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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
NEW CENTURY FINANCIAL CORPORATION
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(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange
Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration statement
number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(4) Date Filed:
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Notes:
<PAGE>
New Century Financial Corporation
18400 Von Karman, Suite 1000
Irvine, California 92612
----------------
Notice of Annual Meeting of Stockholders
May 17, 1999
----------------
New Century Financial Corporation, a Delaware corporation (the "Company"),
will hold its Annual Meeting of Stockholders on May 17, 1999 at 9:00 a.m. at
the Doubletree Hotel, 3050 Bristol Street, Costa Mesa, California, to consider
and vote on:
1. Re-election of three directors for three-year terms ending in 2002;
2. Approval of KPMG LLP as the Company's independent auditors for 1999;
3. Approval of an amendment to the Company's 1995 Stock Option Plan to
increase the number of shares authorized to be issued under the plan
by 500,000 shares, from 2,500,000 shares to 3,000,000 shares;
4. Approval of the Company's 1999 Incentive Compensation Plan; and
5. Any other business as may properly come before the meeting.
The Board of Directors has fixed March 19, 1999 as the record date for the
meeting, and only the holders of record of Common Stock and Series 1998A
Convertible Preferred Stock at the close of business on that date are entitled
to receive notice of and vote at the meeting.
Please sign the enclosed proxy card and return it without delay in the
enclosed postage-paid envelope. If you attend the meeting, you may withdraw
your proxy and vote personally on each matter.
By Order of the Board of Directors
/s/ BRAD A. MORRICE
Brad A. Morrice
Secretary
Irvine, California
April 8, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
Notice of Annual Meeting................................................... 1
Questions and Answers...................................................... 3
Proposals You May Vote On.................................................. 6
Proposal 1--Election of Directors........................................ 6
Proposal 2--Approval of Independent Public Accountants................... 6
Proposal 3--Amendment to Increase Shares Available Under the Stock Option
Plan.................................................................... 7
Summary of Stock Option Plan........................................... 8
Proposal 4--Approval of 1999 Incentive Compensation Plan................. 13
Summary of 1999 Incentive Compensation Plan............................ 15
Board of Directors and Committees of the Board............................. 17
Director Biographical Information........................................ 17
Directors Designated by U.S. Bancorp..................................... 19
Certain Relationships and Related Transactions........................... 19
Committees of the Board.................................................. 19
Attendance at Board and Committee Meetings............................... 19
Compensation of Directors................................................ 20
Security Ownership of Principal Stockholders and Management................ 21
Executive Compensation..................................................... 23
Summary Compensation Table............................................... 23
Option Grants in Last Fiscal Year........................................ 24
Aggregated Option Exercises in Last Fiscal and Fiscal Year-End Option
Values.................................................................. 25
Employment Agreements and Change-in-Control Arrangements................. 25
Compensation Committee Interlocks and Insider Participation.............. 27
Section 16(a) Beneficial Ownership Reporting Compliance.................. 27
Report of Compensation Committee........................................... 28
Overall Compensation Policies............................................ 28
Stock-Based Compensation................................................. 29
Consideration of Tax Implications........................................ 29
1998 Executive Compensation.............................................. 29
Conclusion............................................................... 30
Performance Graph.......................................................... 31
Appendix A -- 1999 Incentive Compensation Plan............................. A-1
</TABLE>
2
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
----------------
PROXY STATEMENT
----------------
We are sending this Proxy Statement to you, the stockholders of New Century
Financial Corporation (the "Company"), as part of the Board of Directors'
solicitation of proxies to be voted at the Company's Annual Meeting of
Stockholders at 9:00 a.m. on May 17, 1999, and at any adjournments of the
meeting. The Annual Meeting will take place at the Doubletree Hotel at 3050
Bristol Street, Costa Mesa, California 92626.
We are mailing this Proxy Statement and proxy card on or about April 8,
1999. We are also enclosing a copy of our 1998 Annual Report to Stockholders,
which includes the Company's 1998 financial statements. The Annual Report is
not, however, part of the proxy materials.
QUESTIONS AND ANSWERS
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Q: What am I voting on?
A: (1) Re-election of three directors (Brad A. Morrice, Michael M. Sachs and
Terrence P. Sandvik);
(2) Approval of KPMG LLP as the Company's independent auditors for 1999;
(3) Approval of an amendment to the Company's 1995 Stock Option Plan to
increase the number of shares authorized to be issued under the plan by
500,000 shares (see page 7 for details); and
(4) Approval of the Company's 1999 Incentive Compensation Plan (see page 13
for details).
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Q: How does the Board recommend I vote on the proposals?
A: The Board recommends you vote FOR each of the nominees and FOR each of the
other three proposals.
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Q: Who is entitled to vote at the meeting?
A: Stockholders of record as of the close of business on March 19, 1999 (the
Record Date) are entitled to vote.
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Q: How do I vote?
A: Sign and date each proxy card you receive and return it in the prepaid
envelope. If you return your signed proxy card but do not mark the boxes
showing how you wish to vote, your shares will be voted FOR each of the
three director nominees and FOR each of the other three proposals. You have
the right to revoke your proxy at any time before your shares are actually
voted at the Annual Meeting by:
(1) notifying the Company's Corporate Secretary in writing;
(2) signing and returning a later-dated proxy card; or
(3) voting in person at the Annual Meeting.
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Q: How will voting on any other business be conducted?
A: Other than the four proposals described in this Proxy Statement, we know of
no other business to be considered at the Annual Meeting. However, if any
other matters are properly presented at the meeting, your signed proxy card
authorizes Robert K. Cole, the Company's Chairman and Chief Executive
Officer, and Brad A. Morrice, the Company's Vice Chairman, President and
Secretary, to vote on those matters according to their best judgment.
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Q: Who will count the vote?
A: Representatives of U.S. Stock Transfer Corporation, the independent
Inspector of Elections, will count the votes.
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3
<PAGE>
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Q: What does it mean if I receive more than one proxy card?
A: It probably means your shares are registered differently and are in more
than one account. Sign and return all proxy cards to ensure that all your
shares are voted.
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Q: How many shares can vote?
A: As of the Record Date, 14,601,462 shares of Common Stock and 20,000 shares
of Series 1998A Convertible Preferred Stock were issued and outstanding.
Holders of Common Stock are entitled to one vote per share for each matter
before the meeting. Holders of Preferred Stock are entitled to 136.24 votes
per share for each matter before the meeting. In other words, the 20,000
shares of Preferred Stock have the voting power of 2,724,800 shares of
Common Stock. Therefore, there were a total of 17,326,262 eligible votes as
of the Record Date.
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Q: What constitutes a "quorum"?
A: The holders of a majority of the voting power of the shares entitled to
vote at the meeting, present in person or represented by proxy, constitutes
a quorum. Since there were 17,326,262 eligible votes as of the Record Date,
we will need at least 8,663,132 votes present in person or by proxy at the
Annual Meeting for a quorum to exist.
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Q: What happens if I abstain?
A: If you submit a properly signed proxy card, but you abstain on one or more
proposals, you will still be considered present for purposes of calculating
a quorum. However, your abstention will not count "for" or "against" any
matter, and will be disregarded in calculation of a plurality or of "votes
cast."
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Q: How will "broker non-votes" be treated?
A: "Broker non-votes" are shares held by brokers or nominees for which the
broker or nominee (i) lacks discretionary power to vote and (ii) never
received specific voting instructions from the beneficial owner of the
shares. Broker non-votes are counted as present and entitled to vote for
purposes of calculating a quorum. However, when the broker or nominee notes
on the proxy card that it lacks discretionary authority to vote shares on a
particular matter, those shares will be treated as not present and not
entitled to vote on that matter.
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Q: Who can attend the Annual Meeting?
A: All stockholders as of March 19, 1999 can attend the Annual Meeting,
although seating is limited. If you plan to attend, please check the box on
your proxy card. If your shares are held through a broker and you would
like to attend, (1) please write or e-mail Carrie Marrelli, our Vice
President of Investor Relations, at 18400 Von Karman, Suite 1000, Irvine,
California 92612; [email protected] and (2) for voting purposes, please
bring a copy of your brokerage account statement or an omnibus proxy (which
you can get from your broker) to the meeting.
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Q: When are Stockholder Proposals Due for the 2000 Annual Meeting?
A: If you are submitting a proposal to be included in next year's proxy
statement pursuant to Rule 14a-8 under the Securities Exchange Act of 1934,
we must receive the proposal by December 10, 1999. If you are submitting a
proposal outside of Rule 14a-8, we must receive it not less than 60 nor
more than 90 days before the annual meeting in order for the proposal to be
brought before the meeting.
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4
<PAGE>
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Q: How will the Company solicit proxies for the Annual Meeting?
A: We are soliciting proxies by mailing this Proxy Statement and proxy card to
the stockholders. In addition to solicitations by mail, some of the
Company's directors, officers and regular employees may, without extra pay,
make additional solicitations by telephone or in person. The Company will
pay the solicitation costs, and will reimburse banks, brokerage houses and
other custodians, nominees and fiduciaries for their reasonable expenses in
forwarding proxy materials to beneficial owners. The Company may also
engage a proxy solicitation company in connection with the Annual Meeting
for a fee which is not expected to exceed $2,500 plus out-of-pocket
expenses.
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Q: How do I obtain a copy of the Annual Report on Form 10-K that the Company
filed with the Securities and Exchange Commission?
A: Our 10-K is actually part of the Annual Report that is being mailed to you
with this Proxy Statement. If, for whatever reason, you need another copy,
please write to Carrie Marrelli, Vice President--Investor Relations, at
18400 Von Karman, Suite 1000, Irvine, California 92612.
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5
<PAGE>
PROPOSALS YOU MAY VOTE ON
----------------
PROPOSAL 1
ELECTION OF DIRECTORS
----------------
At the Annual Meeting, you will be asked to elect three directors for terms
of three years or until their successors are elected. You are entitled to one
vote per share for each of the three directors to be elected. The three
candidates receiving the highest number of votes will be elected.
The nominees for election are Brad A. Morrice, Michael M. Sachs and Terrence
P. Sandvik. Each nominee is a member of the Company's Board of Directors. The
Company's stockholders elected Mr. Morrice and Mr. Sachs to their current
terms in office. The Board of Directors appointed Mr. Sandvik as a director to
fill a vacancy in February 1999. Each nominee has consented to be named in
this Proxy Statement and to serve as a director if elected. (See page 17 for
additional information about the nominees).
If any nominee becomes unavailable for any reason, the persons named in the
proxy card will vote for the candidate the Board selects to replace the
nominee.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU
VOTE "FOR" THE THREE NOMINEES.
----------------
PROPOSAL 2
APPROVAL OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------
The Board of Directors has appointed KPMG LLP as independent auditors of the
Company for the fiscal year ending December 31, 1999, and seeks your approval
of this decision. KPMG LLP has served as the Company's independent auditors
since the Company's formation in 1995.
A KPMG representative will attend the Annual Meeting to answer appropriate
questions and make a statement if he or she so desires.
Approval of this proposal requires the affirmative vote of the holders of a
majority of the voting power present in person or by proxy and entitled to
vote at the meeting. If the stockholders do not approve KPMG LLP as
independent auditors, the Board will reconsider the selection of independent
auditors.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU
VOTE "FOR" APPROVAL OF THIS PROPOSAL.
6
<PAGE>
PROPOSAL 3
----------------
AMENDMENT TO INCREASE SHARES AVAILABLE UNDER
THE STOCK OPTION PLAN
----------------
The Proposed Amendment
The Company's 1995 Stock Option Plan (referred to as the "Stock Option
Plan") helps attract, motivate and retain officers and key employees through
stock options and other incentive awards. On February 18, 1999, the Board of
Directors adopted an amendment to the Stock Option Plan increasing the number
of shares of the Company's Common Stock authorized to be issued under the Plan
from 2,500,000 to 3,000,000 shares (an increase of 500,000 shares). The
stockholders must approve the amendment before it can take effect.
Why does the Plan need more shares?
We believe that there are not enough shares left available under the Stock
Option Plan to accomplish its objectives.
At March 15, 1999, awards covering 2,044,453 shares of Common Stock were
outstanding, while only 264,830 shares remained available for Stock Option
Plan award grants. We believe that the remaining 264,830 shares are
insufficient to provide the Board the flexibility necessary to attract and
retain officers and key employees through the grant of awards under the Stock
Option Plan. In 1998 alone the Company granted Stock Option Plan awards
covering 500,900 shares under the Plan.
As a result, the Board believes a 500,000-share increase in the number of
shares available for issuance under the Stock Option Plan is desirable and in
the Company's best interests.
Specific Benefits
The future number, amount and type of awards to be received by or allocated
to eligible persons under the Stock Option Plan, as amended by this proposal,
cannot be determined at this time. If the additional 500,000 shares
contemplated by this proposal had been available for Stock Option Plan
purposes in 1998, the Company expects that awards would not have been
substantially different from those reported in the Summary Compensation Table
and Option Grants In Last Fiscal Year Table under "Executive Compensation," on
pages 23 and 24 below.
Vote Required for Approval
Approval of this proposal requires the affirmative vote of the holders of a
majority of the voting power present in person or represented by proxy and
entitled to vote at the meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE "FOR" APPROVAL OF THIS
PROPOSED AMENDMENT TO THE STOCK OPTION PLAN.
7
<PAGE>
SUMMARY OF THE STOCK OPTION PLAN
In order to help you evaluate Proposal 3, below we have summarized the Stock
Option Plan's key features. Because this is only a summary, it does not
contain all the information that may be important to you in considering
Proposal 3.
The full text of the Stock Option Plan is available on the Securities and
Exchange Commission's website at http://www.sec.gov. You may also receive a
free copy of the Plan by writing Carrie Marrelli, Vice President-- Investor
Relations at 18400 Von Karman, Suite 1000, Irvine, California 92612.
Capitalized terms used in the summary have the meanings specified in the
Stock Option Plan.
General
The Company adopted the Stock Option Plan in December 1995. Its purpose is
to promote the Company's success by providing a means to attract, motivate and
retain key employees, consultants, advisors and directors.
Grant of Awards under the Plan
Under the Stock Option Plan, awards ("Awards") may consist of any
combination of stock options (incentive or nonqualified), restricted stock,
stock appreciation rights ("SARs") and performance share awards. The Company
can grant Awards to officers, key employees and consultants of the Company. In
addition, directors who are not employees or officers of the Company ("Non-
Employee Directors") are eligible for automatic option grants under the Stock
Option Plan. Approximately 1,500 people are currently eligible to receive
Awards under the Stock Option Plan.
The Stock Option Plan currently authorizes 2,500,000 shares of the Company's
Common Stock for issuance. No participant may receive more than 500,000 shares
covered by options, SARs and performance share awards in a calendar year.
Section 6.2 of the Plan describes the customary circumstances under which
these limits and the other share limits under the Stock Option Plan may be
adjusted (for example, in connection with stock splits, stock dividends,
exchanges of shares and similar events affecting the Common Stock).
As of March 15, 1999, the Company had granted options to purchase a total of
2,604,620 shares of Common Stock under the Stock Option Plan (of which options
covering 2,044,453 shares remained outstanding and of these, options to
acquire 843,928 shares were vested). These numbers include options to purchase
an aggregate of 55,000 shares granted to Non-Employee Directors and options to
purchase an aggregate of 956,220 shares granted to Messrs. Cole, Morrice,
Gotschall and Holder.
Non-Transferability
Generally, Awards may not be sold, assigned, pledged, encumbered or
otherwise transferred. In other words, during his or her lifetime, only the
participant who was granted the Award may exercise it. However, the
Compensation Committee may, for estate and/or tax planning purposes, allow a
participant's relatives or related entities to exercise the participant's
Awards.
Administration
Awards under the Stock Option Plan are recommended by management and
approved by the Compensation Committee.
The Board of Directors appoints the Compensation Committee. The Committee
has the authority to interpret the Stock Option Plan and any Award agreements,
prescribe, amend and rescind rules and regulations relating to the Stock
Option Plan's administration, accelerate or extend the vesting or
exercisability or extend the term of any or all outstanding Awards (within the
maximum 10 year limit on the term of Awards), and make all other decisions
necessary or desirable for the Stock Option Plan's administration. The current
members of the Compensation Committee are identified on page 19.
8
<PAGE>
Stock Options
The Committee may grant two types of stock options under the Stock Option
Plan--nonqualified stock options and incentive stock options (those intended
to qualify under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code")). Incentive stock options may only be granted to employees of the
Company.
The Compensation Committee determines the exercise price, vesting
provisions, and terms of options. However, the exercise price of incentive
stock options cannot be less than the fair market value of the Common Stock on
the date of grant (110% if granted to an employee who owns 10% or more of the
Common Stock).
Non-Employee Director Program
The Stock Option Plan contains a separate program for automatic option
grants to Non-Employee Directors. Under this program, upon initial election or
appointment to the Board, each individual who is not then an employee or
director of the Company and who is elected or appointed to the Board of
Directors will be granted a nonqualified stock option to purchase 15,000
shares of Common Stock (subject to adjustment as described above).
The purchase price per share for each Non-Employee Director option equals
the fair market value of the Common Stock on the grant date. The shares
subject to a Non-Employee Director's option become exercisable in equal
installments on each of the first three anniversaries of the grant date.
These options are granted for 10 year terms, but will terminate earlier if
the director ceases to be a member of the Company's Board.
When U.S. Bancorp's two designees--Messrs. Partel and Sandvik--were
appointed to the Board, the Board of Directors decided that they should not be
considered Non-Employee Directors under the Stock Option Plan because they
were serving on the Board as part of their employment responsibilities at U.S.
Bancorp.
Restricted Stock Awards
Under the Plan, the Compensation Committee may also award restricted stock,
establishing whatever restrictions on the stock subject to the awards as it
deems appropriate. However, the restrictions must not terminate earlier than
six-months after the grant date.
Each restricted stock award agreement must specify the following:
(i) the number of shares of Common Stock subject to
the award,
(ii) the grant date,
(iii) the price, if any, to be paid for the restricted
shares by the participant,
(iv) whether and to what extent the cash consideration
paid for the shares must be returned upon any
forfeiture of the restricted shares, and
(v) the restrictions imposed on the shares.
Shares subject to restricted stock awards are nontransferable.
Stock Appreciation Rights
The Committee may grant SARs two ways--in connection with stock options or
separately. SARs granted with stock options provide for payments to the holder
based upon increases in the Common Stock price over the exercise price of the
related option on the exercise date. The Compensation Committee may elect to
pay SARs in cash, Common Stock or in a combination of cash and Common Stock.
9
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Performance Share Awards
The Compensation Committee may grant performance share awards based on
whatever factors it deems appropriate. The Compensation Committee will specify
the number of shares of Common Stock subject to the award, the price, if any,
to be paid for such shares by the participant and the conditions upon which
the issuance to the participant will be based.
Performance-Based Awards
The Stock Option Plan also permits the Compensation Committee to grant other
Awards ("Performance-Based Awards") which are intended to qualify as
"performance-based compensation" under Section 162(m) of the Code. Options and
SARs granted at fair market value are intended to qualify as Performance-Based
Awards. In addition, other share-based awards may be granted under the Stock
Option Plan that are intended to qualify as Performance-Based Awards. The
Stock Option Plan also provides for grants of Performance-Based Awards that
are not linked to or payable in the Company's stock, but are payable only in
cash ("Cash-Based Awards").
Only the Company's executive officers may receive Performance-Based Awards.
The maximum number of shares of Common Stock which may be delivered pursuant
to all Awards that are granted as Performance-Based Awards to any participant
in any calendar year may not exceed 500,000 shares (subject to adjustment as
described above). The annual aggregate amount of compensation that may be paid
to any participant in respect of Cash-Based Awards may not exceed $1,000,000.
The performance goals and performance targets applicable to Performance-
Based Awards will be determined by the Compensation Committee and may be based
on one or more of the following criteria--Cash Flow, Earnings Per Share, Gain
on Sale of Loans (the gain recognized by the Company on loans sold through
whole loan transactions or securitizations), Loan Production Volume (loans
funded during a given period), Loan Quality (the percentage of the Company's
loans in a given period that command a premium price), Return on Equity, and
Total Stockholder Return (each as defined in Article VII of the Stock Option
Plan). These goals will be applied over performance cycles specified by the
Compensation Committee. Specific cycles and target levels of performance, as
well as the award levels, will be determined by the Compensation Committee not
later than the applicable deadline under Section 162(m) of the Code and in any
event at a time when achievement of such targets is substantially uncertain.
Appropriate adjustments to goals and targets may be made by the Compensation
Committee based upon objective criteria in the case of certain events that
were not anticipated at the time goals were established. The Company believes
that specific performance targets (when established) are likely to constitute
confidential business information, the disclosure of which may adversely
affect the Company or mislead the public.
The Compensation Committee must certify the achievement of the applicable
performance goals and the actual amount payable to each participant under
Performance-Based Awards prior to payment. The Compensation Committee may
retain discretion to reduce, but not increase, the amount payable under a
Performance-Based Award, notwithstanding the achievement of targeted
performance goals. Performance-Based Awards may be fully accelerated or the
Compensation Committee may provide for partial credit in the event of certain
circumstances that the Compensation Committee may determine.
10
<PAGE>
Continuation of Employment
The following table generally describes how different types of Awards under
the Stock Option Plan are usually treated in the event the participant ceases
to be an employee of the Company:
<TABLE>
<CAPTION>
Type of Award Event Consequences
------------- ----- ------------
<C> <C> <S>
Options not yet Termination of employment for any Options lapse
exercisable reason immediately
Options that are Termination of employment for any Options must be
exercisable reason other than retirement, total exercised within 30 days
disability, death or discharge for cause after such date
Discharge for Cause Options lapse
immediately
Retirement, total disability, death Options must be
exercised within 3
months of termination
date, or such shorter
period provided in the
award agreement
SARs granted with Termination of employment for any Have the same
options reason termination provisions
as the options to which
they relate
SARs granted without Termination of employment for any The SARs will be
options reason governed by the
applicable award
agreement
Restricted Stock Termination of employment for any Unvested shares will be
reason forfeited according to
the terms of the
applicable award
agreement
Performance Share Termination of employment for any Shares of Common Stock
Award reason subject to the award
will be forfeited
according to the terms
of the applicable award
agreement to the extent
the shares have not been
issued or become
issuable on the date of
termination
</TABLE>
Acceleration of Awards
Unless the Board decides beforehand that there will be either no
acceleration or limited acceleration of Awards, if the Company's stockholders
approve any one of the following events each option and related SAR will
become immediately exercisable, restricted stock will immediately vest and the
number of shares or an amount of cash covered by each performance share award
will be issued or paid to the participant: (i) the Company's dissolution or
liquidation, (ii) certain mergers or consolidations of the Company, or (iii)
the sale of substantially all of the Company's business assets.
Termination of or Changes to the Stock Option Plan
The authority to grant new Awards under the Stock Option Plan will terminate
in December 2005, unless the Board terminates the Stock Option Plan prior to
that time. The Stock Option Plan's termination typically will not affect
rights of participants that accrued prior to the termination.
The Board of Directors and the Compensation Committee generally may amend
the Stock Option Plan and outstanding Awards. Generally, the Stock Option Plan
may not be amended without stockholder approval to (i) increase the maximum
number of shares which may be delivered pursuant to Awards, (ii) materially
increase the benefits accruing to participants thereunder, or (iii) materially
change the requirements as to the eligibility to participate in the Plan.
11
<PAGE>
Federal Income Tax Consequences
With respect to nonqualified stock options, the Company is generally
entitled to deduct an amount equal to the difference between the option
exercise price and the fair market value of the shares at the time of
exercise. With respect to incentive stock options, the Company is generally
not entitled to a similar deduction either upon grant of the option or at the
time the option is exercised. The current federal income tax consequences of
other awards authorized under the Stock Option Plan generally follow certain
basic patterns: SARs are taxed and deductible when paid in an amount equal to
the value of the payment; nontransferable restricted stock subject to a
substantial risk of forfeiture results in income recognition equal to the
excess of the fair market value of the stock over the purchase price only at
the time the restrictions lapse (unless the recipient elects to accelerate
recognition as of the date of grant); performance share awards generally are
subject to tax at the time of payment; unconditional stock bonuses are
generally subject to tax measured by the value of the payment received; and
Cash-Based Awards generally are subject to tax at the time of payment; in each
of the foregoing cases, the Company will generally have a corresponding
deduction at the time the participant recognizes income. If an Award is
accelerated under the Stock Option Plan, the Company may not be permitted to
deduct the portion of the compensation attributable to the acceleration.
Furthermore, if the compensation attributable to Awards is not "performance-
based" within the meaning of Section 162(m) of the Code, the Company may not
be permitted to deduct such compensation in certain circumstances.
The above tax summary is based upon federal income tax laws in effect on
March 15, 1999.
12
<PAGE>
PROPOSAL 4
APPROVAL OF 1999 INCENTIVE COMPENSATION PLAN
The Proposal
At the Annual Meeting, you will be asked to approve the New Century
Financial Corporation 1999 Incentive Compensation Plan (the "Incentive
Compensation Plan"). On February 18, 1999, the Board adopted the 1999
Incentive Compensation Plan, subject to stockholder approval of such plan at
the Annual Meeting.
What are the Purposes of the Incentive Compensation Plan?
The Incentive Compensation Plan empowers the Compensation Committee to
establish incentive bonuses for the Company's executive officers and other
senior managers tied to their achievement of pre-established performance
targets. Incentive bonuses paid under the Incentive Compensation Plan are
intended to qualify as "performance-based compensation" under Section 162(m)
of the Code ("Section 162(m)").
Section 162(m) limits the tax deductibility of compensation that is not
"performance-based" if the amount of the aggregate non performance-based
compensation exceeds $1 million in certain circumstances. By permitting the
Company to grant bonus incentives that are intended to qualify as
"performance-based" compensation, the Plan will help the Company to preserve
the tax deductibility of compensation should the $1 million threshold ever be
exceeded.
The Incentive Compensation Plan is also consistent with the Company's and
the Compensation Committee's goal of linking a substantial proportion of
executive officers' and other senior managers' compensation to achievement of
the Company's financial and operational goals.
How does this proposal affect the Founding Managers' Incentive Compensation
Plan?
The new Plan replaces the Company's Founding Managers' Incentive
Compensation Plan (the "Founders Plan"). Until now, bonuses paid under the
Founders Plan were intended to be exempt from the Section 162(m) limits
because the Founders Plan was in place prior to the Company's initial public
offering of Common Stock. However, the Company's ability to rely on this
exemption is limited. As a result, the Compensation Committee, in consultation
with senior management, decided that a new plan would be in the Company's best
interests to help ensure the tax deductibility of compensation paid by the
Company.
Specific Awards
The Compensation Committee granted certain awards under the Incentive
Compensation Plan to Messrs. Cole, Morrice, Gotschall and Holder (the
"Founding Managers") in lieu of each executive's continued participation in
the Founders Plan. These awards, summarized below, were granted on February
10, 1999 and were conditioned on stockholder approval of the Incentive
Compensation Plan.
<TABLE>
<CAPTION>
Name and Directors Dollar Value ($)(1)
------------------ -------------------
<S> <C>
Robert K. Cole....................................... $ 666,666
Chairman and Chief Executive Officer
Brad A. Morrice...................................... $ 666,666
Vice Chairman, President and Secretary
Edward F. Gotschall.................................. $ 666,666
Vice Chairman and Chief Financial Officer
Steven G. Holder..................................... $ 666,666
Vice Chairman and Chief Operating Officer-
Production/Operations
----------
Executive Group...................................... $2,666,664
</TABLE>
(1) The Awards are tied to achievement of pre-determined return on equity
targets established by the Compensation Committee for the six months ended
June 30, 1999 and the twelve months ended December 31, 1999. If the
Company achieves the targeted return on equity, each of the Founding
Managers will receive an aggregate bonus of $666,666. The return on equity
targets are based on a sliding scale, with a minimum threshold below which
no bonus will be paid. Thus, the actual bonus paid may be higher or lower,
depending on the Company's actual return on equity for the performance
periods, and in each case subject to the limits of the Incentive
Compensation Plan described in the following pages.
13
<PAGE>
The number, amount and type of other Awards to be received by or allocated
to Eligible Persons under the Incentive Compensation Plan cannot be determined
at this time. If the Incentive Compensation Plan had been in effect in 1998,
the Company expects that compensation levels would not have been substantially
different from those described in the Summary Compensation Table on page 23.
What happens if the Stockholders do not approve the Plan?
It is possible that compensation (in the form of base salary, bonuses,
incentive and other compensation) paid by the Company to one or more of its
officers may, in the future, exceed $1 million per year. If the stockholders
do not approve the Incentive Compensation Plan, bonuses paid by the Company in
the future will not be "performance-based" within the meaning of Section
162(m) and will not be tax deductible to the Company to the extent that (when
combined with other non-exempt compensation paid to such officers) they exceed
the Section 162(m) $1 million limit.
Vote Required for Approval
Approval of this proposal requires the affirmative vote of the holders of a
majority of the voting power present in person or represented by proxy and
entitled to vote at the meeting.
Recommendation
The Board believes that the Incentive Compensation Plan helps to advance the
Company's existing policy to closely relate a substantial portion of executive
compensation to the Company's performance, while allowing the Company to
preserve the tax deductibility of executive compensation.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU
VOTE "FOR" APPROVAL OF 1999 INCENTIVE COMPENSATION PLAN.
14
<PAGE>
SUMMARY OF THE 1999 INCENTIVE COMPENSATION PLAN
Below is a summary of the Incentive Compensation Plan's key features.
Because it is only a summary, it does not contain all the information that may
be important to you in considering Proposal 4.
The full text of the Incentive Compensation Plan is attached as Appendix A
to this Proxy Statement. Capitalized terms used in the summary have the
meanings specified in the Incentive Compensation Plan.
Purpose
The Incentive Compensation Plan's purpose is to promote the success of the
Company by providing to participating Eligible Persons bonus incentives that
qualify as "performance-based" compensation within the meaning of Section
162(m) of the Internal Revenue Code.
Administration
The Incentive Compensation Plan will be administered by a committee
appointed by the Board (the "Committee"). The Board has appointed the
Compensation Committee as the "Committee" under the Incentive Compensation
Plan. The current members of the Committee are identified on page 19. The
Committee has the authority to select Participants, determine Performance
Periods, select Business Criteria, and establish Performance Targets. The
Committee also has the authority to administer, construe, and interpret the
Incentive Compensation Plan, amend and rescind rules for administering the
Incentive Compensation Plan, and make all other determinations necessary or
advisable for the administration of the Incentive Compensation Plan. The
Incentive Compensation Plan will not limit the authority of the Board or the
Committee to grant awards or authorize any other compensation under any other
plan or authority (including the 1995 Stock Option Plan).
Eligibility and Plan Limits
Any officer of the Company or its Subsidiaries, or of any division of the
Company or its Subsidiaries (each an "Eligible Person"), may be granted an
Award (or Awards) by the Committee under the Incentive Compensation Plan. A
maximum amount of $5 million may be paid with respect to all Awards granted
under the Incentive Compensation Plan in any calendar year to any one Eligible
Person. As of March 15, 1999, there were approximately thirty Eligible
Persons.
Plan Awards
Under the Incentive Compensation Plan, the Committee may grant "performance-
based" Awards to Eligible Persons. These Awards will be based on the
performance of the Company and/or one or more of its subsidiaries, divisions,
segments or units.
The Business Criteria with respect to which Performance Targets may be
established include the following: Before-Tax Net Income, Cash Flow, Corporate
Overhead Costs, Delinquency Rates, Earnings Per Share, Employees, Gain on Sale
of Loans, Liquidity Management, Loan Losses, Loan Production Volume, Loan
Quality, Origination Expenses, Origination Revenues, Residual Performance,
Total Stockholder Return and Total Stockholders' Equity (in each case as
defined in Appendix A to the Incentive Compensation Plan), or any combination
thereof.
Awards are payable only if performance reaches specific, pre-established
Performance Targets approved by the Committee in advance of applicable
deadlines under the Code and while the performance relating to the goals
remains substantially uncertain (except that the payment of Awards may be
accelerated under certain circumstances following a Change in Control of the
Company, as described in Section 6.3(b) of the Incentive Compensation Plan).
Performance Targets will generally be adjusted to the extent permitted by
Section 162(m) to reflect certain changes affecting the Company, including
reorganizations, liquidations, capitalizations and accounting changes.
15
<PAGE>
Concurrently with the selection of the Performance Targets, the Committee
must establish an objective formula or standard for calculating the maximum
Bonus which may become payable with respect to each Award.
Payment of Awards
Unless otherwise specified in the applicable Award Agreement, Awards will
generally be paid in cash up to an amount equal to 200% of the Participant's
Base Salary in effect on the grant date. Any Bonus in excess of such limit
will generally be paid in the form of Restricted Stock. Unless otherwise
specified, the Restricted Stock will vest in equal installments on the first
three anniversaries of the Grant Date. The Committee has the discretion to
allow a Participant to specify what portions of a Bonus (up to the general
200% limit) will be in cash, shares of the Company's Common Stock or
restricted Common Stock.
Before any Award is paid, the Committee must certify that the applicable
Performance Targets have been timely satisfied. The Committee generally has
"negative" discretion to reduce payments below maximum Award limits.
Awards are generally nontransferable.
Amendment/Termination of the Plan
The Board or the Committee may amend, suspend or terminate the Incentive
Compensation Plan at any time. Stockholder approval for an amendment will only
be required to the extent necessary to satisfy Section 162(m). Generally,
Section 162(m) would require stockholder approval only if the amendments
change (1) the class of persons eligible to participate in the Incentive
Compensation Plan, (2) the Business Criteria, or (3) the Incentive
Compensation Plan's $5 million limit. Unless earlier terminated by the Board
or the Committee, no new Awards may be granted after February 17, 2004.
Federal Income Tax Consequences of Awards Under the Plan
Awards under the Incentive Compensation Plan will generally be subject to
tax at the time of payment. Restricted Stock granted in payment of an Award
will generally be subject to tax at the time the restrictions lapse (unless
the Participant elects to accelerate recognition at the time of grant). The
Company will generally have a corresponding deduction at the time the
Participant recognizes income. Awards are intended to satisfy the
"performance-based" exception to Section 162(m). If payment of an Award is
accelerated under the Incentive Compensation Plan in connection with a Change
in Control of the Company: (1) the Company may not be permitted to deduct the
portion of the compensation attributable to the acceleration ("parachute
payments") if it exceeds certain threshold limits under the Code (and certain
related excise taxes may be triggered), and (2) the Company may not be
entitled to a tax deduction if payments are accelerated at a time when the
Performance Targets have not been satisfied if the limits of Section 162(m)
are exceeded.
16
<PAGE>
BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Company's Bylaws provide that the Board of Directors consists of nine
members and that the number of directors be fixed or altered exclusively by an
affirmative vote of two-thirds of all of the directors. Currently there are
nine directors.
The Board of Directors is divided into three classes: Class I, Class II and
Class III. The initial terms of office of directors in Class II and Class III
expire after the annual meetings of stockholders of the Company in 1999 and
2000, respectively. The current term of the Class I directors expires in 2001.
After the initial terms, each director will serve for a term expiring at the
annual meeting of stockholders held in the third year following the year of
election and until such director's successor is elected.
The information set forth below as to each nominee has been furnished by the
nominee.
NOMINEES FOR ELECTION AS DIRECTORS TO SERVE THREE-YEAR TERMS
<TABLE>
<CAPTION>
Principal Business Experience During
Past Five Years and Certain Other Director
Name Age Directorships Since
---- --- ------------------------------------ --------
<C> <C> <S> <C>
Brad A. Morrice...... 42 Vice Chairman of the Company (December 1995
1996-present); President and Secretary of
the Company (December 1995-present);
General Counsel of the Company (December
1995-December 1997); Co-Chairman of the
Board and Chief Executive Officer of New
Century Mortgage Corporation (November
1995-present); President and Chief
Operating Officer--Administration of Plaza
Home Mortgage Corporation (February 1994 to
March 1995) (mortgage banking); Executive
Vice President and Chief Administrative
Officer of Plaza Home Mortgage Corporation
(February 1993 to February 1994).
Michael M. Sachs..... 58 Chairman of the Board and Chief Executive 1995
Officer of Westrec Financial, Inc. (1990-
present) (operator of marinas and related
businesses); Chairman of the Board and
Chief Executive Officer of Pinpoint
Systems, Inc. (December 1995 to present)
(manufacturer of marine electronic
equipment).
Terrence P. Sandvik.. 60 President of U.S. Bancorp Business 1999
Technology Center at U.S. Bancorp, Inc.
(1990-present).
</TABLE>
17
<PAGE>
Set forth below is information concerning each of the other six directors of
the Company whose three-year terms of office will continue after the 1999
Annual Meeting of Stockholders.
DIRECTORS WHOSE TERMS EXPIRE IN 2001
<TABLE>
<CAPTION>
Principal Business Experience During
Past Five Years and Certain Other Director
Name Age Directorships Since
---- --- ------------------------------------ --------
<C> <C> <S> <C>
Fredric J. Forster....... 54 Private Investor and Business 1997
Consultant (January 1998-present);
Principal of Financial Institutional
Partners Mortgage Company, LP (November
1996-December 1998); President and
Chief Operating Officer of H.F.
Ahmanson and Company and its subsidiary
Home Savings of America (March 1993-
April 1996) (savings and loan);
President of ITT Federal Bank, formerly
Newport Balboa Savings and Loan
Association (1979-1993); a Director
(and Vice Chairman in 1995) of Federal
Home Loan Bank of San Francisco (1986-
1993).
Edward F. Gotschall...... 44 Vice Chairman of the Company (December 1995
1996-present),
Chief Financial Officer (August 1998 to
present); Chief Operating Officer-
Finance/Administration (December 1995-
August 1998); a Director and Chief
Financial Officer of New Century
Mortgage Corporation (December 1995-
present); Executive Vice
President/Chief Financial Officer of
Plaza Home Mortgage Corporation (April
1994-July 1995) (mortgage banking);
Executive Vice President/Chief
Financial Officer of Option One
Mortgage Corporation (December 1992 to
February 1994) (subprime mortgage
banking).
Francis J. Partel, Jr. .. 57 Senior Vice President, U.S. Bancorp 1998
(March 1996-present); Chief Executive
Officer of WEFA Holdings, Inc. (August
1994-November 1995) (economic
consulting and forecasting).
DIRECTORS WHOSE TERMS EXPIRE IN 2000
<CAPTION>
Principal Business Experience During
Past
Five Years and Certain Other Director
Name Age Directorships Since
---- --- ------------------------------------ --------
<C> <C> <S> <C>
John C. Bentley.......... 39 Principal of Cornerstone Equity 1995
Partners, L.L.C. (February 1995-
present) (private equity investments);
Senior Vice President at Banc One
Capital Corporation in merchant banking
group (February 1989 to February 1995).
Robert K. Cole........... 52 Chairman and Chief Executive Officer of 1995
the Company (December 1995-present); a
Director of New Century Mortgage
Corporation (November 1995-present);
President and Chief Operating Officer-
Finance of Plaza Home Mortgage
Corporation (February 1994 to March
1995) (mortgage banking); President of
Triple Five, Inc. (June 1990 to January
1994) (international real estate
development).
Steven G. Holder......... 41 Vice Chairman of the Company (December 1995
1996-present);
Chief Operating Officer-Loan
Production/Operations of the Company
(December 1995-present); Co-Chairman of
the Board and Chief Executive Officer
of New Century Mortgage Corporation
(December 1996-present); Executive Vice
President of Long Beach Mortgage
Company (February 1993 to August 1995)
(mortgage banking).
</TABLE>
18
<PAGE>
Directors Designated by U.S. Bancorp
Both Mr. Partel and Mr. Sandvik were designated by U.S. Bancorp to serve on
the Company's Board of Directors. Under its Preferred Stock Purchase Agreement
with the Company, U.S. Bancorp has the right to designate nominees to the
Company's Board approximately in proportion to U.S. Bancorp's ownership stake
in the Company. If U.S. Bancorp's ownership percentage increases
significantly, the Company may be obligated to increase the size of its Board
to accommodate an additional U.S. Bancorp-designated director. Likewise, if
U.S. Bancorp's ownership percentage decreases significantly, U.S. Bancorp may
be obligated to cause one of its designated directors to resign from the
Company's Board. Mr. Partel was appointed to the Board in November 1998 at the
time of the closing of the U.S. Bancorp transaction. Mr. Sandvik was appointed
to the Board in February 1999 to fill a vacancy created on the Board by the
resignation of Mr. Sherman I. Chu.
If the Company's stockholders do not re-elect Mr. Sandvik as a director, the
Company will be obligated to expand the Board to accommodate an additional
U.S. Bancorp-designated director.
Certain Relationships and Related Transactions
Mr. Partel and Mr. Sandvik are senior officers of divisions or subsidiaries
of U.S. Bancorp. The Company has business relationships with several U.S.
Bancorp affiliates. U.S. Bank National Association is the agent and lead
lender on the Company's $320 million warehouse credit agreement. In 1998 the
Company's outstanding borrowings under that agreement averaged approximately
$140 million, and the Company expects its borrowings in the current year will
be in a similar range.
In addition, U.S. Bank National Association serves as Trustee or Trust
Administrator for the Company's loan securitizations and serves as custodian
of the Company's loan files that are held as collateral under financing
arrangements with third parties. In 1998 U.S. Bank received fees of
approximately $500,000 for providing these services to the Company. Finally,
in 1999 the Company plans to implement a multifaceted strategic alliance with
U.S. Bank National Association, ND. The elements of the alliance include (i)
originating loans to U.S. Bank customers who did not qualify for a U.S. Bank
mortgage loan, (ii) assisting U.S. Bank to develop its sub-prime loan
origination capability, (iii) performing selected servicing functions for sub-
prime loans originated by U.S. Bank, and (iv) soliciting bids from U.S. Bank
for the Company's whole loan sales. The Company is unable to predict whether
the volume of business to be conducted under the strategic alliance will be
material to the Company in 1999.
Committees of the Board
The Company's Board of Directors has an Audit Committee and a Compensation
Committee. The Audit Committee is comprised of Messrs. Sachs and Partel, and
is responsible for making recommendations concerning the engagement of
independent certified public accountants, approving professional services
provided by the independent certified public accountants and reviewing the
adequacy of the Company's internal accounting controls. During 1998, the Audit
Committee met nine times.
The Compensation Committee is comprised of Messrs. Bentley, Sachs and
Forster, all of whom are non-employee directors. The Compensation Committee
has the exclusive responsibility for establishing the compensation and other
benefits payable to executive officers and has the responsibility for
administering the Company's incentive compensation and benefit plans,
including the Stock Option Plan, the Founding Managers' Incentive Compensation
Plan and the 1999 Incentive Compensation Plan. During 1998, the Compensation
Committee met eight times.
Attendance at Board and Committee Meetings
During 1998, the Board of Directors met in person seven times and held two
telephonic meetings. No director attended fewer than 75% of the aggregate
number of meetings held by the Board of Directors and the Committees of the
Board of Directors on which he served.
19
<PAGE>
Compensation of Directors
During 1998, the Company paid its non-employee directors other than Messrs.
Forster and Partel an annual retainer of $10,000, and a fee of $2,500 for each
board or committee meeting attended. The Company also reimbursed all of its
non-employee directors for reasonable expenses incurred in attending meetings.
Mr. Sandvik was appointed to the Board in 1999, and accordingly did not
receive any fees or reimbursement in 1998.
In addition, the Company's Stock Option Plan provides that, upon initial
election or appointment to the Board, each director designated as a Non-
Employee Director for purposes of the Plan is granted a non-qualified option
to purchase 15,000 shares of Common Stock, subject to vesting in equal
installments over three years from the date of grant (a "Non-Employee Director
Option"). If any such Non-Employee Director ceases to be a member of the
Board, his unvested Non-Employee Director Options terminate immediately.
All of the current non-employee directors other than Mr. Partel and Mr.
Sandvik were granted Non-Employee Director Options in 1997 in accordance with
the Stock Option Plan. In addition, in September 1998 Mr. Forster received a
non-qualified option to purchase 10,000 shares of Common Stock at an exercise
price of $10.00 per share, subject to vesting in equal installments over three
years from the date of grant. At the time of this grant, the Company's Common
Stock was trading at $8.38.
Because Mr. Partel and Mr. Sandvik are serving on the Board at the direction
of their employer, U.S. Bancorp, at the time of their appointment the Board of
Directors decided that they would not be considered to be Non-Employee
Directors for purposes of the Stock Option Plan and for purposes of receiving
cash compensation for serving as directors and attending Board and Committee
meetings.
20
<PAGE>
SECURITY OWNERSHIP OF PRINCIPAL STOCKHOLDERS AND MANAGEMENT
On March 19, 1999, the record date with respect to this solicitation for
determining stockholders entitled to notice of and to vote at the Annual
Meeting, 14,601,462 shares of the Company's Common Stock and 20,000 shares of
the Company's Series 1998A Convertible Preferred Stock were outstanding. No
shares of any other class of stock were outstanding. Only stockholders of
record on such date are entitled to notice of and to vote at the Annual
Meeting and at any adjournment thereof. Holders of Common Stock are entitled
to one vote per share on all matters to come before the Annual Meeting and at
any adjournment thereof. Holders of Convertible Preferred Stock are entitled
to 136.24 votes per share (which corresponds to the number of shares of Common
Stock that would be issued upon conversion of a share of Preferred Stock).
Except as otherwise indicated, the following table sets forth information as
of March 15, 1999 with respect to the beneficial ownership of the Company's
Common Stock by (i) each person who is known by the Company to beneficially
own more than 5% of the Company's Common Stock, (ii) each director of the
Company, (iii) each nominee for election to the Board of Directors, (iv) each
executive officer named in the Summary Compensation Table, and (v) all
directors and executive officers as a group. Except as otherwise indicated,
beneficial ownership includes both voting and investment power with respect to
the shares shown.
<TABLE>
<CAPTION>
Amount and
Nature of
Beneficial Percent of
Name and Address of Beneficial Owner(1) Ownership Class(2)
- --------------------------------------- ---------- ----------
<S> <C> <C>
U.S. Bancorp(3)........................................ 3,224,800 18.6
U.S. Bank Place
601 Second Avenue South
Minneapolis, Minnesota 55402
The Foundation Companies, Inc.(4)...................... 2,361,569 16.2
1313 East Osborn Road, Suite 250
Phoenix, Arizona 85067
Brookhaven Capital Management, LLC(5).................. 1,478,200 10.1
3000 Sandhill Road, Building 3
Suite 105
Menlo Park, California 94025
Wallace R. Weitz & Company(6).......................... 1,337,900 9.2
1125 South 103rd Street, Suite 600
Omaha, Nebraska 68124
Robert K. Cole(7)...................................... 1,378,558 9.3
Brad A. Morrice(8)..................................... 1,379,041 9.3
Edward F. Gotschall(9)................................. 1,319,020 8.9
Steven G. Holder(10)................................... 1,225,941 8.3
Patrick J. Flanagan(11)................................ 48,300 *
John C. Bentley(12).................................... 418,848 2.9
Fredric J. Forster(13)................................. 5,000 *
Francis J. Partel, Jr.................................. -- --
Michael M. Sachs(14)................................... 543,682 3.7
Terrence P. Sandvik.................................... -- --
All directors and executive officers as a group (10
persons)(15).......................................... 6,318,390 41.2
</TABLE>
- --------
* Less than one percent.
21
<PAGE>
(1) Each of the directors and executive officers listed can be reached
through the Company at 18400 Von Karman, Suite 1000, Irvine, California
92612.
(2) If a stockholder holds options or other securities that are exercisable
or otherwise convertible into Common Stock within 60 days of March 15,
1999, we treat the Common Stock underlying those securities as owned by
that stockholder, and as outstanding shares when we calculate that
stockholder's percentage ownership of the Company's Common Stock.
However, we do not consider that Common Stock to be outstanding when we
calculate the percentage ownership of any other stockholder.
(3) Includes 2,724,800 shares of Common Stock issuable upon the conversion of
20,000 shares of Series 1998A Convertible Preferred Stock.
(4) The Foundation Companies, Inc. is a wholly-owned subsidiary of Foundation
Administrative Services, Inc., which in turn is a wholly-owned subsidiary
of the Baptist Foundation of Arizona, each of which may also be deemed to
be the beneficial owner of the shares owned by The Foundation Companies,
Inc. The share information reflected is based on the Schedule 13G
Amendment filed jointly on February 17, 1999 by The Foundation Companies,
Inc., Foundation Administrative Services, Inc., the Baptist Foundation of
Arizona and Cornerstone Fund I, L.L.C.
(5) The share information reflected is based on the Schedule 13G filed
jointly by Brookhaven Capital Management, LLC and Vincent A. Carrino on
March 12, 1999. Mr. Carrino has sole voting and dispositive power with
respect to 11,900 shares. He and Brookhaven Capital Management, LLC share
voting and dispositive power with respect to the remaining 1,466,300.
(6) The share information reflected is based on the Schedule 13G filed by
Wallace R. Weitz & Company on February 9, 1999.
(7) Includes 69,769 shares of restricted stock, as to which Mr. Cole has
voting, but not dispositive power. Also includes 158,639 shares of Common
Stock issuable pursuant to options exercisable within 60 days of March
15, 1999.
(8) Includes 21,103 shares owned by the Samantha H. Morrice Trust, the sole
beneficiary of which is Mr. Morrice's daughter. Also includes 69,769
shares of restricted stock, as to which Mr. Morrice has voting, but not
dispositive power, and 158,639 shares of Common Stock issuable pursuant
to options exercisable within 60 days of March 15, 1999.
(9) Includes 61,667 shares of restricted stock, as to which Mr. Gotschall has
voting, but not dispositive power. Also includes 185,305 shares of Common
Stock issuable pursuant to options exercisable within 60 days of March
15, 1999.
(10) Includes 61,667 shares of restricted stock, as to which Mr. Holder has
voting, but not dispositive power. Also includes 211,973 shares of Common
Stock issuable pursuant to options exercisable within 60 days of March
15, 1999.
(11) Includes 16,500 shares of Common Stock issuable pursuant to options
exercisable within 60 days of March 15, 1999.
(12) Includes 18,543 shares owned by the Meredith M. Bentley Children's
Education Trust. Mr. Bentley's wife is the trustee and their minor
children are the sole beneficiaries. Also includes 74,172 shares held by
Bentley Family Holdings, LLC of which Mr. Bentley is a member and
manager, and 5,000 shares of Common Stock issuable pursuant to options
exercisable within 60 days of March 15, 1999.
(13) Consists of 5,000 shares of Common Stock issuable pursuant to options
exercisable within 60 days of March 15, 1999.
(14) Includes 213,032 shares of Common Stock owned by Westrec PS Plan, of
which Mr. Sachs is the trustee and sole beneficiary, and 2,000 shares
owned by Mr. Sachs' wife. Also includes 5,000 shares of Common Stock
issuable pursuant to options exercisable within 60 days of March 15,
1999.
(15) Includes (i) 262,872 shares of restricted stock and (ii) 746,056 shares
of Common Stock issuable pursuant to options exercisable within 60 days
of March 15, 1999.
22
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth certain information with respect to
compensation earned by the Company's Chief Executive Officer and the Company's
four most highly compensated executive officers other than the Chief Executive
Officer during fiscal 1996, 1997 and 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long Term Compensation
Awards
Annual -----------------------
Compensation Securities
--------------- Restricted Underlying Other
Name and Principal Salary Bonus Stock Awards Options Compensation
Position Year ($)(1) ($)(2) ($)(3) (#) ($)(4)
- ------------------ ---- ------- ------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Robert K. Cole.......... 1998 281,600 600,893 -- -- 8,500
Chairman and 1997 256,000 339,044 775,789 200,305 8,375
Chief Executive Officer 1996 150,000 96,969 -- -- 825
Brad A. Morrice......... 1998 281,600 600,893 -- -- 8,500
Vice Chairman and 1997 256,000 339,044 775,789 200,305 7,285
President 1996 150,000 96,969 -- -- 1,200
Edward F. Gotschall..... 1998 281,600 592,330 -- -- 13,366
Vice Chairman and 1997 252,875 422,088 692,825 200,305 8,375
Chief Financial Officer 1996 143,750 96,969 -- 40,000 6,933
Steven G. Holder........ 1998 281,600 600,893 -- 75,000 11,481
Vice Chairman and 1997 250,020 422,088 692,825 200,305 7,182
Chief Operating 1996 150,000 81,969 -- 80,000 563
Officer--Loan
Production/Operations
Patrick J. Flanagan..... 1998 200,000 321,538 -- 55,000 14,250
Executive Vice 1997 144,167 276,572 -- 47,000 13,068
President(5) 1996 65,046 108,071 -- 43,000 8,539
</TABLE>
- --------
(1) Amounts shown include cash compensation earned and received by the
executive officers. The amounts do not include the value of certain
perquisites which in the aggregate did not exceed the lesser of either
$50,000 or 10 percent of the total of annual salary and bonus reported for
the named executive officer.
(2) Amounts reported for 1997 and 1998 for Messrs. Cole, Morrice, Gotschall
and Holder represent amounts earned pursuant to the Founding Managers'
Incentive Compensation Plan in those years, even though portions of the
bonus were paid in the following year. Amounts reported for 1996 represent
signing bonuses and amounts earned pursuant to the Founding Managers'
Incentive Compensation Plan in 1996 and paid in 1997.
(3) Mr. Cole, Mr. Morrice, Mr. Gotschall and Mr. Holder were each granted a
restricted stock award of 92,500 shares on May 30, 1997 at a price of
$0.01 per share. The value of the unvested portion of the award as of
December 31, 1998 based on the closing price of $13.375 on such date, net
of the consideration paid by such officer, was $891,005. Mr. Cole and Mr.
Morrice elected to receive a portion of their 1997 bonus under the
Founding Managers' Incentive Compensation Plan in restricted stock instead
of cash. As a result, on April 15, 1998 Mr. Cole and Mr. Morrice were each
granted a restricted stock award of 8,102 shares, based on the value of
the Company's Common Stock as of December 31, 1997 of $10.25 per share, at
a price of $0.01 per share. The value of such restricted stock as of
December 31, 1998 based on the closing price of $13.375 on such date, net
of the consideration paid by such officer, was $108,283. All of the above
restricted stock awards vest in three approximately equal annual
installments beginning one year from the award date. Dividends, if any,
paid on the Company's Common Stock are also payable on the restricted
stock, whether or not vested.
23
<PAGE>
(4) Amounts reported for 1998 represent a $6,000 automobile allowance provided
by the Company to Messrs. Cole, Morrice, Gotschall and Holder, a $11,750
automobile allowance provided by the Company to Mr. Flanagan, $4,866 paid
by the Company to lease an automobile for Mr. Gotschall, $2,981 paid by
the Company to lease an automobile for Mr. Holder and contributions made
by the Company to a 401(k) profit sharing plan of $2,500 to each of
Messrs. Cole, Morrice, Gotschall, Holder and Flanagan. Amounts reported
for 1997 represent a $6,000 automobile allowance provided by the Company
to Messrs. Cole, Morrice, Gotschall and Holder, a $12,000 automobile
allowance provided by the Company to Mr. Flanagan, and contributions to
the 401(k) profit sharing plans of $2,375 for Messrs. Cole and Gotschall,
$1,285 for Mr. Morrice, $1,182 for Mr. Holder and $1,068 for Mr. Flanagan.
Amounts reported for 1996 represent contributions made by the Company on
behalf of each executive officer to a 401(k) profit sharing plan, $5,789
paid by the Company to lease an automobile for Mr. Gotschall and a $7,500
automobile allowance provided to Mr. Flanagan.
(5) Mr. Flanagan became an executive officer of the Company in August 1998.
Bonus amounts for Mr. Flanagan in 1997 and 1996 include commission
payments of $91,572 and $83,071 respectively.
Option Grants in Last Fiscal Year
The following table sets forth certain information with respect to
individual grants of stock options made during fiscal 1998 to the named
executive officers.
<TABLE>
<CAPTION>
Potential
Realizable
Value at Assumed
Annual Rates of
Stock
Price Appreciation
for
Individual Grants Option Term (4)
------------------------------------------------ -------------------
Number of
Securities Percent of Total
Underlying Options Granted Exercise
Options to Employees in Price Expiration
Name(1) Granted(2) Fiscal 1998 ($/Sh)(3) Date 5% 10%
- ------- ---------- ---------------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Steven G. Holder........ 75,000 14.8% $ 9.53 07/06/2008 $449,502 $1,139,127
Patrick J. Flanagan..... 35,000 6.9 $10.19 05/17/2008 224,295 568,408
20,000 4.0 $ 8.38 09/16/2008 105,403 267,111
------ ----
55,000 10.9%
</TABLE>
- --------
(1) The other named executive officers--Messrs. Cole, Morrice and Gotschall--
did not receive any options in 1998.
(2) All options were granted "at market" on the date of grant and are
exercisable 20% on the first anniversary of the grant date, and 5% on the
last day of each succeeding calendar quarter, with the final 5% vesting on
the fifth anniversary of the grant date. The options were granted for a
term of 10 years, subject to earlier termination in certain events related
to termination of employment. In certain circumstances, including a
recapitalization, stock split, reorganization, merger, combination,
consolidation and a sale of substantially all of the assets of the
Company, the Board of Directors will adjust, in such manner and to such
extent as it deems appropriate, the number, amount and type of shares
subject to the option and the exercise price of the option.
(3) The exercise price and tax withholding obligations related to exercise may
be paid by delivery of already owned shares of Common Stock, subject to
certain conditions.
(4) This column shows the hypothetical gains or "option spreads" of the
options granted based on the per-share market price of the Common Stock at
the time of the grant and assumed annual compound stock appreciation rates
of 5% and 10% over the full 10-year term of the options. The 5% and 10%
assumed rates of appreciation are mandated by the rules of the Securities
and Exchange Commission and do not represent the Company's estimate or
projection of future Common Stock prices. The gains shown are net of the
option exercise price, but do not include deductions for taxes or other
expenses associated with the exercise of the option or the sale of the
underlying shares. The actual gains, if any, on the exercise of stock
options will depend on the future performance of the Common Stock, the
option holder's continued employment through the option period for options
granted pursuant to the Stock Option Plan, and the date on which the
options are exercised.
24
<PAGE>
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth certain information regarding 1998 option
exercises by the executive officers, and the value of their options at the end
of 1998.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money Options
Shares Options at FY-End at FY-End
Acquired on Value (#) ($) (1)
Exercise Realized ------------------------- -------------------------
Name (#) ($) Exercisable/Unexercisable Exercisable/Unexercisable
- ---- ----------- -------- ------------------------- -------------------------
<S> <C> <C> <C> <C>
Robert K. Cole.......... 0 0 158,639/41,666 $859,085/98,957
Brad A. Morrice......... 0 0 158,639/41,666 $859,085/98,957
Edward F. Gotschall..... 0 0 185,305/55,000 $1,122,412/230,630
Steven G. Holder........ 0 0 211,973/143,332 $1,385,758/650,921
Patrick J. Flanagan..... 10,050(2) 87,513 16,250/109,700 $68,069/582,038
</TABLE>
- --------
(1) The amounts set forth represent the difference between the estimated fair
market value of $13.375 per share as of December 31, 1998 and the exercise
price of the in-the-money options, multiplied by the applicable number of
shares underlying such options.
(2) Includes shares exercised in 1998 by Mr. Flanagan before his appointment
as an executive officer in August 1998.
Employment Agreements and Change-in-Control Arrangements
Founding Manager Employment Agreements. The Company has entered into
employment agreements with Messrs. Cole, Morrice, Gotschall and Holder (the
"Founding Managers"). Each agreement was entered into as of January 1, 1999,
replacing a prior employment agreement of January 1, 1997. The new agreements
continue in effect until December 31, 2002, and are extended automatically for
successive one-year periods thereafter, unless terminated by either the
Company or the respective Founding Manager. The agreements provide for a base
salary of $333,333 in 1999. The Board has the authority to establish the base
salary level for subsequent years, provided that it must represent at least a
5% increase over the preceding year. The agreements also provide for a $500
per month automobile allowance.
Founding Manager Incentive Awards. The agreements also provide that the
Founding Managers will be eligible to receive Incentive Awards under the
Founding Managers' Incentive Compensation Plan, or its successor, the newly-
adopted 1999 Incentive Compensation Plan (see pages 15 and 16 for a summary of
the 1999 Incentive Compensation Plan). The employment agreements stipulate the
basic terms of the Incentive Awards for the six-months ended June 30, 1999
(the "Six-Month Performance Period") and the year ended December 31, 1999 (the
"Twelve-Month Performance Period"). Under the Incentive Awards, the Founding
Managers will be entitled to a percentage of the Company's earnings before
income taxes for the applicable Performance Period (without deducting amounts
payable under the Plan) ("Earnings"). The specific percentage of Earnings used
to determine the bonus levels is based on the ratio (the "Ratio") of Earnings
for the Performance Period to Total Stockholders' Equity (as defined in the
1999 Incentive Compensation Plan).
For the Six-Month Performance Period, if the Ratio is at least 10% but less
than 20%, each Founding Manager is entitled to receive an amount equal to
1.25% of Earnings in excess of 10% of Total Stockholders' Equity. If the Ratio
is at least 20%, each Founding Manager is entitled to receive an additional
sum equal to 0.5% of the Earnings in excess of 20% of Total Stockholders'
Equity.
For the Twelve-Month Performance Period, if the Ratio is at least 20% but
less than 40%, each Founding Manager is entitled to receive an amount equal to
1.25% of Earnings in excess of 20% of Total Stockholders' Equity. If the Ratio
is at least 40%, each Founding Manager is entitled to receive an additional
sum equal to 0.5% of the Earnings in excess of 40% of Total Stockholders'
Equity.
25
<PAGE>
The amount of any Incentive Award paid for the Twelve-Month Performance
Period will be reduced by any amounts paid for the Six-Month Performance
Period. Amounts payable under the Awards are payable in cash, unless the
Compensation Committee elects to allow the Founding Managers to choose to
receive part of the Award in the form of restricted stock.
Employment Agreement Change-In-Control Provisions. If, within twelve months
following a "change in control" of the Company, a Founding Manager is
terminated without "cause," quits his employment for "good reason," or is
given notice that the Company intends not to renew his employment agreement
(as such terms are defined in the employment agreement), then the Company
will:
(i) pay the Founding Manager his base salary through the end of the
current month plus credit for any vacation earned but not taken;
(ii) pay the Founding Manager as severance pay (a) his base salary in
effect as of the termination date, for a minimum of eighteen months,
or, if longer, through the expiration of the current term of the
employment agreement; plus (b) an amount equal to the cash portion of
the most recent annual profit sharing and/or incentive bonus received
by the Founding Manager from the Company or, if more, the cash amount
which would be due under the profit sharing and/or incentive bonus
plans applicable to him for the then current year; such payment to be
made in substantially equal installments over the same time period as
base salary payments continue;
(iii) maintain the Founding Manager's medical insurance and other benefit
programs in which he was entitled to participate until the earlier of
expiration of the term of employment then in effect or his
commencement of full time employment with a new employer; and
(iv) pay all costs up to $20,000 related to such Founding Manager's
participation in a senior executive outplacement program.
Flanagan Employment Agreement. The Company entered into a one-year
employment agreement with Mr. Flanagan, effective January 1, 1999, that
provides for a base salary of $230,000 per year, an automobile allowance of
$1,000 per month and eligibility to participate in a bonus plan developed by
the Board. Unless terminated earlier by Mr. Flanagan or the Company, the
agreement renews automatically for additional one-year terms.
If the Company terminates Mr. Flanagan's employment without "cause" (as
defined in the agreement), then the Company will:
(i) pay Mr. Flanagan his base salary through the end of the current month
plus credit for any vacation earned but not taken;
(ii) pay Mr. Flanagan as severance pay his base salary in effect as of the
termination date, for the greater of six months or the remaining term
of his employment agreement;
(iii) maintain Mr. Flanagan's medical insurance and other benefit programs
in which he was entitled to participate until the expiration of the
salary continuation period; and
(iv) pay Mr. Flanagan's reasonable costs for participating in an
outplacement program.
Other Change-In-Control Provisions. The Company's 1995 Stock Option Plan
provides for the acceleration of award vesting upon a change in control (as
defined in the plan), unless the Board has decided otherwise prior to the
change in control. Similarly, under the Company's 1999 Incentive Compensation
Plan, unless the Board decides otherwise prior to the event, a change in
control results in accelerated payment of outstanding Awards. The payment
level assumes achievement of the maximum performance goal for each Award, but
is pro-rated according to the portion of the applicable Performance Period
elapsed at the time of acceleration.
26
<PAGE>
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee is a former or current officer or
employee of the Company or any of its subsidiaries. No executive officer of
the Company serves as a member of the board of directors or compensation
committee of any entity which has one or more executive officers serving as a
member of the Company's Board of Directors or Compensation Committee.
Section 16(a) Beneficial Ownership Reporting Compliance
The Securities and Exchange Commission requires that we disclose any late
Section 16 filings of directors and officers during the last fiscal year.
Based solely on our review of reports furnished to the Company and written
representations that no other reports were required during the fiscal year
ended December 31, 1998, all Section 16 filing requirements were met except
for an inadvertent failure by Mr. Bentley to file in a timely manner a Form 4
reflecting the sale of shares by a trust of which his wife is the trustee and
his children are the beneficiaries.
27
<PAGE>
The following Report of the Compensation Committee and the Performance Graph
that appears immediately after it shall not be deemed to be soliciting
material or to be filed with the Securities and Exchange Commission under the
Securities Act of 1933 or the Securities Exchange Act of 1934 or incorporated
by reference in any document so filed.
REPORT OF COMPENSATION COMMITTEE
The Compensation Committee is responsible for administering the Company's
incentive plans, including the 1995 Stock Option Plan, the Founding Managers'
Incentive Compensation Plan and its successor, the 1999 Incentive Compensation
Plan. In addition, the Committee evaluates the performance and compensation
levels of the Company's senior executives and considers management succession
and related matters. The Committee reviews with the Board the compensation for
the Company's executive officers.
Overall Compensation Policies
The Committee's overriding objective is to structure executive compensation
in a way that will assist the Company in achieving its strategic and financial
goals, which will ultimately enhance the value of the Company's stock. To this
end, the Committee adheres to the following overall compensation policies:
. Compensation levels should be appropriate to attract, retain and
motivate talented executives.
. A substantial portion of each executive officer's annual compensation
should be linked to the Company's overall financial performance.
. Compensation levels should also motivate each executive officer to
achieve goals more closely related to his or her direct
responsibilities, and should reward the executive for attaining those
objectives.
. Executive officers should have a strong incentive to advance the
Company's long-term strategic and financial goals, and not merely be
concerned with its shorter-term financial performance.
. Recognizing the importance to the Company's success of the unique
partnership-like working relationship of Messrs. Cole, Morrice,
Gotschall and Holder (the "Founding Managers"), the Committee generally
strives to provide them with substantially equal compensation
arrangements.
. The tax implications to the Company and its executive officers of
various payments and benefits should be considered in structuring total
executive compensation.
The Committee relies principally on three forms of compensation to pursue
these policies: annual salary, annual bonus and stock-based awards.
Base Salary and Bonus
Founding Managers. The base level of the Founding Managers' annual salary of
$281,600 for 1998 was established under their employment agreements dated
January 1, 1997. For 1998, these agreements required that the base salary be
least 7.5% greater than the 1997 base salary of $256,000. The Committee had
the discretion to increase this amount, but not to decrease it. The Founding
Managers' bonus for 1998 of $600,893 was established under the Founding
Managers' Incentive Compensation Plan, and was structured as incentive
compensation based on the Company's return on equity.
Patrick Flanagan was appointed as an executive officer of the Company in
August 1998. Consequently, his 1998 base salary of $200,000 and bonus of
$271,538 were established under his compensation plan as Executive Vice
President and Chief Operating Officer of New Century Mortgage Corporation, the
Company's main subsidiary.
28
<PAGE>
Stock-Based Compensation
From time to time the Committee awards to executive officers stock options
or restricted stock. Because the value of these awards is directly related to
the future value of the Company's Common Stock, the Committee uses them to
align the interests of the executive officers with those of the stockholders.
Consideration of Tax Implications
As one of the factors in its consideration of compensation matters, the
Committee takes note of the anticipated tax treatment to the Company and to
its executive officers of various payments and benefits. For example, some
types of compensation payments and their deductibility (i.e., the spread on
exercise of non-qualified options) depend upon the timing of an executive's
vesting or exercise of previously granted rights.
In addition, Internal Revenue Code Section 162(m) affects the deductibility
of executive compensation for federal income tax purposes. Generally, it
limits the Company's deduction to $1,000,000 per year for compensation (other
than certain qualified performance-based compensation) paid to the Company's
most highly-compensated executives.
The Committee has taken several steps in light of these tax considerations.
First, bonuses under the Founding Managers' Incentive Compensation Plan have
been structured with a view to qualifying as performance-based compensation
under Section 162(m). Second, in order to provide the flexibility for future
executive bonuses to qualify as performance-based compensation, the Committee
guided the design and approval by the Board of the 1999 Incentive Compensation
Plan, which is being presented to the Company's stockholders at the 1999
Annual Meeting. Finally, the Committee helped to design and implement the
Company's Deferred Compensation Plan, which allows executive officers and
other highly-compensated employees to defer cash compensation until later
years or until retirement.
1998 Executive Compensation
Founding Managers. In 1998, the Founding Managers each received an annual
base salary of $281,600 under the terms of their employment agreements. In
addition, the Founding Managers are entitled to receive additional incentive
compensation under the Founding Managers' Incentive Compensation Plan based on
the Company's financial performance in 1998. The amounts payable under the
Plan are based on a percentage of the Company's earnings before income taxes
(without deducting amounts payable under the Plan) ("Earnings"). The specific
percentage of Earnings used to determine the incentive pool is based on the
ratio (the "Ratio") of Earnings to Total Stockholders' Equity. If the Ratio is
at least 25% but less than 50%, the pool is an amount equal to 5% of Earnings
in excess of 25% of Total Stockholders Equity (as defined in the Plan). If the
Ratio is at least 50%, the incentive pool is an amount equal to the sum of (i)
5% of Earnings in excess of 25% of Total Stockholders' Equity, plus (ii) 2% of
Earnings in excess of 50% of Total Stockholders' Equity. Unless the Committee
decides otherwise, amounts payable under the Plan are payable in cash up to
200% of the executive's base salary, and in restricted stock for any amount
exceeding 200% of the base salary. Based on this formula, and their respective
elections, each Founding Manager received or will receive cash payments
totaling $600,893 based on the Company's 1998 performance. Mr. Gotschall
elected to have his bonus reduced by a nominal amount the Company had paid in
1998 for his automobile lease.
In July 1998 the Committee granted to Mr. Holder options to purchase 75,000
shares of the Company's Common Stock at an exercise price of $9.53 pursuant to
the 1995 Stock Option Plan. The options vest 20% on the first anniversary of
the grant date, and 5% on the last day of each succeeding calendar quarter,
with the final 5% installment vesting on the fifth anniversary of the grant
date.
Patrick Flanagan. In 1998 Mr. Flanagan received a base salary of $200,000
and earned bonuses totaling $271,538 under his compensation plan as an
executive officer of New Century Mortgage Corporation. Separately, the
Committee made two option grants to Mr. Flanagan in 1998 under the 1995 Stock
Option Plan. In May, Mr. Flanagan received options to purchase 35,000 shares
of Common Stock at an exercise price of $10.19. In
29
<PAGE>
September he received options to purchase an additional 20,000 shares of
Common Stock at an exercise price of $8.38. Both awards vest 20% on the first
anniversary of the grant date, and 5% on the last day of each succeeding
calendar quarter, with the final 5% vesting on the fifth anniversary of the
grant date.
Factors Considered. The Committee established the executive officers' salary
levels and bonus targets for 1998 and for the coming year based on the
Committee's evaluation of the role of the executive officers in the Company's
outstanding accomplishments in 1998, including: (i) achieving record revenues
and earnings, (ii) guiding the Company successfully through a severe liquidity
crisis in the sub-prime mortgage industry and (iii) obtaining the $20 million
U.S. Bancorp capital investment and strategic alliance. The Committee has not,
in determining the level of compensation to be paid, conducted any formal
survey of the salaries paid by other specialty finance companies but has from
time to time informally consulted with a firm engaged in hiring and placing of
professional managers with specialty finance firms and has reviewed publicly
available information.
Conclusion
The Committee has reviewed each element of compensation for each of the
executive officers for 1998. The Committee reported to the Board of Directors
that, in the Committee's opinion, the compensation of each executive officer
is reasonable in view of the Company's performance and the Committee's
subjective evaluation of the contribution of each executive officer to that
performance.
February 18, 1999
COMPENSATION COMMITTEE
John C. Bentley
Michael M. Sachs
Frederic J. Forster
30
<PAGE>
PERFORMANCE GRAPH
The graph below shows the Company's total return to stockholders compared to
the Nasdaq Stock Market and a Peer Group Index(1) over the period from June
26, 1997 (the date of registration of the Common Stock under Section 12 of the
Securities Exchange Act of 1934) to December 31, 1998.
Comparison of Cumulative Total Return from June 26, 1997 through December 31,
1998(2)
[PERFORMANCE GRAPH APPEARS HERE]
<TABLE>
<CAPTION>
June 26, 1997 Dec. 31, 1997 June 30, 1998 Dec. 31, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
New Century............. 100 75.2 73.4 98.2
Nasdaq Stock Market..... 100 109.5 131.2 151.4
Peer Group.............. 100 77.5 77.4 24.9
</TABLE>
(1) The Peer Group Index identified by the Company consists of the following
publicly traded companies engaged in the business of subprime mortgage
banking: Aames Financial Corporation, Delta Financial Corp., Homegold
Financial Inc. (formerly known as Emergent Group, Inc.), Long Beach
Financial, and United Companies. Delta Funding Corp. was added to the
Company's self-selected Peer Group to replace Southern Pacific Funding
Corporation, which declared bankruptcy and was delisted in 1998.
(2) Assumes that $100.00 was invested on June 26, 1997 in the Company's Common
Stock at the closing sales price of $13.63 per share and at the closing
sales price for each index on that date and that all dividends were
reinvested. No cash dividends have been declared on the Company's Common
Stock. Stockholder returns over the indicated period should not be
considered indicative of future stockholder returns.
31
<PAGE>
APPENDIX A
NEW CENTURY FINANCIAL CORPORATION
1999 INCENTIVE COMPENSATION PLAN
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <C> <S> <C>
1. Purpose............................................................... A-1
2. Definitions and Terms................................................. A-1
2.1. Accounting Terms............................................... A-1
2.2. Specific Terms................................................. A-1
3. Administration of the Plan............................................ A-4
3.1. The Committee.................................................. A-4
3.2. Powers of the Committee........................................ A-4
3.3. Binding Determinations/Liability Limitation.................... A-4
3.4. Reliance on Experts............................................ A-4
3.5. Express Authority (and Limitations on Authority) to Change
Terms and Conditions of Awards; Acceleration or Deferral of
Payment....................................................... A-4
4. Bonus Provisions...................................................... A-5
4.1. Participation.................................................. A-5
4.2. Award Agreements............................................... A-5
4.3. Provision for Bonus............................................ A-5
4.4. Determination of Performance Measures, Performance Scales...... A-5
4.5. Maximum Individual Bonus....................................... A-5
4.6. Adjustments.................................................... A-6
4.7. Committee Discretion to Determine Bonuses...................... A-6
4.8. Committee Certification........................................ A-6
4.9. Time of Payment; Deferred Amounts.............................. A-6
5. Restricted Stock...................................................... A-7
5.1. General........................................................ A-7
5.2. Restricted Stock Grant......................................... A-7
5.3. Pre-Vesting Restraints......................................... A-7
5.4. Dividend and Voting Rights..................................... A-7
5.5. Vesting........................................................ A-8
5.6. Share Certificates............................................. A-8
5.7. No Fractional Shares........................................... A-8
5.8. Adjustments.................................................... A-8
6. General Provisions.................................................... A-9
6.1. Rights of Eligible Persons, Participants and Beneficiaries..... A-9
6.2. Non-Transferability of Benefits and Interests.................. A-9
6.3. Consequences of a Change in Control............................ A-9
6.4. Effect of Termination of Employment............................ A-10
6.5. Compliance with Laws........................................... A-11
6.5. Law to Govern.................................................. A-11
6.7. Additional Payment Conditions.................................. A-12
6.8. Construction................................................... A-12
6.9. Tax Withholding................................................ A-12
6.10. Conflicts with Plan............................................ A-12
6.11. Amendments, Suspension or Termination of Plan.................. A-12
6.12. Receipt and Release............................................ A-13
6.13. Effective Date................................................. A-13
</TABLE>
i
<PAGE>
<TABLE>
<C> <C> <S> <C>
6.14. Term of the Plan............................................... A-13
6.15. Captions....................................................... A-13
6.15. Effect of Change of Subsidiary Status.......................... A-13
6.17. Non-Exclusivity of Plan........................................ A-13
6.18. No Corporate Action Restriction................................ A-13
6.19. Other Company Benefit and Compensation Program................. A-13
</TABLE>
ii
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
1999 INCENTIVE COMPENSATION PLAN
I. Purpose.
The purpose of this Plan is to promote the success of the Company by
providing to participating eligible persons bonus incentives that qualify
as performance-based compensation within the meaning of Section 162(m).
This Plan provides for payment of incentive compensation and, accordingly,
is not intended to be a plan that is subject to the Employee Retirement
Income Security Act of 1974, as amended, and shall be administered
accordingly.
II. Definitions and Terms.
A. Accounting Terms. Except as otherwise expressly provided (including,
without limitation, as provided in Section 4.6(b)) or the context
otherwise requires, financial and accounting terms herein and in
Appendix A hereto are used as defined for purposes of, and shall be
determined in accordance with, generally accepted accounting principles,
as from time to time in effect, as applied and reflected in the
consolidated financial statements of the Company, prepared in the
ordinary course of business.
B. Specific Terms. The following words and phrases as used herein shall
have the following meanings unless a different meaning is plainly
required by the context:
"Award" means an award, subject to the terms and conditions hereof,
under this Plan of a conditional right to receive a Bonus if the
applicable Performance Measure(s) is(are) satisfied in the relevant
Performance Period.
"Award Agreement" means a written agreement evidencing the grant of an
Award under this Plan that has been authorized by the Committee.
"Base Salary" means the annualized aggregate base salary of a
Participant from the Company and all affiliates of the Company at the
time the Participant is granted an Award, exclusive of any commissions
or other actual or imputed income from any Company-provided benefits or
perquisites, but prior to any reductions for salary deferred pursuant
to any deferred compensation plan or for contributions to a plan
qualifying under Section 401(k) of the Code or contributions to a
cafeteria plan under Section 125 of the Code.
"Beneficiary" means the person, persons, trust or trusts designated by
a Participant or, in the absence of a designation, entitled by will or
the laws of descent and distribution, to receive the benefits specified
in the Award Agreement and under this Plan in the event of a
Participant's death, and shall mean the Participant's executor or
administrator if no other Beneficiary is designated and able to act
under the circumstances.
"Board" means the Board of Directors of the Company.
"Bonus" means a payment in accordance with Section 4.9 or Section 5.1
or a payment opportunity in respect of an Award under this Plan, as the
context requires.
"Business Criteria" means one or any combination of the criteria set
forth on Appendix A hereto.
"Change in Control" means any of the following:
(a)consummation of a merger, consolidation, or other reorganization,
with or into, or the sale of all or substantially all of the
Company's business and/or assets as an entirety to, one or more
entities that are not Subsidiaries (a "Business Combination"),
unless (i) as a result of the Business Combination at least 50% of
the outstanding securities voting generally in the election of
directors of the surviving or resulting entity or a parent thereof
(the "Successor Entity") immediately after the reorganization are,
or will be, owned, directly or indirectly, by stockholders of the
Company immediately before the Business Combination; and (ii) no
"person" (as such term is defined for
A-1
<PAGE>
purposes of clause (b) below and excluding the Successor Entity)
beneficially owns, directly or indirectly, more than 40% of the
outstanding shares of the combined voting power of the outstanding
voting securities of the Successor Entity, after giving effect to
the Business Combination;
(b)any "person" (as such term is used in Section 13(d) and 14(d) of
the Exchange Act) becomes the beneficial owner (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities
of the Company representing more than 40% of the combined voting
power of the Company's then outstanding securities entitled to then
vote generally in the election of directors of the Company; or
(c)during any period not longer than two consecutive years,
individuals who at the beginning of such period constituted the
Board cease to constitute at least a majority thereof, unless the
election, or the nomination for election by the Company's
stockholders, of each new Board member was approved by a vote of at
least two-thirds of the Board members then still in office who were
Board members at the beginning of such period (including for these
purposes, new members whose election or nomination was so approved),
but excluding for this purpose, any such individual whose initial
assumption of office occurs as a result of an actual or threatened
election contest with respect to the election or removal or
directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a person other than the Board.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Committee" means the committee appointed by the Board to administer
this Plan in accordance with Section 162(m) and Section 3.1.
"Common Stock" means the Common Stock of the Company and such other
securities or property as may become the subject of Awards and
Restricted Stock grants pursuant to an adjustment made under Section
5.8.
"Company" means New Century Financial Corporation, a Delaware
corporation, and any successor thereto.
"Disability" means that the Participant is eligible for long-term
disability benefits under the Company's long-term disability plan.
"Eligible Person" means any officer of the Company, a Subsidiary, or
any division of the Company or a Subsidiary.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" on any date means:
(a)if the stock is listed or admitted to trade on a national
securities exchange, the closing price of the stock on the Composite
Tape, as published in the Western Edition of The Wall Street
Journal, of the principal national securities exchange on which the
stock is so listed or admitted to trade, on such date, or, if there
is no trading of the stock on such date, then the closing price of
the stock as quoted on such Composite Tape on the next preceding
date on which there was trading in such shares;
(b)if the stock is not listed or admitted to trade on a national
securities exchange, the last price for the stock on such date, as
furnished by the National Association of Securities Dealers, Inc.
("NASD") through the NASDAQ National Market Reporting System or a
similar organization if the NASD is no longer reporting such
information;
(c)if the stock is not listed or admitted to trade on a national
securities exchange and is not reported on the National Market
Reporting System, the mean between the bid and asked price for the
stock on such date, as furnished by the NASD or a similar
organization; or
(d)if the stock is not listed or admitted to trade on a national
securities exchange, is not reported on the National Market
Reporting System and if bid and asked prices for the stock are not
furnished by the NASD or a similar organization, the value as
established by the Committee at such time for purposes of this Plan.
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"Participant" means an Eligible Person who has been granted an Award
under this Plan.
"Performance Measure(s)" means the specific objective goal or goals
(which may be cumulative and/or alternative) that are timely set by the
Committee for each Participant and set forth in his or her Award
Agreement for the Performance Period in respect of any one or more of
the Business Criteria applicable to the Award.
"Performance Period" means the fiscal year of the Company or other
specific period of time established by the Committee with respect to
which the Performance Measures applicable to the Award are set by the
Committee. A Performance Period shall not be less than three months and
shall not exceed 10 years.
"Performance Scale" means the weights assigned to the Performance
Measures and any graduated scale established by the Committee pursuant
to Section 4 to indicate the percentage of the Target Incentive that
will be payable as a Bonus with respect to the Award.
"Personal Representative" means the person or persons who, upon the
disability or incompetence of a Participant, shall have acquired on
behalf of the Participant, by legal proceeding or otherwise, the power
to exercise the rights or receive benefits under this Plan and who
shall have become the legal representative of the Participant.
"Plan" means this New Century Financial Corporation 1999 Incentive
Compensation Plan, as amended from time to time.
"Restricted Shares" or "Restricted Stock" means shares of Common Stock
granted to a Participant under Section 5, subject to payment of such
consideration, conditions on vesting, and transfer and other
restrictions as are established in or pursuant to this Plan and the
related Award Agreement and Restricted Stock Agreement, for so long as
such shares remain unvested under the terms of this Plan and the
applicable Restricted Stock Agreement.
"Restricted Stock Agreement" means a written agreement evidencing the
terms and conditions of a Restricted Stock grant under this Plan.
"Retirement" or "Retire" means termination of employment from the
Company and its Subsidiaries upon or after attainment of age sixty five
(65) in accordance with the retirement policies of the Company then in
effect.
"Section 162(m)" means Section 162(m) of the Code, and the regulations
promulgated thereunder, all as amended from time to time.
"Subsidiary" means any corporation or other entity a majority or more
of whose outstanding voting stock or voting power is beneficially
owned, directly or indirectly, by the Company.
"Target Incentive" means the amount, expressed as a percentage of Base
Salary, established pursuant to Section 4 that a Participant may
receive as a Bonus in respect of the Award if the applicable
Performance Measures are timely met.
"Termination for Cause" means that the Eligible Person's employment has
been terminated by the Company or a Subsidiary because such Eligible
Person (i) materially breached his or her employment agreement with the
Company, or in the absence of a written agreement, the material terms
of his or her employment, (ii) continually failed to substantially
perform his or her duties with the Company (other than a failure
resulting from the Employee's incapacity due to physical or mental
illness), (iii) willfully engaged in conduct which is injurious to the
Company, monetarily or otherwise, or (iv) committed a felony.
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III.Administration of the Plan.
A. The Committee. This Plan shall be administered by a Committee, duly
authorized by the Board to administer this Plan, which Committee shall
consist solely of two or more members of the Board who are "outside
directors" within the meaning of Section 162(m) and "Non-Employee
Directors" within the meaning of Rule 16b-3 promulgated under the
Exchange Act. Action of the Committee with respect to the administration
of this Plan shall be taken pursuant to a majority vote or by written
consent of its members.
B. Powers of the Committee. Subject to the express provisions of this Plan,
the Committee shall have the sole authority:
(a)to determine eligibility and, from among those persons determined to be
eligible, the particular Eligible Persons who will receive Awards;
(b)to grant Awards to Eligible Persons, and determine the other specific
terms and conditions of such Awards consistent with the express limits of
this Plan (including, without limitation, the authority to determine
Performance Periods, select the applicable Performance Measure(s),
determine the Performance Scale (if any), and establish the Target
Incentive);
(c)to determine the amount of Bonuses, and the time or times at which and
the form and manner in which Bonuses will be paid (which may include
elective or mandatory deferral alternatives);
(d)to approve the forms of Awards Agreements and Restricted Stock
Agreements (which need not be identical among Participants);
(e)to construe and interpret this Plan and any agreements (including,
without limitation, Award Agreements and Restricted Stock Agreements)
defining the rights and obligations of the Company and Participants under
this Plan, further define the terms used in this Plan, and prescribe, amend
and rescind rules and regulations relating to the administration of this
Plan;
(f)to make all other determinations and take such other action as
contemplated by this Plan or as may be necessary or advisable for the
administration of this Plan and the effectuation of its purposes.
C. Binding Determinations/Liability Limitation. Any action taken by, or
inaction of, the Company, any Subsidiary, the Board or the Committee
relating or pursuant to this Plan and within its authority hereunder or
under applicable law shall be within the absolute discretion of that
entity or body and shall be conclusive and binding upon all persons.
Neither the Board nor the Committee, nor any member thereof or person
acting at the direction thereof, shall be liable for any act, omission,
interpretation, construction or determination made in good faith in
connection with this Plan (or any Award Agreement or Restricted Stock
Agreement), and all such persons shall be entitled to indemnification
and reimbursement by the Company in respect of any claim, loss, damage
or expense (including, without limitation, attorneys' fees) arising or
resulting therefrom to the fullest extent permitted by law and/or under
any directors and officers liability insurance coverage that may be in
effect from time to time.
D. Reliance on Experts. In making any determination or in taking or not
taking any action under this Plan, the Committee may obtain and may rely
upon the advice of experts, including professional advisors to the
Company. No director, officer or agent of the Company shall be liable
for any such action or determination taken or made or omitted in good
faith.
E. Express Authority (and Limitations on Authority) to Change Terms and
Conditions of Awards; Acceleration or Deferral of Payment. Without
limiting the Committee's authority under other provisions of this Plan,
but subject to any express limitations of this Plan and compliance with
Section 162(m), the Committee shall have the authority to accelerate a
Bonus (after the attainment of the applicable Performance Measure(s))
and to waive restrictive conditions for a Bonus (including any
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<PAGE>
forfeiture conditions, but not Performance Measure(s)), in such
circumstances as the Committee deems appropriate. In the case of any
acceleration of a Bonus after the attainment of the applicable
Performance Measure(s), the amount payable shall be discounted to its
present value using an interest rate equal to Moody's Average Corporate
Bond Yield (or such other rate of interest which is deemed to constitute
a "reasonable rate of interest" for purposes of Section 162(m)) for the
month preceding the month in which such acceleration occurs. Any
deferred payment shall be subject to Section 4.9.
IV.Bonus Provisions.
A. Participation. Awards may be granted by the Committee only to those
persons that the Committee determines to be Eligible Persons. An
Eligible Person who has been granted an Award may, if otherwise
eligible, be granted additional Awards if the Committee so determines.
The Committee shall, for each Award, determine the applicable
Performance Period, Performance Measure(s), Performance Scale (if any),
and the Target Incentive, each of which shall be determined consistent
with the other terms of this Plan and Section 162(m) and shall be set
forth in the applicable Award Agreement.
B. Award Agreements. Each Award shall be evidenced by a written Award
Agreement, the form of which shall be approved by the Committee, which
shall set forth the terms and conditions of that Award. Each Award
Agreement shall be signed by a duly authorized officer of the Company
and, if required by the Committee, by the recipient of that Award.
C. Provision for Bonus. Each Participant may receive a Bonus if and only if
the Performance Measure(s) established by the Committee for the Award,
relative to the applicable Business Criteria, are attained in the
applicable Performance Period. Notwithstanding the fact that the
Performance Measure(s) have been attained, the Committee may pay a Bonus
of less than the amount determined by the formula or standard
established pursuant to Section 4.4 or to pay no Bonus at all.
D. Determination of Performance Measures, Performance Scales.
(a)Performance Measures. The specific Performance Measure(s) with
respect to an Award must be established by the Committee while the
performance relating to the Performance Measure(s) remains
substantially uncertain within the meaning of Section 162(m) and in
no event:
(i)more than 90 days after the commencement of the applicable
Performance Period, and
(ii)after 25% of the applicable Performance Period has elapsed.
At the time the Performance Measure(s) for an Award are selected,
the Committee shall provide, in terms of an objective formula or
standard for the Participant (which may include a Performance
Scale), the method of computing the specific amount of the Target
Incentive for the Award that will be payable to the Participant as a
Bonus if the Performance Measure(s) are attained, subject to
Sections 4.3, 4.5, 4.7, and 4.8.
(b)Performance Scales. The Committee may choose to assign different
weights to the importance of any Performance Measure; provided that
the total of the relevant weights assigned to all measures shall
equal one hundred percent (100%) of the total Target Incentive. The
Committee may also establish a graduated scale for each Performance
Measure that is established to indicate that percentage of the
Target Incentive that will be payable for each level of such measure
that is achieved. The Committee may assign values between zero (0%)
and two hundred percent (200%), inclusive, relating to the degree of
attainment under and over the principal measure (100%).
E. Maximum Individual Bonus. Notwithstanding any other provision hereof,
the maximum aggregate Bonus that may be paid (including amounts paid in
Common Stock or converted into Restricted Stock) pursuant to all Awards
granted in any calendar year to any one Eligible Person is $5 million.
The foregoing limit shall be subject to adjustments consistent with
Section 3.5.
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<PAGE>
F. Adjustments. To preserve the intended incentives and benefits of an
Award, the Committee shall (a) adjust Performance Measures or other
features of an Award to reflect any material change in corporate
capitalization, any material corporate transaction (such as a
reorganization, combination, separation, merger, acquisition, or any
combination of the foregoing), or any complete or partial liquidation of
the Company, (b) calculate Performance Measures without regard for any
change in accounting policies or practices affecting the Company and/or
the Business Criteria or the Performance Measures, and (c) adjust
Business Criteria and Performance Measures or other features of an Award
to reflect the effects of any special charges to the Company's earnings;
in each case only to the extent consistent with the requirements of
Section 162(m) to qualify such Award as performance-based compensation.
By express provision in an Award Agreement, the Committee may (x)
provide that one or more of the adjustments in (a), (b) or (c) above
will not be made with respect to the Award, and/or (y) establish such
other events or circumstances, consistent with Section 162(m), with
respect to which the Committee will make appropriate adjustments to the
Award.
G. Committee Discretion to Determine Bonuses. The Committee has the sole
discretion to determine the standard or formula pursuant to which each
Participant's Bonus shall be calculated (in accordance with Sections 4.3
and 4.4), whether all or any portion of the amount so calculated will be
paid, subject in all cases to the terms, conditions and limits of this
Plan and of any other written commitment authorized by the Committee. To
this same extent, the Committee may at any time establish additional
conditions and terms of an Award or for the payment of Bonuses
(including but not limited to the achievement of other financial,
strategic or individual goals, which may be objective or subjective) as
it may deem desirable in carrying out the purposes of this Plan and may
take into account such other factors as it deems appropriate in
administering any aspect of this Plan. The Committee may not, however,
increase the maximum amount permitted to be paid to any individual under
Section 4.4 or 4.5 or pay a Bonus under this Plan if the applicable
Performance Measure(s) have not been satisfied (subject to Sections
6.1(e) and 6.3).
H. Committee Certification. No Participant shall receive any payment
(including, without limitation, any cash, Common Stock, Restricted
Stock, or other payment in accordance with Section 4.9 or Section 5)
under this Plan unless the Committee has certified, by resolution or
other appropriate action in writing, that the amount thereof has been
accurately determined in accordance with the terms, conditions and
limits of this Plan and that the Performance Measure(s) (including, if
applicable to the Award, the relative level of performance in relation
to the Performance Scale) and any other material terms previously
established by the Committee or set forth in this Plan or the applicable
Award Agreement were in fact satisfied.
I. Time of Payment; Deferred Amounts. Any Bonuses shall be paid as soon as
practicable following the Committee's determinations under this Section
4 and the certification of the Committee's findings under Section 4.8.
Payment shall be in cash or Common Stock, as determined by the Committee
at the time of payment (or, if the limits in Section 5.1 are reached,
the excess shall be paid in Restricted Stock or Common Stock as set
forth in Section 5), unless the Committee provides otherwise in the
applicable Award Agreement, in which case the Committee may provide for
payment in Common Stock, restricted Common Stock, cash or cash
equivalent, or any combination thereof. All payments shall be subject to
the satisfaction of the terms and conditions of Sections 6.7 and 6.9.
Notwithstanding the foregoing but subject to compliance with Section
162(m) and Sections 4.5 and 5.1, the Committee may provide a Participant
the opportunity to elect to defer the payment of any Bonus under a
nonqualified deferred compensation plan maintained by the Company. In
the case of any deferred payment of a Bonus after the attainment of the
applicable Performance Measure(s), any amount in excess of the amount
otherwise payable shall be based on either Moody's Average Corporate
Bond Yield (or such other rate of interest which is deemed to constitute
a "reasonable rate of interest" for purposes of Section 162(m)) over the
deferral period or the return over the deferral period of one or more
predetermined actual investments (including Shares) such that the amount
payable at the later
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<PAGE>
date will be based upon actual returns, including any decrease or
increase in the value of the investment(s). If the Committee provides
for payment in Common Stock, the number of shares of Common Stock to be
delivered in respect of a Participant's Bonus shall equal (a) the dollar
amount of the Bonus to be paid in such form, divided by (b) the Fair
Market Value of a share of Common Stock on the date that cash payment of
the Bonus would otherwise be made; provided that no fractional shares of
Common Stock shall be issued under this Plan and all fractional share
interests shall be disregarded.
V. Restricted Stock.
A. General. Unless expressly provided otherwise in the applicable Award
Agreement, the maximum aggregate Bonus that may be paid under Section
4.9 pursuant to all Awards granted in any calendar year to any one
Eligible Person is 200% of the Eligible Person's Base Salary (as in
effect on the date of grant of the Eligible Person's first Award in that
year). In the event that the Eligible Person's aggregate Bonus(es)
awarded in the calendar year would exceed the limitation described in
the preceding sentence, the excess amount shall be paid in the form of
Restricted Stock (or, if the Eligible Person is eligible to Retire on
the date of payment, in shares of Common Stock) in accordance with this
Section 5.
B. Restricted Stock Grant. If all or a portion of a Bonus exceeds the
payment limitation set forth in Section 5.1, the portion of the Bonus
which exceeds such limit shall be paid in the form of Restricted Shares
(or, if the Eligible Person is eligible to Retire on the date of
payment, in shares of Common Stock). The grant of such Restricted Shares
shall be evidenced by a Restricted Stock Agreement in substantially the
form attached hereto as Exhibit B or such other form that the Committee
may approve. As a condition to the delivery of any Restricted Shares,
the Participant must sign the applicable Restricted Stock Agreement. The
number of shares of Restricted Stock (or, if the Participant is eligible
to Retire on the date of payment, the number of shares of Common Stock)
to be delivered in respect of a Participant's Bonus shall equal (a) the
dollar amount of the Bonus that could not be paid in cash due to the
limitation contained in Section 5.1, divided by (b) the Fair Market
Value of a share of Common Stock on date that cash payment of the Bonus
would otherwise be made (the "Grant Date"). Shares of Common Stock
delivered to a Retirement-eligible Participant in accordance with the
foregoing provisions of this Section 5.2 shall not be subject to the
restraints set forth in Section 5.3 and shall be fully (100%) vested on
the Grant Date.
C. Pre-Vesting Restraints. Shares of Restricted Stock may not be sold,
assigned, transferred, pledged or otherwise disposed of or encumbered,
either voluntarily or involuntarily, until the restrictions on such
shares have lapsed and the shares have become vested.
D. Dividend and Voting Rights. Unless otherwise provided by the Committee
in the applicable Award Agreement, a Participant receiving Restricted
Stock shall be entitled to cash dividend and voting rights for all
shares issued even though they are not vested, provided that such rights
shall terminate immediately as to any Restricted Shares which cease to
be eligible for vesting.
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<PAGE>
E. Vesting. Unless otherwise provided by the Committee in the applicable
Award Agreement, Restricted Stock granted in connection with a Bonus (to
the extent not previously terminated or forfeited) shall vest as set
forth below:
<TABLE>
<CAPTION>
Date on which Restricted Stock Number of shares as
vests (the "Vesting Date") to which vesting occurs
------------------------------ ----------------------------
<C> <S>
One year after the applicable Grant Date One-third (1/3) of the total
number of Restricted Shares
granted in respect of the
Bonus.
Two years after the applicable Grant Date One-third (1/3) of the total
number of Restricted Shares
granted in respect of the
Bonus.
Three years after the applicable Grant Date One-third (1/3) of the total
number of Restricted Shares
granted in respect of the
Bonus.
</TABLE>
Notwithstanding the foregoing, Restricted Stock (to the extent not
previously terminated or forfeited) granted in connection with a Bonus
shall vest on the date that the Participant is eligible to Retire.
F. Share Certificates. Certificates representing Restricted Stock shall be
imprinted with a legend to the effect that neither the shares
represented thereby nor any interest therein may be sold, exchanged,
transferred, pledged, hypothecated or otherwise disposed of during the
period that such shares are nontransferable or remain subject to a risk
of forfeiture.
G. No Fractional Shares. No fractional shares of Restricted Stock shall be
issued under this Plan and all such fractions shall be disregarded.
H. Adjustments. Upon or in contemplation of any reclassification,
recapitalization, stock split (including a stock split in the form of a
stock dividend) or reverse stock split; any merger, combination,
consolidation, or other reorganization; any spin-off, split-up, or
similar extraordinary dividend distribution ("spin-off") in respect of
the Common Stock (whether in the form of securities or property); any
exchange of Common Stock or other securities of the Company, or any
similar, unusual or extraordinary corporate transaction in respect of
the Common Stock; or a sale of all or substantially all the assets of
the Company as an entirety ("asset sale"); then the Committee shall, in
such manner, to such extent (if any) and at such time as it deems
appropriate and equitable in the circumstances:
(a)in any of such events, proportionately adjust any or all of (i) the type
of shares of Common Stock (or other securities) that thereafter may be made
the subject of Awards, (ii) the number, amount and type of shares of Common
Stock (or other securities or property) subject to any or all outstanding
Awards, (iii) the purchase price of Restricted Shares, and/or (iv) the
securities, cash or other property deliverable upon payment of any
outstanding Awards; or
(b)in the case of a reclassification, recapitalization, merger,
consolidation, combination, or other reorganization, spin off or asset
sale, make provision for a cash payment or for the substitution or exchange
of any or all Restricted Shares, based upon the distribution or
consideration payable to holders of the Common Stock upon or in respect of
such event.
In any of such events, the Committee may take such action prior to such
event to the extent that the Committee deems the action necessary to permit
the Participant to realize the benefits intended to be conveyed with
respect to the underlying shares in the same manner as is or will be
available to stockholders generally.
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VI.General Provisions.
A. Rights of Eligible Persons, Participants and Beneficiaries
(a)Employment Status. Status as an Eligible Person shall not be
construed as a commitment that any Award will be made under this
Plan to an Eligible Person or to Eligible Persons generally.
(b) No Employment Contract. Nothing contained in this Plan (or in
any other documents under this Plan or in any Award Agreement or
Restricted Stock Agreement) shall confer upon any Eligible Person or
Participant any right to continue in the employ or other service of
the Company, constitute any contract or agreement of employment or
other service or affect an employee's status as an employee at will,
nor shall interfere in any way with the right of the Company to
change a person's compensation or other benefits, or to terminate
his or her employment or other service, with or without cause.
Nothing in this Section 6.1(b), however, is intended to adversely
affect any express independent right of such person under a separate
employment or service contract other than an Award Agreement or
Restricted Stock Agreement.
(c)Plan Not Funded. Awards payable under this Plan shall be payable
from the general assets of the Company and no special or separate
reserve, fund or deposit shall be made to assure payment of such
Awards. No Participant, Beneficiary or other person shall have any
right, title or interest in any fund or in any specific asset
(including shares of Common Stock, except as expressly otherwise
provided) of the Company by reason of any Award hereunder. Neither
the provisions of this Plan (or of any related documents), nor the
creation or adoption of this Plan, nor any action taken pursuant to
the provisions of this Plan shall create, or be construed to create,
a trust of any kind or a fiduciary relationship between the Company
and any Participant, Beneficiary or other person. To the extent that
a Participant, Beneficiary or other person acquires a right to
receive payment pursuant to any Award hereunder, such right shall be
no greater than the right of any unsecured general creditor of the
Company.
(d)Privileges of Stock Ownership. Except as otherwise expressly
authorized by the Committee or this Plan, a Participant shall not be
entitled to any privilege of stock ownership as to any shares of
Common Stock not actually delivered to and held of record by the
Participant. No adjustment will be made for dividends or other
rights as a stockholder for which a record date is prior to such
date of delivery.
B. Non-Transferability of Benefits and Interests. Except as expressly
provided by the Committee in accordance with the provisions of Section
162(m): (a) all Awards are non-transferable and shall not be subject in
any manner to sale, transfer, anticipation, alienation, assignment,
pledge, encumbrance or charge; and (b) amounts payable in respect of an
Award shall be delivered only to (or for the account of) the
Participant. The forgoing transfer restrictions in this Section 6.2
shall not apply to:
(a)transfers to the Company;
(b)the designation of a beneficiary to receive benefits in the event
of the Participant's death or, if the Participant has died,
transfers to the Participant's Beneficiary; or
(c)if the Participant has suffered a disability, permitted transfers
to the Participant's Personal Representative.
C. Consequences of a Change in Control.
(a)Acceleration. Unless prior to a Change in Control the Committee
determines that, upon its occurrence, benefits under any or all
Awards shall not be accelerated or determines that only certain or
limited benefits under any or all Awards shall be accelerated and
the extent to which
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they shall be accelerated, and/or establishes a different time in
respect of such event for such acceleration, then upon the
occurrence of a Change in Control:
(i)Restricted Stock shall immediately vest free of restrictions,
and
(ii)each Award shall become payable to the Participant in
accordance with Section 6.3(b) and shall, subject to such
payment, terminate.
The Committee may override the limitations on acceleration in this
Section 6.3(a) by express provision in the Award Agreement and may
accord any Eligible Person a right to refuse any acceleration, whether
pursuant to the Award Agreement or otherwise, in such circumstances as
the Committee may approve. Any acceleration of Awards shall comply with
applicable legal requirements. The Committee may deem an acceleration
to occur immediately prior to the applicable event.
Any discretion with respect to these events shall be limited to the
extent required by applicable accounting requirements in the case of a
transaction intended to be accounted for as a pooling of interests
transaction.
(b)Acceleration Payout. Payment for early termination of an
outstanding Award in accordance with Section 6.3(a) shall equal (i)
the maximum Bonus that would be paid with respect to such Award if
all Performance Measures had been achieved, divided by (ii) a
fraction the numerator of which shall equal the number of days in
the Performance Period occurring prior to the Change in Control (or
such later date as may be determined by the Board or the Committee)
and the denominator of which shall equal the total number of days in
that Performance Period.
(c)No Parachute Payments. Notwithstanding anything else in this
Section 6.3 to the contrary, in no event shall the payment of an
Award or the vesting of Restricted Stock be accelerated under this
Plan to an extent or in a manner which would not be fully deductible
by the Company for federal income tax purposes because of Section
280G of the Code, nor shall any payment or vesting hereunder be
accelerated if any portion of such accelerated payment or vesting
would not be deductible by the Company because of Section 280G of
the Code. If a holder would be entitled to benefits or payments
hereunder and under any other plan or program which would constitute
"parachute payments" as defined in Section 280G of the Code, then
the holder may by written notice to the Company designate the order
in which such parachute payments shall be reduced or modified so
that the Company is not denied federal income tax deductions for any
"parachute payments" because of Section 280G of the Code.
Notwithstanding the foregoing, an employment or other agreement with
the Participant may expressly provide for benefits in excess of
amounts determined by applying the foregoing Section 280G
limitations.
D. Effect of Termination of Employment.
(a)General. Unless otherwise provided by the Committee in the
applicable Award Agreement, if a Participant ceases to be an
employee of the Company or a Subsidiary for any reason (other than
due to the Participant's death, Total Disability, or Retirement):
(i)the Participant's outstanding Award(s) for the Performance
Period(s) in which the Participant's termination occurs shall
terminate and the Participant shall have no further rights with
respect thereto, and
(ii)the Restricted Shares previously delivered or then
deliverable to the Participant, to the extent not vested as of
the date of the Participant's termination, shall be forfeited to
the Company and the Participant shall have no further rights
with respect thereto.
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<PAGE>
(b)Death, Disability, Retirement. Unless otherwise provided by the
Committee in the applicable Award Agreement, if a Participant
terminates employment with the Company or a Subsidiary due to his or
her death, Total Disability, or Retirement:
(i)the Restricted Shares then held by or deliverable to the
Participant (and not previously terminated or forfeited) shall
become immediately vested and all restrictions imposed on such
shares shall thereupon lapse; and
(ii)the Participant shall be entitled to a pro-rata portion,
determined in accordance with the next sentence, of his or her
Awards outstanding on the date of his or her termination of
employment. The pro-rata portion shall equal the amount of the
Bonus that would have been payable for the full Performance
Period of the Award had the Participant not terminated
employment, multiplied by a fraction the numerator of which
shall equal the number of days in the Performance Period that
the Participant was an employee of the Company or a Subsidiary
and the denominator of which shall equal the number of days in
the Performance Period. Payment shall be made in a cash lump sum
(notwithstanding Section 5.1) at the time provided in Section
4.9.
(c)Termination for Cause. If a Participant is employed on the last
day of the applicable Performance Period but his or her employment
is Terminated for Cause prior to the date that the Bonus for such
Performance Period is actually paid to such Participant pursuant to
Section 4.9 (or credited as a deferral pursuant to such section in
lieu of actual payment at that time, or paid in shares of Common
Stock or Restricted Stock if Section 5 is applicable), the
Participant's Award and any Bonus that is then or may become payable
in respect of the Award to the Participant shall be forfeited and
the Participant shall have no further rights with respect thereto.
(d)Events Not Deemed a Termination of Employment. Unless Company
policy or the Committee otherwise provides, the employment or
service relationship shall not be considered terminated in the case
of (x) sick leave, (y) military leave, or (z) any other leave of
absence authorized by the Company or the Committee; provided that
unless reemployment upon the expiration of such leave is guaranteed
by contract or law, such leave is for a period of not more than 90
days.
(e)Independent Contractual Rights. The foregoing provisions of this
Section 6.4 are subject to any express bonus payment rights that a
Participant may have with respect to his or her termination of
employment under a written contract with the Company in effect on
the grant date of the Award to the extent such payment rights do not
frustrate the qualification of the Award and any related Bonus, in
the absence of a termination of employment, as performance-based
compensation under Section 162(m).
E. Compliance with Laws. This Plan, the granting and vesting of Awards
under this Plan, the offer, issuance and delivery of shares of Common
Stock, and the payment of money under this Plan or under Awards are
subject to compliance with all applicable federal and state laws, rules
and regulations (including but not limited to state and federal
securities law) and to such approvals by any listing, regulatory or
governmental authority as may, in the opinion of counsel for the
Company, be necessary or advisable in connection therewith. In addition,
any securities delivered under this Plan may be subject to any special
restrictions that the Committee may require to preserve a pooling of
interests under generally accepted accounting principles. The person
acquiring any securities under this Plan will, if requested by the
Company, provide such assurances and representations to the Company as
the Committee may deem necessary or desirable to assure compliance with
all applicable legal and accounting requirements as a condition of the
delivery of such security by the Company.
F. Law to Govern. All questions pertaining to the construction, regulation,
validity and effect of the provisions of this Plan and/or Award
Agreements or Restricted Stock Agreements shall be determined in
accordance with the laws of the State of Delaware.
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<PAGE>
G. Additional Payment Conditions. Notwithstanding anything else contained
herein to the contrary, in the event that the payment of a Participant's
benefits under this Plan would cause the Company to violate any covenant
contained in any agreement entered into by the Company with a third-
party, or in the event that the Company is in violation of any third
party financial covenant, the payment of benefits under this Plan shall
be deferred (with interest or other earnings in accordance with Section
4.9) until such time as the Company would remain in compliance with such
non-financial covenants, or be in compliance with such financial
covenants, after such benefits are paid.
H. Construction. It is the intent of the Company that (except with respect
to the accelerated payment of Awards pursuant to Section 6.3 in
connection with a Change in Control and any payment in respect of a
Participant's express written contract rights in accordance with Section
6.4(e)) this Plan, Awards, and Bonuses paid hereunder will qualify as
performance-based compensation or will otherwise be exempt from
deductibility limitations under Section 162(m). Any provision,
application or interpretation of this Plan inconsistent with this intent
to satisfy the standards in Section 162(m) shall be avoided.
Further, it is the intent of the Company that transactions involving this
Plan, Awards, Bonuses, and Restricted Stock, in the case of Participants
who are or may be subject to Section 16 of the Exchange Act, satisfy to the
extent feasible the requirements for applicable exemptions under Rule 16
promulgated under the Exchange Act so that such persons (unless they
otherwise agree) will be entitled to the benefits of Rule 16b-3 or other
exemptive rules under Section 16 of the Exchange Act in respect of those
transactions and will not be subject to avoidable liability thereunder.
I. Tax Withholding. Upon any payment of any Award or upon the vesting of
Restricted Shares (or, if a Code Section 83(b) election is made by the
recipient of the Restricted Shares, in connection with such election),
the Company shall have the right at its option to:
(a)require the Participant (or Personal Representative or
Beneficiary, as the case may be) to pay or provide for payment of
the amount of any taxes which the Company or any Subsidiary may be
required to withhold with respect to such event or payment; or
(b)deduct from any amount payable in cash the amount of any taxes
which the Company or any Subsidiary may be required to withhold with
respect to such cash payment.
In any case where a tax is required to be withheld in connection with the
delivery of shares of Common Stock under this Plan, the Committee may in
its sole discretion (subject to Section 6.5) grant (either at the time of
the Award or thereafter) to the Participant the right to elect, pursuant to
such rules and subject to such conditions as the Committee may establish,
to have the Company reduce the number of shares to be delivered by (or
otherwise reacquire) the appropriate number of shares valued at their Fair
Market Value, to satisfy such withholding obligation, determined in each
case as of the trading day next preceding the applicable date of exercise,
vesting or payment.
J. Conflicts with Plan. In the event of any inconsistency or conflict
between the terms of this Plan, any summary and/or any Award Agreement
or Restricted Stock Agreement, the terms of this Plan shall govern.
K. Amendments, Suspension or Termination of Plan. The Board or the
Committee may, at any time, terminate or, from time to time, amend,
modify or suspend this Plan, in whole or in part, or, consistent with
Section 162(m), amend any outstanding Award. No Awards may be granted
during any suspension of this Plan or after termination of this Plan,
but the Committee shall retain jurisdiction as to Awards and Restricted
Stock then outstanding in accordance with the terms of this Plan.
Notwithstanding the foregoing, no amendment may be effective without
Board and/or stockholder approval if such approval is necessary to
comply with the applicable rules of Section 162(m) or applicable law. No
amendment, suspension or termination of this Plan or change of or
affecting any outstanding Award or Restricted Stock grant shall, without
written consent of the Participant, affect in
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<PAGE>
any manner materially adverse to the Participant any rights or benefits
of the Participant or obligations of the Company under any Award or
Restricted Stock grant under this Plan prior to the effective date of
such change. Changes contemplated by Section 4.6 or Section 5.8 shall
not be deemed to constitute changes or amendments for purposes of this
Section 6.11.
L. Receipt and Release. Any payment of a Bonus under Section 4.9 or Section
5.1 to a Participant or the Participant's Beneficiary in accordance with
the provisions of this Plan shall, to the extent thereof, be in full
satisfaction of all claims against the Board and the Company.
M. Effective Date. This Plan is effective upon the date of its adoption by
the Board (the "Effective Date"); subject, however, to the approval of
the Company's stockholders within 12 months thereafter. Any Award
granted under this Plan prior to the date of such stockholder approval
shall be, and hereby is, specifically conditioned upon such stockholder
approval.
N. Term of the Plan. No Award will be granted under this Plan on or after
the fifth (5th) anniversary of the Effective Date (the "termination
date"). Unless otherwise expressly provided in this Plan or in an
applicable Award Agreement, any Award granted prior to the termination
date may extend beyond such date, and all authority of the Committee
with respect to Awards hereunder, including the authority to amend an
Award Agreement or Restricted Stock Agreement, shall continue during any
suspension of this Plan and in respect of Awards and Restricted Stock
outstanding on the termination date.
O. Captions. Captions and headings are given to the sections and
subsections of this Plan solely as a convenience to facilitate
reference. Such headings shall not be deemed in any way material or
relevant to the construction or interpretation of this Plan or any
provision thereof.
P. Effect of Change of Subsidiary Status. For purposes of this Plan and any
Award or Restricted Stock grant hereunder, if an entity ceases to be a
Subsidiary, a termination of employment and service shall be deemed to
have occurred with respect to each Eligible Person in respect of such
Subsidiary who does not continue as an Eligible Person in respect of
another entity within the Company.
Q. Non-Exclusivity of Plan. Subject to compliance with Section 162(m),
nothing in this Plan shall limit or be deemed to limit the authority of
the Board or the Committee to grant awards or authorize any other
compensation, with or without reference to the Common Stock and/or Bonus
Criteria or Performance Measures, under any other plan or authority.
R. No Corporate Action Restriction. The existence of this Plan, the Award
Agreements, Restricted Stock Agreements, and the Awards and Restricted
Stock granted hereunder shall not limit, affect or restrict in any way
the right or power of the Board or the stockholders of the Company to
make or authorize: (a) any adjustment, recapitalization, reorganization
or other change in the Company's or any Subsidiary's capital structure
or its business, (b) any merger, amalgamation, consolidation or change
in the ownership of the Company or any Subsidiary, (c) any issue of
bonds, debentures, capital, preferred or prior preference stock ahead of
or affecting the Company's or any Subsidiary's capital stock or the
rights thereof, (d) any dissolution or liquidation of the Company or any
Subsidiary, (e) any sale or transfer of all or any part of the Company
or any Subsidiary's assets or business, or (f) any other corporate act
or proceeding by the Company or any Subsidiary. No Participant,
Beneficiary or any other person shall have any claim under any Award,
Award Agreement, or Restricted Stock Agreement against any member of the
Board or the Committee, or the Company or any employees, officers or
agents of the Company or any Subsidiary, as a result of any such action.
S. Other Company Benefit and Compensation Program. Payments and other
benefits received by a Participant under an Award made pursuant to this
Plan shall not be deemed a part of a Participant's compensation for
purposes of the determination of benefits under any other employee
welfare or benefit plans or arrangements, if any, provided by the
Company or any Subsidiary, except where the Committee or the Board
expressly otherwise provides or authorizes in writing.
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<PAGE>
APPENDIX A
BUSINESS CRITERIA
The Business Criteria shall mean any one or a combination of the following,
in each case Subject to Section 2.1 of the Plan. The Business Criteria
applicable to an Award may be established with respect to the Company or any
applicable Subsidiary, division, segment, or unit (as applicable, the
"Entity").
Before-Tax Net Income. "Before-Tax Net Income" means net income from
operations before reduction for income taxes with the following adjustments:
(a) benefits payable under the Company's employee incentive compensation plans
for the Performance Period to employees of the Entity (other than employees
who participate in the Plan for that Performance Period) shall be deducted,
but any benefits payable under the Plan shall not be deducted; and (b) any
income or loss derived from discontinued operations shall be excluded (unless
the Committee expressly provides in the applicable Award Agreement that such
income or loss shall not be excluded with respect to the related Award).
Cash Flow. "Cash Flow" means cash and cash equivalents derived from either:
(a) net cash flow from operations, or (b) net cash flow from operations,
financings and investing activities, as determined by the Committee at the
time of grant and set forth in the applicable Award Agreement.
Corporate Overhead Costs. "Corporate Overhead Costs" means an Entity's
allocable share of the Company's corporate overhead shared services including
human resources, accounting, legal and compliance services.
Delinquency Rates. "Delinquency Rates" means the percentage of borrowers
whose loans are serviced by Company who have not made a payment on or before
its due date.
Earnings Per Share. "Earnings Per Share" means earnings per share of Common
Stock on a fully diluted basis (giving effect to the dilutive effects of stock
options, restricted stock, and other dilutive instruments) determined by
dividing: (a) net earnings, less dividends on any preferred stock of the
Company, by (b) the weighted average number of common shares and common share
equivalents outstanding.
Employees. "Employees" means the Entity's aggregate number of employees, or
the number performing a specific function (such as loan officers, account
executives, telemarketers, etc.)
Gain on Sale of Loans. "Gain on Sale of Loans" means the total gain
recognized on loans sold through whole loan transactions or through
securitizations, net of premiums paid to acquire such loans and net of
expenses associated with the sale of such loans.
Liquidity Management. "Liquidity Management" means the Company's cash and
borrowing capacity under its credit commitments.
Loan Losses. "Loan Losses" means sales of loans for less than the loan
amount or sales of REOs for less than the loan amount at the time of
foreclosure plus expenses and other advances in maintaining and selling the
REO.
Loan Production Volume. "Loan Production Volume" means the aggregate volume
of loans funded during any given period or the volume of a type or category of
loans funded during any given period, as specified by the Committee in the
Award Agreement.
Loan Quality. "Loan Quality" means the number of loans originated in
accordance with the Company's underwriting policies and procedures and is
measured as loans sold, either individually, through bulk sales transactions,
or through securitizations, at a premium price as a percentage of total loans
sold.
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<PAGE>
Origination Expenses. "Origination Expenses" means the aggregate points and
fees paid to mortgage brokers or correspondents, commission expenses and other
direct origination-related expenses paid by an Entity in connection with loan
originations over a specified period.
Origination Revenues. "Origination Revenues" means the aggregate points and
fees and other revenues received by an Entity from borrowers in connection
with loan originations over a specified period.
Residual Performance. "Residual Performance" means the performance of
residual interests in the Company's loan securitization transactions as
compared with the projected performance used by the Company in recording the
book value of the residual interests.
Return on Equity. "Return on Equity" means consolidated net income of the
Company (less any preferred dividends), divided by the average consolidated
common stockholders equity.
Total Stockholders' Equity. "Total Stockholders' Equity" means the Company's
total stockholders' equity as shown on the Company's audited financial
statements as of the first day of a Performance Period, increased for equity
issued during the Performance Period in the manner described in the next
sentence. The amount of such increase shall be equal to the amount of equity
issues during the Performance Period multiplied by a fraction, the numerator
of which is the number of days remaining in the Performance Period and the
denominator of which is the total number of days is 365.
Total Stockholder Return. "Total Stockholder Return" means, with respect to
the Company or other entities (if measured on a relative basis): (a) the
change in the market price of its common stock (as quoted on the principal
market on which it is traded as of the beginning and ending of the period)
plus dividends and other distributions paid, divided by (b) the beginning
quoted market price for the common stock, all of which is adjusted for any
changes in equity structure, including but not limited to stock splits and
stock dividends.
Stock Price. "Stock Price" means the stock price or market value of the
Common Stock of the Company.
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<PAGE>
APPENDIX B
FORM OF RESTRICTED STOCK AGREEMENT
NEW CENTURY FINANCIAL CORPORATION
1999 INCENTIVE COMPENSATION PLAN
RESTRICTED STOCK AGREEMENT
THIS RESTRICTED STOCK AGREEMENT (this "Agreement") is dated as of the day
of , , by and between NEW CENTURY FINANCIAL CORPORATION, a
Delaware corporation (the "Company") and
(the "Participant").
W I T N E S S E T H
WHEREAS, the Company maintains the New Century Financial Corporation 1999
Incentive Compensation Plan (the "Plan");
WHEREAS, the "Committee" duly appointed and acting under the Plan has
determined that the Participant is entitled to a "Bonus" under the Plan for
the performance period ending , and that, in accordance
with Section 5 of the Plan, all or a portion of such Bonus is to be paid in
the form of "Restricted Stock" (as such terms are defined in the Plan);
WHEREAS, the Committee desires to grant Restricted Stock to the Participant
in respect of such Bonus upon the terms and conditions set forth herein and in
the Plan;
NOW, THEREFORE, in consideration of the mutual promises and covenants made
herein and the mutual benefits to be derived herefrom, the parties hereto
agree as follows:
1. Restricted Stock Grant.
(a) Subject to the terms of this Agreement, the Company hereby grants to
the Participant a grant of an aggregate of shares (subject to
adjustment in accordance with Section 5.8 of the Plan) of Restricted Stock
(the "Restricted Shares"). Any additional shares attributable to the
Restricted Shares received by the Participant as a result of any stock
dividend, recapitalization, merger, reorganization or similar event
described in Section 5.8 of the Plan shall also be deemed restricted stock
subject to the terms and conditions of this Agreement. For purposes of
vesting, the "Grant Date" of the Restricted Shares is , .
(b) The Company shall issue a certificate or certificates in respect of the
Restricted Shares, registered in the name of the Participant, which
certificate(s) shall be held by the Company or with a third party
designated by the Committee until such time as the shares vest. Such
certificates shall be legended in accordance with Section 5.6 of the Plan.
(c) The Participant shall execute a stock power or stock powers, in blank,
with respect to such certificate(s) and shall deliver the same to the
Company. The Participant, by execution of this Agreement, hereby appoints
the Company and each of its authorized representatives as the Participant's
attorney(s)-in-fact to effect any transfer of such shares to the Company as
may be required pursuant to the Plan or this Agreement and to execute such
documents as the Company or such representatives deem necessary or
advisable in connection with any such transfer.
(d) The Participant shall have voting and dividend rights with respect to
the Restricted Shares as provided in Section 5.4 of the Plan.
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<PAGE>
2. Restrictions on Transfer.
Prior to the date that they become vested, the Restricted Shares may not be
sold, assigned, transferred, pledged or otherwise disposed of or encumbered,
either voluntarily or involuntarily. The Participant shall, upon the Company's
request, provide further assurances and documents as the Committee, in its
sole discretion, may require to enforce such restrictions.
3. Vesting; Lapse of Restrictions.
The Restricted Shares shall vest in accordance with Section 5.5 of the Plan.
Promptly after each applicable vesting date and satisfaction of all other
applicable restrictions, a certificate or certificates evidencing the number
of shares of Common Stock as to which the restrictions have lapsed on such
date (after any applicable reduction in the number of shares pursuant to
Section 6.9 of the Plan) shall be delivered to the Participant; provided, that
the Participant shall have delivered to the Company any written statements
required pursuant to Section 6.5 of the Plan and all withholding taxes
required pursuant to Section 6.9 of the Plan have been paid or otherwise
provided for.
4. Forfeiture Upon Termination of Service.
The Restricted Shares shall be subject to forfeiture as provided in Section
6.4 of the Plan. Upon any forfeiture of the Restricted Shares, the
Participant, or the Participant's Beneficiary or Personal Representative, as
the case may be, shall transfer to the Company the forfeited portion of the
Restricted Shares, without payment of any consideration by the Company for
such transfer. Notwithstanding any such transfer to the Company, or failure,
refusal or neglect to transfer, by the Participant, or Participant's
Beneficiary or Personal Representative, as the case may be, such nonvested
portion of the Restricted Shares shall be deemed transferred automatically to
the Company on the date of termination of employment.
5. Terms of Plan Govern.
The grant of the Restricted Shares and this Restricted Stock Agreement are
subject to, and the Company and the Participant agree to be bound by, all of
the terms and conditions of the Plan. Capitalized terms not otherwise defined
herein are defined in the Plan. The Participant acknowledges receipt of a copy
of the Plan, which is incorporated herein by this reference. The rights of the
Participant are subject to limitations, adjustments and modifications in
certain circumstances and upon the occurrence of certain conditions as set
forth herein and in the Plan.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Restricted Stock Agreement
to be executed on its behalf by a duly authorized officer and the Participant
has hereunto set his or her hand as of the date and year first above written.
NEW CENTURY FINANCIAL CORPORATION
By:
---------------------------------------
Its:
--------------------------------------
PARTICIPANT
------------------------------------------
(Signature)
------------------------------------------
(Print Name)
------------------------------------------
(Address)
------------------------------------------
(City, State, Zip Code)
------------------------------------------
(Social Security Number)
CONSENT OF SPOUSE
In consideration of the execution of the foregoing Restricted Stock
Agreement by New Century Financial Corporation, I, , the
spouse of Participant therein named, do hereby join with my spouse in
executing the foregoing Restricted Stock Agreement and do hereby agree to be
bound by all of the terms and provisions thereof and of the Plan.
- ------------------------------------------ ---------------------
(Signature of Spouse) (Date)
- ------------------------------------------
(Print Name)
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<PAGE>
APPENDIX B
NEW CENTURY FINANCIAL CORPORATION
1995 STOCK OPTION PLAN
(Amended and Restated May 30, 1997)
Composite Plan document reflecting the First Amendment to the Plan,
adopted March 19, 1998 and approved by shareholders May 18, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
I. THE PLAN.................................................................. 1
1.1 Purpose.............................................................. 1
1.2 Administration....................................................... 1
1.3 Participation........................................................ 2
1.4 Shares Available Under the Plan...................................... 2
1.5 Grant of Awards...................................................... 3
1.6 Exercise of Awards................................................... 3
1.7 No Transferability; Limited Exception to Transfer Restrictions....... 3
II. OPTIONS................................................................... 4
2.1 Grants............................................................... 4
2.2 Option Price......................................................... 4
2.3 Option Period........................................................ 5
2.4 Exercise of Options.................................................. 5
2.5 Limitations on Grant of Incentive Stock Options...................... 6
2.6 Non-Employee Director Awards......................................... 6
III. STOCK APPRECIATION RIGHTS................................................. 8
3.1 Grants............................................................... 8
3.2 Exercise of Stock Appreciation Rights................................ 9
3.3 Payment.............................................................. 9
IV. RESTRICTED STOCK AWARDS................................................... 10
4.1 Grants............................................................... 10
4.2 Restrictions......................................................... 10
V. PERFORMANCE SHARE AWARDS.................................................. 11
5.1 Grants of Performance Share Awards................................... 11
5.2 Grants of Performance-Based Share Awards............................. 11
VI. OTHER PROVISIONS.......................................................... 13
6.1 Rights of Eligible Employees, Participants and Beneficiaries......... 13
6.2 Adjustments Upon Changes in Capitalization........................... 14
6.3 Termination of Employment............................................ 15
6.4 Acceleration of Awards............................................... 17
6.5 Government Regulations............................................... 17
6.6 Tax Withholding...................................................... 18
6.7 Amendment, Termination and Suspension................................ 18
6.8 Privileges of Stock Ownership........................................ 19
6.9 Effective Date of the Plan........................................... 19
6.10 Term of the Plan..................................................... 19
6.11 Governing Law........................................................ 20
6.12 Plan Construction.................................................... 20
6.13 Non-Exclusivity of Plan.............................................. 20
VII. DEFINITIONS............................................................... 20
7.1 Definitions.......................................................... 20
</TABLE>
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<PAGE>
NEW CENTURY FINANCIAL CORPORATION
1995 STOCK OPTION PLAN
(Amended and Restated May 30, 1997)
I. THE PLAN
1.1 Purpose.
-------
The purpose of this Plan is to promote the success of the Company by providing
an additional means to attract, motivate and retain key personnel, consultants,
advisors and knowledgeable directors through the grant of Options and other
Awards that provide added long term incentives for high levels of performance
and for significant efforts to improve the financial performance of the Company.
Capitalized terms are defined in Article VII.
1.2 Administration.
--------------
(a) This Plan shall be administered by the Committee. Action of the Committee
with respect to the administration of this Plan shall be taken pursuant to a
majority vote or the unanimous written consent of its members. In the event
action by the Committee is taken by written consent, the action shall be deemed
to have been taken at the time specified in the consent or, if none is
specified, at the time of the last signature. The Committee may delegate
administrative functions to individuals who are officers or employees of the
Company.
(b) Subject to the express provisions of this Plan, the Committee shall
have the authority to construe and interpret this Plan and any agreements
defining the rights and obligations of the Company and Participants under this
Plan, to further define the terms used in this Plan, to prescribe, amend and
rescind rules and regulations relating to the administration of this Plan, to
determine the duration and purposes of leaves of absence which may be granted to
Participants without constituting a termination of their employment or
consulting services for purposes of this Plan, to accelerate or extend the
exercisability or extend the term of any or all outstanding Awards within the
maximum term of such Awards required by Section 2.3 or applicable law, and to
make all other determinations necessary or advisable for the administration of
this Plan. The determination of the Committee on any of the foregoing matters
shall be conclusive.
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(c) Any action taken by, or inaction of, the Company, any Subsidiary, the
Board or the Committee relating to this Plan shall be within the absolute
discretion of that entity or body. No member of the Board or Committee, or
officer of the Company or any Subsidiary, shall be liable for any such action or
inaction.
(d) In making any determination or in taking or not taking any action under
this Plan, the Company, any Subsidiary, the Board or the Committee may obtain
and rely upon the advice of experts, including professional advisors to the
Company. No member of the Board or Committee, or officer of the Company or any
Subsidiary, shall be liable for any such action or determination made or
omitted.
(e) Subject to the requirements of Section 7.1(h), the Board, at any time
it so desires, may increase or decrease the number of members of the Committee,
may remove from membership on the Committee all or any portion of its members,
and may appoint such person or persons as it desires to fill any vacancy
existing on the Committee, whether caused by removal, resignation or otherwise.
1.3 Participation.
-------------
Awards may be granted only to Eligible Employees. An Eligible Employee who has
been granted an Award may, if otherwise eligible, be granted additional Awards
if the Committee shall so determine. Except as provided in Section 2.6 below,
members of the Board who are not officers or employees of the Company shall not
be eligible to receive Awards.
1.4 Shares Available Under the Plan
-------------------------------
Subject to the provisions of Section 6.2, the capital stock that may be
delivered under this Plan shall be shares of the Company's authorized but
unissued Common Stock and any shares of its Common Stock held as treasury
shares. The aggregate maximum number of shares of Common Stock that may be
issued or transferred pursuant to Awards (including Incentive Stock Options)
granted under this Plan shall not exceed 2,500,000 shares. The maximum number of
shares of Common Stock that may be delivered pursuant to options qualified as
Incentive Stock Options granted under the Plan is 2,500,000 shares. The maximum
number of shares that may be subject to Options and Stock Appreciation Rights
that are granted during any calendar year to any individual shall not exceed
500,000 shares. Each of the foregoing numerical limits shall be subject to
adjustment as contemplated by this Section 1.4 and Section 6.2. If any Option
and any related Stock Appreciation Right shall lapse or be cancelled or
terminate without having been exercised in full, or any
2
<PAGE>
Common Stock subject to a Restricted Stock Award shall not vest or any Common
Stock subject to a Performance Share Award shall not have been transferred, the
unpurchased, unvested or nontransferred shares subject thereto shall again be
available for purposes of this Plan.
1.5 Grant of Awards.
---------------
Subject to the express provisions of this Plan, the Committee shall determine
from the class of Eligible Employees those individuals to whom Awards under this
Plan shall be granted, the terms of Awards (which need not be identical) and the
number of shares of Common Stock subject to each Award. Each Award shall be
subject to the terms and conditions set forth in this Plan and such other terms
and conditions established by the Committee as are not inconsistent with the
purpose and provisions of this Plan. The grant of an Award is made on the Award
Date.
1.6 Exercise of Awards.
------------------
An Option or Stock Appreciation Right shall be deemed to be exercised when the
Secretary of the Company receives written notice of such exercise from the
Participant, together with payment of the purchase price made in accordance with
Section 2.2(a), except to the extent payment may be permitted to be made
following delivery of written notice of exercise in accordance with Section
2.2(b). Notwithstanding any other provision of this Plan, the Committee may
impose, by rule and in Awards Agreements, such conditions upon the exercise of
Awards (including, without limitation, conditions limiting the time of exercise
to specified periods) as may be required to satisfy applicable regulatory
requirements.
1.7 No Transferability; Limited Exception to Transfer Restrictions.
--------------------------------------------------------------
(a) Unless otherwise expressly provided below (or pursuant to) this Section
1.7, by applicable law and by the Award Agreement, as the same may be amended,
(i) all Awards are non-transferable and shall not be subject in any manner to
sale, transfer, anticipation, alienation, assignment, pledge, encumbrance or
charge; Awards shall be exercised only by the Participant; and (ii) amounts
payable or shares issuable pursuant to an Award shall be delivered only to (or
for the account of) the Participant.
(b) The Committee may permit Awards to be exercised by and paid to certain
persons or entities related to the Participant, including but not limited to
members of the Participant's immediate family and/or charitable institutions, or
to such other persons or entities as may be
3
<PAGE>
approved by the Committee, pursuant to such conditions and procedures as the
Committee may establish. Any permitted transfer shall be subject to the
condition that the Committee receive evidence satisfactory to it that the
transfer is being made for estate and/or tax planning purposes on a gratuitous
or donative basis and without consideration (other than minimal consideration).
Notwithstanding the foregoing, Incentive Stock Options and Restricted Stock
Awards shall be subject to any and all additional transfer restrictions under
the Code.
(c) The exercise and transfer restrictions in Section 1.7(a) shall not apply
to:
(i) transfers to the Company;
(ii) the designation of a beneficiary to receive benefits in the event of
the Participant's death or, if the Participant has died, transfers to or
exercise by the Participant's beneficiary, or in the absence of a validly
designated beneficiary, transfers by will or the laws of descent and
distribution;
(iii) transfers pursuant to a QDRO order if approved or ratified
by the Committee;
(iv) if the Participant has suffered a Total Disability, permitted
transfers or exercises on behalf of the Participant by his legal
representative;
(v) the authorization by the Committee of "cashless exercise" procedures
with third parties who provide financing for the purpose of (or who otherwise
facilitate) the exercise of Awards consistent with applicable laws and the
express authorization of the Committee.
II. OPTIONS.
2.1 Grants.
------
One or more Options may be granted to any Eligible Employee. Each Option so
granted shall be designated by the Committee as either a Nonqualified Stock
Option or an Incentive Stock Option; provided, however, that consultants or
advisors may not be granted Incentive Stock Options under the Plan.
2.2 Option Price.
------------
(a) The purchase price per share of Common Stock covered by each Option shall
be determined by the Committee, but in the case of Incentive Stock Options shall
not be less than
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100% (110% in the case of a Participant who owns more than 10% of the total
combined voting power of all classes of stock of the Company) of the Fair Market
Value of the Common Stock on the date the Incentive Stock Option is granted. The
purchase price of any shares purchased shall be paid in full at the time of each
purchase in one or a combination of the following methods: (i) in cash or by
check payable to the order of the Company, (ii) if authorized by the Committee
or specified in the Option being exercised, by a promissory note made by the
Participant in favor of the Company, upon the terms and conditions determined by
the Committee, and secured by the Common Stock issuable upon exercise in
compliance with applicable law (including, without limitation, state corporate
law and federal margin requirements) or (iii) if authorized by the Committee or
specified in the Option being exercised, by shares of Common Stock of the
Company already owned by the Participant; provided, however, that any shares
delivered which were initially acquired upon exercise of a stock option must
have been owned by the Participant at least six months as of the date of
delivery. Shares of Common Stock used to satisfy the exercise price of an Option
shall be valued at their Fair Market Value on the date of exercise.
(b) In addition to the payment methods described in subsection (a), the
Option may provide that the Option can be exercised and payment made by
delivering a properly executed exercise notice together with irrevocable
instructions to a bank or broker to promptly deliver to the Company the amount
of sale or loan proceeds necessary to pay the exercise price and, unless
otherwise allowed by the Committee, any applicable tax withholding under Section
6.6. The Company shall not be obligated to deliver certificates for the shares
unless and until it receives full payment of the exercise price therefor.
2.3 Option Period.
-------------
Each Option and all rights or obligations thereunder shall expire on such date
as shall be determined by the Committee, but not later than 10 years after the
Award Date, and shall be subject to earlier termination as hereinafter provided.
2.4 Exercise of Options.
-------------------
(a) Subject to Sections 6.2 and 6.4, an Option may become exercisable or
vest, in whole or in part, on the date or dates specified in the Award Agreement
and thereafter shall remain exercisable until the expiration or earlier
termination of the Option. An Option may be exercisable or vest on the Award
Date.
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(b) The Committee may, at any time after grant of the Option and from time to
time, increase the number of shares exercisable at any time so long as the total
number of shares subject to the Option is not increased. No Option shall be
exercisable except in respect of whole shares, and fractional share interests
shall be disregarded. Not less than 10 shares of Common Stock may be purchased
at one time unless the number purchased is the total number at the time
available for purchase under the terms of the Option.
2.5 Limitations on Grant of Incentive Stock Options.
-----------------------------------------------
(a) To the extent that the aggregate fair market value of stock with respect
to which incentive stock options first become exercisable by a Participant in
any calendar year exceeds $100,000, taking into account both Common Stock
subject to Incentive Stock Options under this Plan and stock subject to
incentive stock options under all other plans of the Company, such options shall
be treated as nonqualified stock options. For purposes of determining whether
the $100,000 limit is exceeded, the fair market value of stock subject to
options shall be determined as of the date the options are awarded. In reducing
the number of options treated as incentive stock options to meet the $100,000
limit, the most recently granted options shall be reduced first. To the extent a
reduction of simultaneously granted options is necessary to meet the $100,000
limit, the Company may, in the manner and to the extent permitted by law,
designate which shares of Common Stock are to be treated as shares acquired
pursuant to the exercise of an Incentive Stock Option.
(b) There shall be imposed in any Award Agreement relating to Incentive Stock
Options such terms and conditions as are required in order that the Option be an
"incentive stock option" as that term is defined in Section 422 of the Code.
(c) No Incentive Stock Option may be granted to any person who, at the time
the Incentive Stock Option is granted, owns shares of outstanding Common Stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company, unless the exercise price of such Option is at least 110%
of the Fair Market Value of the stock subject to the Option and such Option by
its terms is not exercisable after the expiration of five years from the date
such Option is granted.
2.6 Non-Employee Director Awards.
----------------------------
(a) Participation. Awards under this Section 2.6 shall be made only to
-------------
Non-Employee Directors.
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(b) Option Grants. Each Non-Employee Director who is elected to the Board
-------------
in May 1997 shall be granted a Nonqualified Stock Option (the Award Date of
which shall be the date of such annual meeting) to purchase 15,000 shares of
Common Stock. Subsequent to such election, upon an individual's initial election
to the Board as a Non-Employee Director (or initial appointment to the Board as
a Non-Employee Director), such Non-Employee Director shall be granted a
Nonqualified Stock Option (the Award Date of which shall be the date of such
election or appointment) to purchase 15,000 shares of Common Stock.
(c) Option Price. The purchase price per share of the Common Stock covered
------------
by each Option granted pursuant to this Section 2.6 shall be one hundred percent
of the Fair Market Value of the Common Stock on the Award Date. The purchase
price of any shares purchased shall be paid in full at the time of each purchase
in cash or by check or in shares of Common Stock valued at their Fair Market
Value on the business day next preceding the date of exercise of the Option, or
partly in such shares and partly in cash.
(d) Option Period. Each Option granted under this Section 2.6 and all
-------------
rights or obligations thereunder shall expire on the tenth anniversary of the
Award Date and shall be subject to earlier termination as provided below.
(e) Exercise of Options. Except as otherwise provided in the applicable
-------------------
Award Agreement and Sections 2.6(f) and 2.6(g), each Option granted under this
Section 2.6 shall become exercisable according to the following schedule: (i)
one-third of the total number of shares subject to the Option shall become
exercisable on the first anniversary of the Award Date, (ii) an additional one-
third of the total number of shares subject to the Option shall become
exercisable on the second anniversary of the Award Date, and (iii) the remaining
number of shares subject to the Option shall become exercisable on the third
anniversary of the Award Date. Notwithstanding the foregoing, the vesting and
exercisability of Options granted to Non-Employee Directors prior to May 24,
1997 shall be governed by the terms of this Section 2.6(e) as it existed prior
to such date.
(f) Termination of Directorship. If a Non-Employee Director Participant's
---------------------------
services as a member of the Board terminate, each Option granted pursuant to
Section 2.6(b) hereof held by such Non-Employee Director Participant which is
not then exercisable shall terminate; provided, however, that if a Non-Employee
Director Participant's services as a member of the Board terminate by reason of
death or Total Disability, either the Board or the Committee may, in its
discretion, consider to be exercisable a greater portion of
7
<PAGE>
any such Option than would otherwise be exercisable, upon such terms as the
Board or the Committee shall determine. If a Non-Employee Director Participant's
services as a member of the Board terminate by reason of death or Total
Disability, any portion of any such Option which is then exercisable may be
exercised for one year after the date of such termination or the balance of such
Option's term, whichever period is shorter. If a Non-Employee Director
Participant's services as a member of the Board terminate for any other reason,
any portion of any such Option which is then exercisable may be exercised for
six months after the date of such termination or the balance of such Option's
term, whichever period is shorter.
(g) Acceleration Upon an Event. Immediately prior to the occurrence of an
--------------------------
Event, in order to protect the holders of Options granted under this Section
2.6, each Option granted under Section 2.6(b) hereof shall become exercisable in
full.
(h) Adjustments. The specific number of shares stated in the foregoing
-----------
Section 2.6(b) hereof and the consideration payable for such shares shall be
subject to adjustment in certain events as provided in Section 6.2 of this Plan.
III. STOCK APPRECIATION RIGHTS.
3.1 Grants.
------
In its discretion, the Committee may grant Stock Appreciation Rights
concurrently with the grant of Options. A Stock Appreciation Right shall extend
to all or a portion of the shares covered by the related Option. A Stock
Appreciation Right shall entitle the Participant who holds the related Option,
upon exercise of the Stock Appreciation Right and surrender of the related
Option, or portion thereof, to the extent the Stock Appreciation Right and
related Option each were previously unexercised, to receive payment of an amount
determined pursuant to Section 3.3. Any Stock Appreciation Right granted in
connection with an Incentive Stock Option shall contain such terms as may be
required to comply with the provisions of Section 422 of the Code and the
regulations promulgated thereunder. In its discretion, the Committee may also
grant Stock Appreciation Rights independently of any Option subject to such
conditions as the Committee may in its absolute discretion provide.
8
<PAGE>
3.2 Exercise of Stock Appreciation Rights.
-------------------------------------
(a) A Stock Appreciation Right granted concurrently with an Option shall be
exercisable only at such time or times, and to the extent, that the related
Option shall be exercisable and only when the Fair Market Value of the stock
subject to the related Option exceeds the exercise price of the related Option.
(b) In the event that a Stock Appreciation Right granted concurrently with an
Option is exercised, the number of shares of Common Stock subject to the related
Option shall be charged against the maximum amount of Common Stock that may be
issued or transferred pursuant to Awards under this Plan. The number of shares
subject to the Stock Appreciation Right and the related Option of the
Participant shall also be reduced by such number of shares.
(c) If a Stock Appreciation Right granted concurrently with an Option extends
to less than all the shares covered by the related Option and if a portion of
the related Option is thereafter exercised, the number of shares subject to the
unexercised Stock Appreciation Right shall be reduced only if and to the extent
that the remaining number of shares covered by such related Option is less than
the remaining number of shares subject to such Stock Appreciation Right.
(d) A Stock Appreciation Right granted independently of any Option shall be
exercisable pursuant to the terms of the Award Agreement.
3.3 Payment.
-------
(a) Upon exercise of a Stock Appreciation Right and surrender of an
exercisable portion of the related Option, the Participant shall be entitled to
receive payment of an amount determined by multiplying
(i) the difference obtained by subtracting the exercise price per share
of Common Stock under the related Option from the Fair Market Value of a share
of Common Stock on the date of exercise of the Stock Appreciation Right, by
(ii) the number of shares with respect to which the Stock Appreciation
Right shall have been exercised.
(b) The Committee, in its sole discretion, may settle the amount determined
under paragraph (a) above solely in cash, solely in shares of Common Stock
(valued at Fair Market Value on the date of exercise of the Stock Appreciation
Right), or partly in such shares and partly in cash, provided that the Committee
shall have determined that such
9
<PAGE>
exercise and payment are consistent with applicable law. In any event, cash
shall be paid in lieu of fractional shares. Absent a determination to the
contrary, all Stock Appreciation Rights shall be settled in cash as soon as
practicable after exercise. The exercise price for the Stock Appreciation Right
shall be the exercise price of the related Option. Notwithstanding the
foregoing, the Committee may, in the Award Agreement, determine the maximum
amount of cash or stock or a combination thereof which may be delivered upon
exercise of a Stock Appreciation Right.
(c) Upon exercise of a Stock Appreciation Right granted independently of any
Option, the Participant shall be entitled to receive payment of an amount based
on a percentage, specified in the Award Agreement, of the difference obtained by
subtracting the Fair Market Value per share of Common Stock on the Award Date
from the Fair Market Value per share of Common Stock on the date of exercise of
the Stock Appreciation Right. Such amount shall be paid as described in
paragraph (b) above.
IV. RESTRICTED STOCK AWARDS
4.1 Grants.
------
Subject to Section 1.4, the Committee may, in its discretion, grant one or
more Restricted Stock Awards to any Eligible Employee. Each Restricted Stock
Award agreement shall specify the number of shares of Common Stock to be issued
to the Participant, the date of such issuance, the price, if any, to be paid for
such shares by the Participant and the restrictions imposed on such shares,
which restrictions shall not terminate earlier than six months after the Award
Date.
4.2 Restrictions.
(a) Shares of Common Stock included in Restricted Stock Awards may not be
sold, assigned, transferred, pledged or otherwise disposed of or encumbered,
either voluntarily or involuntarily, until such shares have vested.
(b) Participants receiving Restricted Stock shall be entitled to dividend and
voting rights for the shares issued even though they are not vested, provided
that such rights shall terminate immediately as to any forfeited Restricted
Stock.
(c) In the event that the Participant shall have paid cash in connection with
the Restricted Stock Award, the Award Agreement shall specify whether and to
what extent
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<PAGE>
such cash shall be returned upon a forfeiture (with or without an earnings
factor).
V. PERFORMANCE SHARE AWARDS.
5.1 Grants of Performance Share Awards
----------------------------------
The Committee may, in its discretion, grant Performance Share Awards to
Eligible Employees based upon such factors as the Committee shall determine. A
Performance Share Award agreement shall specify the number of shares of Common
Stock (if any) subject to the Performance Share Award, the price, if any, to be
paid for any such shares by the Participant and the conditions upon which
payment or issuance to the Participant shall be based. The amount of cash or
shares or other property that may be deliverable pursuant to a Performance Share
Award shall be based upon the degree of attainment over a specified period of
not more than 10 years (a "performance cycle") as may be established by the
Committee of such measure(s) of the performance of the Company (or any part
thereof) or the Participant as may be established by the Committee. The
Committee may provide for full or partial credit, prior to completion of such
performance cycle or the attainment of the performance achievement specified in
the Award in the event of the Participant's death, Retirement, or Total
Disability, an Event or in such other circumstances as the Committee, consistent
with Section 6.12, may determine.
5.2 Grants of Performance-Based Share Awards.
----------------------------------------
Without limiting the generality of the foregoing, and in addition to Options
and Stock Appreciation Rights granted under other provisions of this Plan which
are intended to satisfy the exception for "performance-based compensation" under
Section 162(m) of the Code (with such Awards hereinafter referred to as
"Qualifying Options" or "Qualifying Stock Appreciation Rights," respectively),
other performance-based awards within the meaning of Section 162(m) of the Code
("Performance-Based Awards"), whether in the form of Cash-Based Awards,
restricted stock, performance stock, phantom stock or other rights, the grant,
vesting, exercisability, or payment of which depends on the degree of
achievement of the Performance Goals relative to preestablished targeted levels
for the Company or a consolidated segment, subsidiary, or division of the
Company, may be granted under this Plan. Any Qualifying Option or Qualifying
Stock Appreciation Right shall be subject only to the requirements of
subsections (a) and (c) below in order for such Awards to satisfy the
requirements for Performance-Based Awards under this Section 5.2. With the
exception of any Qualifying Option or Qualifying Stock
11
<PAGE>
Appreciation Right, an Award that is intended to satisfy the requirements of
this Section 5.2 shall be designated as a Performance-Based Award at the time of
grant.
(a) The eligible class of persons for Performance-Based Awards under this
Section shall be executive officers of the Company.
(b) The applicable performance goals for Performance-Based Awards (other than
Qualifying Options) shall be, on an absolute or relative basis, one or more of
the Performance Goals, as selected by the Committee in its sole discretion. The
Committee shall establish in the applicable Award Agreement the specific
performance targets(s) relative to the Performance Goal(s) which must be
attained before the compensation under the Performance-Based Award becomes
payable. The specific targets shall be determined within the time period
permitted under Section 162(m) of the Code (and any regulations issued
thereunder) so that such targets are considered to be preestablished and so that
the attainment of such targets is substantially uncertain at the time of their
establishment. The applicable performance measurement period may not be less
than one nor more than 10 years.
(c) Notwithstanding any other provision of the Plan to the contrary, the
maximum number of shares of Common Stock which may be delivered pursuant to
Awards qualified as Performance-Based Awards to any Participant in any calendar
year shall not exceed 500,000 shares, either individually or in the aggregate,
subject to adjustment as provided in Section 6.2. Awards that are cancelled
during the year shall be counted against this limit to the extent required by
Section 162(m) of the Code. In addition, the aggregate amount of compensation
to be paid to any Participant in any calendar year in respect of any Cash-Based
Awards granted during any calendar year as Performance-Based Awards shall not
exceed $1,000,000.
(d) Before any Performance-Based Award under this Section 5.2 is paid (other
than a Qualifying Option or Qualifying Stock Appreciation Right), the
Committee must certify in writing that the Performance Goals and any other
material terms of the Performance-Based Award were satisfied; provided,
however, that a Performance-Based Award may be paid without regard to the
satisfaction of the applicable Performance Goal(s) with respect to an Event
in accordance with Section 6.4.
(e) The Committee will have discretion to determine the restrictions or other
limitations of the individual Awards under this Section 5.2 (including the
authority to reduce Awards, payouts or vesting or to pay no Awards, in its
sole
12
<PAGE>
discretion, if the Committee preserves such authority at the time of grant by
language to this effect in its authorizing resolutions or otherwise).
(f) In the event of a change in corporate capitalization, such as a stock
split or stock dividend, or a corporate transaction, such as a merger,
consolidation, spinoff, reorganization or similar event, or any partial or
complete liquidation of the Company, or any similar event consistent with the
regulations issued under Section 162(m) of the Code including, without
limitation, any material change in accounting policies or practices affecting
the Company and/or the Performance Goals or targets, then the Committee may make
adjustments to the Performance Goals and targets relating to outstanding
Performance-Based Awards to the extent such adjustments are made to reflect the
occurrence of such an event; provided, however, that adjustments described in
this subsection may be made only to the extent that the occurrence of an event
described herein was unforeseen at the time the targets for a Performance-Based
Award were established by the Committee.
VI. OTHER PROVISIONS.
6.1 Rights of Eligible Employees, Participants and Beneficiaries.
------------------------------------------------------------
(a) Status as an Eligible Employee shall not be construed as a commitment
that any Award will be granted under this Plan to any Eligible Employee
generally.
(b) Nothing contained in this Plan (or in Award Agreements or in any other
documents related to this Plan or to Awards) shall confer upon any Eligible
Employee or Participant any right to continue in the service or employ of
the Company or constitute any contract or agreement of service or
employment, or interfere in any way with the right of the Company to reduce
such person's compensation or other benefits or to terminate the services
or employment of such Eligible Employee or Participant, with or without
cause, but nothing contained in this Plan or any document related thereto
shall affect any independent contractual right of any Eligible Employee or
Participant. Nothing contained in this Plan or any document related hereto
shall influence the construction or interpretation of the Company's
Certificate of Incorporation or Bylaws regarding service on the Board.
(c) Options payable under this Plan shall be payable in shares and no special
or separate reserve, fund or deposit shall be made to assure payment of
such Options. No Participant, Beneficiary or other person shall have any
13
<PAGE>
right, title or interest in any fund or in any specific asset (including
shares of Common Stock) of the Company by reason of any Award granted
hereunder. Neither the provisions of this Plan (or of any documents
related hereto), nor the creation or adoption of this Plan, nor any action
taken pursuant to the provisions of this Plan shall create, or be construed
to create, a trust of any kind or a fiduciary relationship between the
Company and any Participant, Beneficiary or other person. To the extent
that a Participant, Beneficiary or other person acquires a right to receive
an Award hereunder, such right shall be no greater than (and will be
subordinate to) the right of any unsecured general creditor of the Company.
6.2 Adjustments Upon Changes in Capitalization.
------------------------------------------
(a) If the outstanding shares of Common Stock are changed into or exchanged
for cash or a different number or kind of shares or securities of the Company or
of another issuer, or if additional shares or new or different securities are
distributed with respect to the outstanding shares of the Common Stock, through
a reorganization or merger to which the Company is a party, or through a
combination, consolidation, recapitalization, reclassification, stock split,
stock dividend, reverse stock split, stock consolidation or other capital change
or adjustment, an appropriate adjustment shall be made in the number and kind of
shares or other consideration that is subject to or may be delivered under this
Plan and pursuant to outstanding Awards. A corresponding adjustment to the
consideration payable with respect to Awards granted prior to any such change
and to the price, if any, paid in connection with Restricted Stock Awards or
Performance Share Awards shall also be made. Any such adjustment, however, shall
be made without change in the total payment, if any, applicable to the portion
of the Award not exercised but with a corresponding adjustment in the price for
each share. Corresponding adjustments shall be made with respect to Stock
Appreciation Rights based upon the adjustments made to the Options to which they
are related or, in the case of Stock Appreciation Rights granted independently
of any Option, based upon the adjustments made to Common Stock.
(b) Upon the dissolution or liquidation of the Company, or upon a
reorganization, merger or consolidation of the Company with one or more
corporations as a result of which the Company is not the surviving
corporation, the Plan shall terminate. Notwithstanding the foregoing, the
Committee may provide in writing in connection with, or in contemplation
of, any such transaction for any or all of the following alternatives
(separately or in combinations): (i) for the assumption by the successor
corporation of the Awards theretofore granted or the substitution by such
corporation
14
<PAGE>
for such Awards of Awards covering the stock of the successor corporation, or a
parent or subsidiary thereof, with appropriate adjustments as to the number and
kind of shares and prices; (ii) for the continuance of this Plan by such
successor corporation in which event this Plan and the Options shall continue in
the manner and under the terms so provided; or (iii) for the payment in cash or
shares of Common Stock in lieu of and in complete satisfaction of such Awards.
(c) In adjusting Awards to reflect the changes described in this Section 6.2,
or in determining that no such adjustment is necessary, the Committee may rely
upon the advice of independent counsel and accountants of the Company, and the
determination of the Committee shall be conclusive. No fractional shares of
stock shall be issued under this Plan on account of any such adjustment.
6.3 Termination of Employment.
-------------------------
(a) If the Participant's service to or employment by the Company terminates
for any reason other than Retirement, death or Total Disability, the Participant
shall have, subject to earlier termination pursuant to or as contemplated by
Section 2.3, thirty days or such shorter period as is provided in the Award
Agreements from the date of termination of services or employment to exercise
any Option to the extent it shall have become exercisable on the date of
termination of employment, and any Option not exercisable on that date shall
terminate. Notwithstanding the preceding sentence, in the event the Participant
is discharged for cause as determined by the Committee in its sole discretion,
all Options shall lapse immediately upon such termination of services or
employment.
(b) If the Participant's service to or employment by the Company terminates
as a result of Retirement or Total Disability, the Participant or Participant's
Personal Representative, as the case may be, shall have, subject to earlier
termination pursuant to or as contemplated by Section 2.3, 3 months or such
shorter period as is provided in the Award Agreements from the date of
termination of services or employment to exercise any Option to the extent it
shall have become exercisable by the date of termination of services or
employment and any Option not exercisable on that date shall terminate.
(c) If the Participant's service to or employment by the Company terminates
as a result of death while the Participant is rendering services to the Company
or is employed by the Company or during the 3 month period referred to in
subsection (b) above, the Participant's Option shall be exercisable by the
Participant's
15
<PAGE>
Beneficiary, subject to earlier termination pursuant to or as contemplated by
Section 2.3, during the 3 month period or such shorter period as is provided in
the Award Agreements following the Participant's death, as to all or any part of
the shares of Common Stock covered thereby to the extent exercisable on the date
of death (or earlier termination).
(d) Each Stock Appreciation Right granted concurrently with an Option shall
have the same termination provisions and exercisability periods as the Option to
which it relates. The termination provisions and exercisability periods of any
Stock Appreciation Right granted independently of an Option shall be established
in accordance with Section 3.2(d). The exercisability period of a Stock
Appreciation Right shall not exceed that provided in Section 2.3 or in the
related Award Agreement and the Stock Appreciation Right shall expire at the end
of such exercisability period.
(e) In the event of termination of services to or employment with the Company
for any reason, (i) shares of Common Stock subject to the Participant's
Restricted Stock Award shall be forfeited in accordance with the provisions of
the related Award Agreement to the extent such shares have not become vested on
that date; and (ii) shares of Common Stock subject to the Participant's
Performance Share Award shall be forfeited in accordance with the provisions of
the related Award Agreement to the extent such shares have not been issued or
become issuable on that date.
(f) In the event of termination of services to or employment with the Company
for any reason, other than discharge for cause, the Committee may, in its
discretion, increase the portion of the Participant's Award available to the
Participant, or Participant's Beneficiary or Personal Representative, as the
case may be, upon such terms as the Committee shall determine.
(g) If an entity ceases to be a Subsidiary, such action shall be deemed for
purposes of this Section 6.3 to be a termination of services or employment of
each consultant or employee of that entity who does not continue as a consultant
or as an employee of another entity within the Company.
(h) Upon forfeiture of a Restricted Stock Award pursuant to this Section 6.3,
the Participant, or his or her Beneficiary or Personal Representative, as the
case may be, shall transfer to the Company the portion of the Restricted Stock
Award not vested at the date of termination of services or employment, without
payment of any consideration by the Company for such transfer unless the
Participant paid a purchase price in which case repayment, if any, of that
16
<PAGE>
price shall be governed by the Award Agreement. Notwithstanding any such
transfer to the Company, or failure, refusal or neglect to transfer, by the
Participant, or his or her Beneficiary or Personal Representative, as the case
may be, such nonvested portion of any Restricted Stock Award shall be deemed
transferred automatically to the Company on the date of termination of services
or employment. The Participant's original acceptance of the Restricted Stock
Award shall constitute his or her appointment of the Company and each of its
authorized representatives as attorney(s)-in-fact to effect such transfer and to
execute such documents as the Company or such representatives deem necessary or
advisable in connection with such transfer.
6.4 Acceleration of Awards.
----------------------
(a) Unless prior to an Event the Board determines that, upon its occurrence,
there shall be no acceleration of Awards or determines those selected Awards
which shall be accelerated and the extent to which they shall be accelerated,
upon the occurrence of an Event (i) each Option and each related Stock
Appreciation Right shall become immediately exercisable to the full extent
theretofore not exercisable, (ii) Restricted Stock shall immediately vest free
of restrictions and (iii) the number of shares covered by each Performance Share
Award shall be issued to the Participant; subject, however, to compliance with
applicable regulatory requirements, including without limitation Section 422 of
the Code. For purposes of this section only, the Board shall mean the Board as
constituted immediately prior to the Event.
(b) If any Option or other right to acquire Common Stock under this Plan has
been fully accelerated as permitted by Section 6.4(a) but is not exercised prior
to (i) a dissolution of the Corporation, or (ii) an event described in Section
6.2 that the Corporation does not survive, such Option or right shall thereupon
terminate, subject to any provision that has been expressly made by the
Committee pursuant to Section 6.2(b) for the survival, substitution, exchange or
other settlement of such Option or right.
6.5 Government Regulations.
----------------------
This Plan, the granting and vesting of Awards under this Plan and the issuance
or transfer of shares of Common Stock (and/or the payment of money) pursuant
thereto are subject to compliance with all applicable federal and state laws,
rules and regulations (including but not limited to state and federal securities
law and federal margin requirements) and to such approvals by any listing,
regulatory or governmental authority as may, in the opinion of counsel for
17
<PAGE>
the Company, be necessary or advisable in connection therewith. Any securities
delivered under this Plan shall be subject to such restrictions, and the person
acquiring such securities shall, if requested by the Company, provide such
assurances and representations to the Company as the Company may deem necessary
or desirable to assure compliance with all applicable legal requirements.
6.6 Tax Withholding.
---------------
(a) Upon the disposition by a Participant or other person of shares of Common
Stock acquired pursuant to the exercise of an Incentive Stock Option prior to
satisfaction of the holding period requirements of Section 422 of the Code, or
upon the exercise of a Nonqualified Stock Option, the exercise of a Stock
Appreciation Right, the vesting of a Restricted Stock Award or the payment of a
Performance Share Award the Company shall have the right at its option to (i)
require such Participant or such other person to pay by cash or check payable to
the Company, the amount of any taxes which the Company may be required to
withhold with respect to such transactions or (ii) deduct from amounts paid in
cash the amount of any taxes which the Company may be required to withhold with
respect to such cash amounts. The above notwithstanding, in any case where a tax
is required to be withheld in connection with the issuance or transfer of shares
of Common Stock under this Plan, the Participant may elect, pursuant to such
rules as the Committee may establish, to have the Company reduce the number of
such shares issued or transferred by the appropriate number of shares to
accomplish such withholding.
(b) The Committee may, in its discretion, permit a loan from the Company to a
Participant in the amount of any taxes which the Company may be required to
withhold with respect to shares of Common Stock received pursuant to a
transaction described in subsection (a) above. Such a loan will be for a term,
at a rate of interest and pursuant to such other terms and rules as the
Committee may establish.
6.7 Amendment, Termination and Suspension.
-------------------------------------
(a) The Board may, at any time, terminate or, from time to time, amend,
modify or suspend this Plan (or any part hereof). In addition, the Committee
may, from time to time, amend or modify any provision of this Plan except
Section 6.4 and, with the consent of the Participant, make such modifications of
the terms and conditions of such Participant's Award as it shall deem advisable.
The Committee, with the consent of the Participant, may also amend the terms of
any Option to provide that the Option price of the shares remaining subject to
the original Award shall be reestablished at a price not less than 100% of the
18
<PAGE>
Fair Market Value of the Common Stock on the effective date of the amendment. No
modification of any other term or provision of any Option which is amended in
accordance with the foregoing shall be required, although the Committee may, in
its discretion, make such further modifications of any such Option as are not
inconsistent with or prohibited by this Plan. No Awards may be granted during
any suspension of this Plan or after its termination.
(b) If an amendment would materially (i) increase the benefits accruing to
Participants, (ii) increase the aggregate number of shares which may be issued
under this Plan, or (iii) modify the requirements of eligibility for
participation in this Plan, the amendment shall be approved by the Board and, to
the extent then required by applicable law or deemed necessary or desirable by
the Board, by a majority of the shareholders.
(c) In the case of Awards issued before the effective date of any amendment,
suspension or termination of this Plan, such amendment, suspension or
termination of the Plan shall not, without specific action of the Board or the
Committee and the consent of the Participant, in any way modify, amend, alter or
impair any rights or obligations under any Award previously granted under the
Plan.
6.8 Privileges of Stock Ownership.
-----------------------------
Except as otherwise expressly authorized by the Committee or under this Plan,
a Participant shall not be entitled to any privilege of stock ownership as to
any shares of Common Stock not actually delivered to and held of record by him
or her. No adjustment will be made for dividends or other rights as a
shareholder for which a record date is prior to such date of delivery.
6.9 Effective Date of the Plan.
--------------------------
This Plan shall be effective upon its approval by the Board, subject to
approval by the shareholders of the Company within twelve months from the date
of such Board approval.
6.10 Term of the Plan.
----------------
Unless previously terminated by the Board, this Plan shall terminate ten years
after the Effective Date of the Plan, and no Awards shall be granted under it
thereafter, but such termination shall not affect any Award theretofore granted.
19
<PAGE>
6.11 Governing Law.
-------------
This Plan and the documents evidencing Awards and all other related
documents shall be governed by, and construed in accordance with, the laws of
the State of California. If any provision shall be held by a court of competent
jurisdiction to be invalid and unenforceable, the remaining provisions of this
Plan shall continue to be fully effective.
6.12 Plan Construction.
-----------------
(a) It is the intent of the Company that transactions in and affecting
Awards in the case of Participants who are or may be subject to Section 16 of
the Exchange Act satisfy any then applicable requirements of Rule 16b-3 so that
such persons (unless they otherwise agree) will be entitled to the benefits of
such rule or other exemptive rules under Section 16 of the Exchange Act in
respect of those transactions and will not be subjected to avoidable liability
thereunder. If any provision of the Plan or of any Award would frustrate or
otherwise conflict with the intent expressed above, that provision to the extent
possible shall be interpreted as to avoid such conflict. If the conflict
remains irreconcilable, the Committee may disregard the provision if it
concludes that to do so furthers the interest of the Company and is consistent
with the purposes of the Plan as to such persons in the circumstances.
(b) It is the further intent of the Company that Options and Stock
Appreciation Rights with an exercise or base price not less than Fair Market
Value on the date of grant and Performance Share Awards under Section 5.2 of
this Plan that are granted to or held by a person subject to Section 16 of the
Exchange Act shall qualify as performance-based compensation under Section
162(m) of the Code, and this Plan shall be interpreted consistent with such
intent.
6.13 Non-Exclusivity of Plan.
-----------------------
Nothing in this plan shall limit or be deemed to limit the authority
of the Board to grant options, stock awards or authorize any other compensations
under any other plan or authority.
VII. DEFINITIONS.
7.1 Definitions.
------------
(a) "Award" means an Option, which may be designated as a Nonqualified
-----
Stock Option or an Incentive Stock Option, a
20
<PAGE>
Stock Appreciation Right, Restricted Stock Award, Performance Share Award or
Performance-Based Award.
(b) "Award Agreement" means a written agreement setting forth the
---------------
terms of an Award.
(c) "Award Date" means the date upon which the Committee took the
----------
action granting an Award or such later date as is prescribed by the Committee
or, in the case of Options granted under Section 2.6, the date specified in such
Section 2.6.
(d) "Beneficiary" means the person, persons, trust or trusts entitled
-----------
by will or the laws of descent and distribution to receive the benefits
specified under this Plan in the event of a Participant's death.
(e) "Board" means the Board of Directors of the Company.
-----
(f) "Cash-Based Awards" mean Awards that, if paid, must be paid in
-----------------
cash and that are neither denominated in nor have derived the value of, nor an
exercise or conversion privilege at a price related to, shares of Common Stock.
(g) "Cash Flow" shall mean cash and cash equivalents derived from
---------
either (i) net cash flow from operations, or (ii) net cash flow from operations,
financings and investing activities, as determined by the Committee at the time
the Award is granted.
(h) "Code" means the Internal Revenue Code of 1986, as amended from
----
time to time.
(i) "Commission" means the Securities and Exchange Commission.
----------
(j) "Committee" means the Board or a committee appointed by the Board
---------
to administer this Plan, which committee shall be comprised only of two or more
directors or such greater number of directors as may be required under
applicable law, each of whom (i) in respect of any transaction at a time when
the affected Participant may be subject to Section 162(m) of the Code, shall be
an "outside director" within the meaning of Section 162(m) of the Code, and (ii)
in respect of any transaction at a time when the affected Participant may be
subject to Section 16 of the Exchange Act, shall be a "Non-Employee Director"
within the meaning of Rule 16b-3(b)(3) under the Exchange Act.
(k) "Common Stock" means the Common Stock of the Company.
------------
(l) "Company" means New Century Financial Corporation, a Delaware
-------
corporation, and its successors.
21
<PAGE>
(m) "Director" means member of the board of Directors of the Company
--------
or any person performing similar functions with respect to the Company.
(n) "Earnings Per Share" shall mean earnings per share of Common Stock
------------------
on a fully diluted basis determined by dividing (i) net earnings, less dividends
on any preferred stock of the Company, by (ii) the weighted average number of
common shares and common share equivalents outstanding.
(o) "Eligible Employee" means (i) an officer or key employee of the
-----------------
Company and (ii) any individual consultant or advisor who renders or has
rendered bona fide services (other than services in connection with the offering
---- ----
or sale of securities of the Company in a capital raising transaction) to the
Company, and who is selected to participate in this Plan by the Committee.
(p) "Event" means any of the following:
-----
(1) Approval by the shareholders of the Company of the dissolution
or liquidation of the Company;
(2) Approval by the shareholders of the Company of an agreement to
merge or consolidate, or otherwise reorganize, with or into one or more
entities other than Subsidiaries, as a result of which less than 50% of the
outstanding voting securities of the surviving or resulting entity are, or are
to be, owned by former shareholders of the Company; or
(3) Approval by the shareholders of the Company of the sale of
substantially all of the Company's business assets to a person or entity which
is not a Subsidiary.
(q) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(r) "Fair Market Value" means (i) if the stock is listed or admitted
-----------------
to trade on a national securities exchange, the closing price of the stock on
the Composite Tape, as published in the Western Edition of The Wall Street
---------------
Journal, of the principal national securities exchange on which the stock is so
- -------
listed or admitted to trade, on such date, or, if there is no trading of the
stock on such date, then the closing price of the stock as quoted on such
Composite Tape on the next preceding date on which there was trading in such
shares; (ii) if the stock is not listed or admitted to trade on a national
securities exchange, the last price for the stock on such date, as furnished by
the National Association of Securities Dealers, Inc. ("NASD") through the NASDAQ
National Market Reporting System or a similar organization if the NASD is no
longer reporting such
22
<PAGE>
information; (iii) if the stock is not listed or admitted to trade on a national
securities exchange and is not reported on the National Market Reporting System,
the mean between the bid and asked price for the stock on such date, as
furnished by the NASD; or (iv) if the stock is not listed or admitted to trade
on a national securities exchange, is not reported on the National Market
Reporting System and if bid and asked prices for the stock are not furnished by
the NASD or a similar organization, the values established by the Committee for
purposes of the Plan.
(s) "Gain on Sale of Loans" means the total gain recognized on loans
---------------------
sold through whole loan transactions or through securitizations, net of premiums
paid to acquire such loans and net of expenses associated with the sale of such
loans, as reported in the Company's quarterly and/or annual financial
statements.
(t) "Incentive Stock Option" means an option which is designated as an
----------------------
incentive stock option within the meaning of Section 422 of the Code, the award
of which contains such provisions as are necessary to comply with that section.
(u) "Loan Production Volume" means loans funded during any given
----------------------
period as reported in the Company's quarterly and/or annual financial
statements.
(v) "Loan Quality" means the number of loans originated in accordance
------------
with the Company's underwriting policies and procedures and is measured as loans
sold, either individually, through bulk sales transactions, or through
securitizations, at a premium price as a percentage of total loans sold, based
on information as reported in the Company's quarterly and/or annual financial
statements.
(w) "Non-Employee Director" means a member of the Board who is not an
---------------------
officer or employee of the Company.
(x) "Non-Employee Director Participant" means a Non-Employee Director
---------------------------------
who has been granted an Option under Section 2.6.
(y) "Nonqualified Stock Option" means an option which is designated as
-------------------------
a Nonqualified Stock Option and shall include any Option intended as an
Incentive Stock Option that fails to meet applicable legal requirements thereof.
Any Option granted hereunder that is not designated as an Incentive Stock Option
shall be deemed to be designated a Nonqualified Stock Option under this Plan and
not an incentive stock option under the Code.
(z) "Officer" means a president, vice-president, secretary, treasurer
-------
or principal financial officer,
23
<PAGE>
comptroller or principal accounting officer and any person routinely performing
corresponding functions with respect to the Company.
(aa) "Option" means an option to purchase Common Stock under this
------
Plan. An Option shall be designated by the Committee as a Nonqualified Stock
Option or an Incentive Stock Option.
(ab) "Participant" means an Eligible Employee who has been granted an
-----------
Award or a Non-Employee Director Participant.
(ac) "Performance-Based Award" means an Award of a right to receive
-----------------------
shares of Common Stock or other compensation (including cash) under Section 5.2,
the issuance or payment of which is contingent upon, among other conditions, the
attainment of performance objectives specified by the Committee.
(ad) "Performance Goal" shall mean Cash Flow, Earnings Per Share, Gain
----------------
on Sale of Loans, Loan Production Volume, Loan Quality, Return on Equity, Total
Stockholder Return, or any combination thereof.
(ae) "Performance Share Award" means an award of a right to receive
-----------------------
shares of cash or Common Stock under Section 5.1, or to receive shares of Common
Stock or other compensation (including cash) under Section 5.2, the issuance or
payment of which is contingent upon, among other things, the attainment of
performance objectives specified by the Committee.
(af) "Personal Representative" means the person or persons who, upon
-----------------------
the disability or incompetence of a Participant, shall have acquired on behalf
of the Participant by legal proceeding or otherwise the power to exercise the
rights and receive the benefits specified in this Plan.
(ag) "Plan" means the New Century Financial Corporation 1995 Stock
----
Option Plan, as amended.
(ah) "QDRO" means an order requiring the transfer of an Award or
----
portion thereof pursuant to a state domestic relations law to the spouse, former
spouse, child or other dependent of a Participant. Such order must be in a form
substantially identical to a qualified domestic relations order as defined by
the Code or Title I of the Employee Retirement Income Security Act of 1974, as
amended.
(ai) "Restricted Stock" means those shares of Common Stock issued
----------------
pursuant to a Restricted Stock Award which are subject to the restrictions set
forth in the related Award Agreement.
24
<PAGE>
(aj) "Restricted Stock Award" means an award of a fixed number of
----------------------
shares of Common Stock to the Participant subject, however, to payment of such
consideration, if any, and such forfeiture provisions, as are set forth in the
Award Agreement.
(ak) "Retirement" means retirement from employment by or providing
----------
services to the Company or any Subsidiary after age 65 and, in the case of
employees, in accordance with the retirement policies of the Company then in
effect.
(al) "Return on Equity" means consolidated net income of the Company
----------------
(less any preferred dividends), divided by the average consolidated common
shareholders equity.
(am) "Rule 16b-3" means Rule 16b-3 as promulgated by the Commission
----------
pursuant to the Exchange Act as amended from time to time.
(an) "Securities Act" means the Securities Act of 1933, as amended.
--------------
(ao) "Stock Appreciation Right" means a right to receive a number of
------------------------
shares of Common Stock or an amount of cash, or a combination of shares and
cash, determined as provided in Section 3.3 (a).
(ap) "Subsidiary" means any corporation or other entity a majority or
----------
more of whose outstanding voting stock or voting power is beneficially owned
directly or indirectly by the Company.
(aq) "Total Disability" means a "permanent and total disability"
----------------
within the meaning of Section 22(e)(3) of the Code.
(ar) "Total Stockholder Return" means, with respect to the Company or
------------------------
other entities (if measured on a relative basis), the (i) change in the market
price of its Common Stock (as quoted on the principal market on which it is
traded as of the beginning and ending of the period) plus dividends and other
distributions paid, divided by (ii) the beginning quoted market price, all of
which is adjusted for any changes in equity structure, including but not limited
to stock splits and stock dividends.
25
<PAGE>
- --------------------------------------------------------------------------------
NEW CENTURY FINANCIAL CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF THE COMPANY FOR ANNUAL MEETING, MAY 17, 1999
The undersigned, a stockholder of NEW CENTURY FINANCIAL CORPORATION, a
Delaware corporation (the "Company"), acknowledges receipt of a copy of the
Notice of Annual Meeting of Stockholders, the accompanying Proxy Statement and
the Annual Report to Stockholders for the year ended December 31, 1998; and,
revoking any proxy previously given, hereby constitutes and appoints Robert K.
Cole and Brad A. Morrice and each of them, his or her true and lawful agents
and proxies with full power of substitution in each, to vote the shares of
Common Stock of the Company standing in the name of the undersigned at the
Annual Meeting of the Stockholders of the Company to be held at the Doubletree
Hotel, 3050 Bristol Street, Costa Mesa, California, on Monday, May 17, 1999 at
9:00 a.m., local time, and at any adjournment thereof, on all matters coming
before said meeting.
The Board of Directors recommends a vote FOR Items 1-4.
1. Nominees for a three-year term as a Class II member of the Company's Board
of Directors: Brad A. Morrice, Michael M. Sachs and Terrence P. Sandvik.
For all nominees. [_] WITHHOLD AUTHORITY to vote for
all nominees. [_]
(Authority to vote for any nominee named may be withheld by lining through that
nominee's name.)
2. Approval of KPMG LLP as independent auditors of the Company for the fiscal
year ending December 31, 1999.
[_] FOR [_] AGAINST [_] ABSTAIN
3. Approval of an amendment to the Company's 1995 Stock Option Plan to
increase number of shares authorized to be issued under the Plan by 500,000
shares, from 2,500,000 shares to 3,000,000 shares.
[_] FOR [_] AGAINST [_] ABSTAIN
4. Approval of the Company's 1999 Incentive Compensation Plan.
[_] FOR [_] AGAINST [_] ABSTAIN
5. In their discretion, upon any other matters as may properly come before
the meeting or at any adjournment thereof.
(continued and to be signed on other side)
THE PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREBY
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSALS 1-4. IF ANY NOMINEE BECOMES UNAVAILABLE FOR ANY REASON, THE
PERSONS NAMED AS PROXIES SHALL VOTE FOR THE ELECTION OF SUCH OTHER PERSON AS
THE BOARD OF DIRECTORS MAY PROPOSE TO REPLACE SUCH NOMINEE.
Dated: _________, 1999
Dated: _________, 1999
----------------------
(Signature of
Stockholder)
----------------------
(Signature of
Stockholder)
This proxy must be signed exactly
as your name appears hereon.
Executors, administrators,
trustees, etc. should give full
title, as such. If the
stockholder is a corporation, a
duly authorized officer should
sign on behalf of the corporation
and should indicate his or her
title.
[_] Please check this box if you plan to attend the Annual Meeting of
Stockholders.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED
ENVELOPE.
