE>
New Century Mortgage Corporation
March 31, 1998 Page 2.
Bank National Association, SBMSI 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. Any Sub-Servicer (including Comerica) shall
execute a letter agreement recognizing Salomon's interest in the Mortgage Loans
in the form of Exhibit A.
(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.
<PAGE>
New Century Mortgage Corporation
March 31, 1998 Page 3.
2. Securitizations.
---------------
(a) In General. As noted above, New Century shall meet its commitment
----------
to Salomon with respect to not less than $1,000,000,000 in Mortgage Loans
between April 1, 1998 and March 31, 1999 by using a shelf registration statement
of SBMSI or New Century pursuant to transactions in which SBI or an affiliate of
SBI shall act as the sole underwriter. Sales of whole Mortgage Loans by New
Century to Salomon shall not be counted toward the $1,000,000,000 commitment.
New Century will pay to SBI promptly upon the closing of each Securitization an
underwriting discount equal to the product of (i) the applicable Underwriting
Fee Percentage (as defined herein) multiplied by (ii) the aggregate unpaid
principal balance of the Mortgage Loans subject to such Securitization (the
"Underwriting Fee"). The "Underwriting Fee Percentage" with respect to each
Securitization shall be three-eighths of one percent (0.375 %); provided
however, the Underwriting Fee Percentage shall be one-fourth of one percent
(0.25 %) if a Securitization is fully wrapped by a bond insurer. If in any six-
month period commencing with the period from April 1, 1998 through September 30,
1998, and thereafter on a semiannual basis, New Century fails to pay SBI a
cumulative Underwriting Fee of at least $1,875,000, New Century shall pay to SBI
on the last business day of such period an amount equal to (i) $1,875,000 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 $1,875,000
shall be carried forward and applied toward New Century's Underwriting Fee
commitment hereunder; provided, further, that the minimum semiannual
Underwriting Fee commitment shall not apply in any such period in which New
Century utilizes SBI as the exclusive underwriter for all securitizations
completed by New Century during such period. In addition, if on March 31, 1999,
New Century has not paid to SBI a cumulative Underwriting Fee of at least
$3,750,000, New Century shall pay to SBI on the last business day of such period
an amount equal to (i) $3,750,000 less (ii) the cumulative Underwriting Fee.
In addition to those fees described above, in the event SBI sells on behalf
of New Century a CE Bond (as defined below), SBI shall receive a fee equal to
2.0 % of the proceeds of the CE Bond, and, if SBI sells on behalf of New Century
a NIMS bond, SBI shall receive a fee equal to 2.0% of the stated principal
balance of such bond.
(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
(including those fees associated with the annual monitoring of previously closed
Securitizations), 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
SBI's), costs of preparing and printing any offering documents and trustee fees,
etc. SBI shall be responsible for the fees and disbursements of its own legal
counsel and any due diligence expenses incurred by SBI. It is understood and
agreed that New Century may require that the parties incurring or charging such
costs and
<PAGE>
New Century Mortgage Corporation
March 31, 1998 Page 4.
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 SBI with all financial and
-----------
other information concerning New Century as SBI deems reasonably appropriate in
connection with the performance of the services contemplated by this letter,
including (without limitation) "Monthly Cash Flow Projections and Sensitivity
Analyses", and in that connection will provide SBI with reasonable access during
normal business hours to New Century's officers, directors, employees,
accountants, and other representatives. New Century acknowledges and confirms
that SBI (i) will rely on such information in the performance of the services
contemplated by this letter without independently investigating or verifying any
of it and (ii) assumes no responsibility for the accuracy or completeness of
such information.
(d) Offering Documents. In connection with each Securitization, New
------------------
Century will be solely responsible for the contents of any private placement
memorandum, prospectus supplement or other offering document used in connection
with the placement of the Securities (as such documents may be amended or
supplemented and including any information incorporated therein by reference,
the "Offering Document") and any and all other written communications provided
by, or authorized to be provided on behalf of, New Century to any actual or
prospective purchaser of the Securities except to the extent such contents of
the Offering Document are provided by SBI 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 SBI
(but as to which SBI 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 SBI for use
specifically in such Offering Document. New Century shall authorize SBI 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 SBI of such event and SBI 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 SBI 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 SBI and each person who controls Salomon within the meaning of either
the Securities Act of 1933, as
<PAGE>
New Century Mortgage Corporation
March 31, 1998 Page 5.
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 SBI or any person who controls
- -------
SBI to the extent that any misstatement or alleged misstatement or omission or
alleged omission was made in reliance upon and in conformity with the
information provided in writing to New Century by SBI 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 SBI
within the meaning of either the Act or the Exchange Act shall have the same
rights to contribution as SBI. 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 SBI in
connection with the transactions contemplated hereby (including, without
limitation, any computer models, cash flow analyses, and any documentation
prepared by counsel for SBI) shall be proprietary to SBI. 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
<PAGE>
New Century Mortgage Corporation
March 31, 1998 Page 6.
or documentation without SBI'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 SBI pursuant to
----------
Sections 1 and 2 of this Letter Agreement, Salomon shall make available to New
Century an aggregation line (the "Aggregation Line") pursuant to which Salomon
shall simultaneously purchase from, and sign a forward commitment to resell to,
New Century Mortgage Loans that are deemed acceptable for such Aggregation Line
as set forth below. 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 but shall
provide for servicing of the Mortgage Loans by New Century and require that,
upon a Termination Event (as defined in Section 5) principal and interest
collections be held in a segregated bank account acceptable to Salomon pending
remittance to 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)(iii) of this Letter Agreement. Unless Salomon provides notice to New
Century and First Bank pursuant to this section, the Purchase Price for each
Standard Mortgage Loan shall be equal to at least 103 % of the unpaid principal
balance of such Standard Mortgage Loan, and the Purchase Price for each other
Mortgage Loan shall be equal to at least the minimum percentage of the unpaid
principal balance of such Mortgage Loan that is specified in the financing
agreements between New Century and First Bank. In order for Salomon to
determine when notice is required to be delivered to First Bank pursuant
<PAGE>
New Century Mortgage Corporation
March 31, 1998 Page 7.
to this section, New Century shall forward to Salomon copies of the financing
agreements between New Century and First Bank.
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 %; provided, however,
with respect to any second lien Mortgage Loans with a combined loan-to-value
ratio greater than 95 % (to a maximum of 125 %) the Aggregation Cost shall equal
One Month LIBOR plus 2.50%. 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, Non-
Standard Mortgage Loans and Mortgage Loans described in Sections 3(c)(ii) and
4(b), at any one time shall be limited to $600 million in amount of Mortgage
Loans and shall have a term of one month. The maximum amount of Problem
Mortgage Loans and Non-Standard Mortgage Loans in the Aggregation Line shall not
exceed $120 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 twice a month (one of which shall be 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
March 31, 1998 Page 8.
(i) the maximum Aggregation Line with respect to Problem Mortgage
Loans shall equal $42 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 sixty-
day period after purchase, 90% of the unpaid principal balance
of the Problem Mortgage Loan as of the date of purchase and (B)
thereafter, 90% 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 sixty-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 95.00 %); 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 $120 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 $42 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 has a loan-to-
value ratio greater than 95 % if it is a first lien or a combined loan-to-value
ratio greater than 125% if it is a second 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 $78 million (of which no more than
$30 million shall have unpaid principal balances greater than
$1,000,000 (including any Problem Loans with unpaid principal
balances greater than $500,000) and no more than $42 million
shall be Mortgage Loans with a loan-to-value ratio in excess of
85.00% (up to a maximum of 95.00%)), as of any trade date on
which there was formal notification of a trade by a
confirmation letter or trade ticket;
<PAGE>
New Century Mortgage Corporation
March 31, 1998 Page 9.
(ii) the maximum Aggregation Line with respect to second lien
Mortgage Loans shall equal $25 million for second lien Mortgage
Loans with a combined loan-to-value ratio in excess of 95.00%
(up to a maximum of 125.00%), as of any trade date on which
there was formal notification of a trade by a confirmation
letter or trade ticket, and Mortgage Loans provided for in this
clause (ii) shall not be applied to the $42 million limit in
the preceding clause (i); and
(iii) with respect to first lien Mortgage Loans, the Purchase Price
for the first sixty days shall be the market value of such
Mortgage Loans as determined by Salomon acting in good faith,
and thereafter, the Purchase Price shall decrease by 20 % of
such market value and by an additional 20 % thereof for each
succeeding month (to zero at the fifth such reduction); and
with respect to second lien Mortgage Loans, the Purchase Price
for the first sixty days shall be the market value of such
Mortgage Loan as determined by Salomon acting in good faith,
and thereafter, the maximum Purchase Price shall decrease by 20
% of such market value and by an additional 20 % thereof for
each succeeding month (to zero at the fifth such reduction).
(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.).
(f) Hedging. New Century agrees to establish one or more securities
-------
or commodities accounts at SBI and to enter into transactions in such accounts
(and only in such accounts) that are intended to hedge the interest rate risk on
the fixed-rate Mortgage Loans included in the Aggregation Line.
4. (a) Financing of CE Bonds. Salomon or an affiliate shall
---------------------
provide a financing facility for the CE bonds (the "CE Bonds") created by the
asset-backed structure on any New Century securitizations which SBI has acted as
the sole underwriter pursuant to this Letter Agreement. Such facility shall
provide for financing at a rate equal to 75% of the present value
<PAGE>
New Century Mortgage Corporation
March 31, 1998 Page 10.
of the CE Bonds, as determined by Salomon. The CE Bonds shall be financed by
Salomon or an affiliate 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, if New Century terminates its relationship with
Greenwich Capital Financial Products, Inc. ("Greenwich"), Salomon or an
affiliate shall provide such facility with respect to the CE bonds created by
New Century's fixed rate transactions with Greenwich. Such terms shall be
acceptable to Salomon. In connection therewith, Salomon agrees to reduce by
one-eighth (0.125 %) of one percent the interest rate on the fixed rate loans
included in the Aggregation Line over the term of this Aggregation Line to the
extent necessary to refund the "termination fee" New Century has agreed to pay
to Greenwich (and to the extent any amounts remain after the termination of the
line, Salomon shall pay such shortfall). Such fee shall be calculated based
upon an assumed underwriting fee of 0.25 % on an assumed deal with an unpaid
principal balance of $100,000,000.
(b) Financing of Trigger Buybacks. Salomon shall purchase under the
-----------------------------
Aggregation Line mortgage loans which are repurchased by New Century based upon
trigger buybacks in effect pursuant to the pooling and servicing agreements for
SBMSVII 1997-NC 1, 1997-NC2, 1997-NC3 and New Century Home Equity Loan Trust
Series 1997-NC5. The maximum aggregate outstanding Purchase Price will be
$10,000,000. Such mortgage loans will be deemed Problem Mortgage Loans in the
Aggregation Line and will be financed by Salomon in the same manner as Problem
Mortgage Loans. The pricing for these purposes will be at the market value as
determined by Salomon acting in good faith.
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;
(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;
<PAGE>
New Century Mortgage Corporation
March 31, 1998 Page 11.
(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 to provide written notification to Salomon of any
change in its loan origination, acquisition or appraisal
guidelines or practices, or New Century, without the prior
consent of Salomon (which shall not be unreasonably withheld),
amends in any material respect its loan origination,
acquisition or appraisal guidelines or practices;
provided, that Salomon shall have the right to dispose of any collateral held by
Salomon pursuant to this Letter Agreement. In connection with a Termination
Event under this Paragraph 5, Salomon shall have the right to transfer servicing
to another servicer (which such servicer shall not be Option One Mortgage
Corporation, Long Beach Mortgage Company or Ameriquest Mortgage Company) without
payment of any fee to New Century; provided, however, Salomon shall pay all
costs associated with such servicing transfer. New Century will cooperate in
good faith to effect such servicing transfer.
<PAGE>
New Century Mortgage Corporation
March 31, 1998 Page 12.
(c) Subject to the provisions of Paragraph 3 of this Letter Agreement,
this Letter Agreement shall terminate upon the earlier of (i) satisfaction of
the $1,000,000,000 commitment and (ii) March 31, 1999; provided that the CE
"repo" facility provided for in Section 4 shall continue under its terms;
provided, further, that Salomon may, in its sole discretion, extend the terms of
this Letter Agreement until such time that New Century has been able to fulfill
its commitment without payment of a termination fee.
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) SBI's Discretion. It is understood that SBI 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. 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 and Salomon shall have the right to approve or disapprove any Mortgage Loan
with an unpaid principal balance in excess of $1,000,000 (for which such
Mortgage Loans, New Century shall have obtained two appraisals).
(b) Governing law. This Letter Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of New York (without regard
to its conflicts of laws principles).
(c) Amendment or Waiver. This Letter Agreement may not be amended or
-------------------
modified except in writing signed by each of the parties hereto.
(d) Counterparts. This Letter Agreement may be executed
------------
simultaneously in any number of counterparts. Each counterpart shall be deemed
to be an original, and all such counterparts shall constitute one and the same
instrument.
<PAGE>
New Century Mortgage Corporation
March 31, 1998 Page 13.
(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.
(h) Termination. Other than those sections intended to survive in the
-----------
letter agreement dated August 27, 1997 between New Century and Salomon
(including those sections related to indemnification), such letter agreement is
hereby terminated.
(i) Expenses. In addition to those expenses set forth in Section 2(a)
--------
above, New Century shall pay subject to prenegotiated caps, all costs and
expenses related to any amendment 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/ Vincent J. Varca
--------------------
Name: Vincent J. Varca
--------------------
Title: Authorized Agent
--------------------
SALOMON BROTHERS INC.
By: /s/ Bruce M. Rose
-----------------
Name: Bruce M. Rose
-----------------
Title: Managing Director
-----------------
ACCEPTED AND AGREED TO
AS OF THE DATE FIRST ABOVE WRITTEN:
By: /s/ Brad A. Morrice
-------------------
Name: Brad A. Morrice
-------------------
Title: CEO
-------------------
<PAGE>
EXHIBIT A
FORM OF RECOGNITION LETTER
Salomon Brothers Realty Corp.
Seven World Trade Center
New York, NY 10048
Attention: Mr. Vincent Varca
Facsimile No. (212) 783-3895
Re: [Name and Date of] Servicing Agreement ("Agreement") between
[Name of Sub-Servicer] and New Century Mortgage Corporation
Gentlemen:
The undersigned, __________ ("Sub-Servicer"), having an address at
__________________, _________ Attention: __________, has been informed by New
Century Mortgage Corporation ("New Century") that New Century from time to time
enters into transactions with you ("SBRC") in which SBRC purchases mortgage
loans serviced by SubServicer for New Century pursuant to the captioned
Agreement, and New Century agrees to repurchase such mortgage loans on specified
future dates (the agreement that provides for such purchases and repurchases,
the "Purchase and Sale Agreement"). New Century has requested that Sub-Servicer
provide this letter agreement to SBRC in order to, and Sub-Servicer hereby
agrees to, acknowledge that SBRC shall have the right, upon a written notice to
Sub-Servicer of a default by New Century under the Purchase and Sale Agreement
and written notice to Sub-Servicer from First Bank National Association
("Custodian") that Custodian holds specified mortgage loans (the "Salomon
Loans") for SBRC, to succeed immediately to New Century's rights under the
Agreement. New Century hereby agrees to indemnify Sub-Servicer for any loss,
liability, damage, judgement, cost or expense in any way related to the exercise
of such right by SBRC with respect to the Salomon Loans.
Yours sincerely,
[SUB-SERVICER]
By: __________________
Name: ________________
Title: _______________
<PAGE>
New Century Mortgage Corporation
March 31, 1998 Page 16.
NEW CENTURY MORTGAGE
CORPORATION
By: __________________
Name: ________________
Title: _______________
Acknowledged and agreed:
SALOMON BROTHERS REALTY CORP.
By: _________________________
Name: _______________________
Title: ______________________
<PAGE>
EXHIBIT 11.1
New Century Financial Corporation
Statement Re Computation of Per Share Earnings
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1998 1997
----------------------------
<S> <C> <C>
Basic:
Net earnings $ 6,233,000 $ 2,347,000
============================
Weighted average common shares outstanding 14,004,153 528,618
----------------------------
Earnings per share $ 0.45 $ 4.44
============================
Diluted:
Net earnings $ 6,233,000 $ 2,347,000
============================
Weighted average number of common and common
equivalent shares outstanding:
Weighted average common shares outstanding 14,004,153 $ 528,618
Dilutive effect of convertible preferred stock,
stock options and warrants, after application 960,282 8,894,007
----------------------------
14,964,434 9,422,625
Earnings per share $ 0.42 $ 0.25
============================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES FOR
THE THREE-MONTH PERIOD ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 9,173,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 257,094,000
<CURRENT-ASSETS> 0
<PP&E> 6,480,000
<DEPRECIATION> 1,755,000
<TOTAL-ASSETS> 404,449,000
<CURRENT-LIABILITIES> 0
<BONDS> 322,652,000
0
0
<COMMON> 144,000
<OTHER-SE> 69,178,000
<TOTAL-LIABILITY-AND-EQUITY> 404,449,000
<SALES> 24,319,000
<TOTAL-REVENUES> 38,448,000
<CGS> 0
<TOTAL-COSTS> 18,910,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,709,000
<INCOME-PRETAX> 10,829,000
<INCOME-TAX> 4,596,000
<INCOME-CONTINUING> 6,233,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,233,000
<EPS-PRIMARY> 0.45
<EPS-DILUTED> 0.42
</TABLE>
