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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-22633
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NEW CENTURY FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 33-0683629
<S> <C>
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
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18400 VON KARMAN, SUITE 1000, IRVINE, CALIFORNIA 92612
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 440-7030
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $0.01
PAR VALUE
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of Common Stock held by non-affiliates of the
Registrant on March 19, 1999 was approximately $68.6 million based on the
closing sales price for the Common Stock on such date of $11.13 as reported on
the Nasdaq National Market.
As of March 19, 1999, the Registrant had 14,601,462 shares of Common Stock
outstanding.
PART III INCORPORATES INFORMATION BY REFERENCE FROM THE REGISTRANT'S
DEFINITIVE PROXY STATEMENT FOR ITS 1999 ANNUAL MEETING OF STOCKHOLDERS TO BE
FILED WITH THE COMMISSION WITHIN 120 DAYS OF DECEMBER 31, 1998.
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PART I
ITEM 1. BUSINESS
GENERAL
New Century Financial Corporation ("New Century" or the "Company") is a
specialty finance company that originates, purchases, sells and services sub-
prime mortgage loans secured primarily by first mortgages on single family
residences. The Company was incorporated in Delaware in November 1995 and
commenced lending operations in February 1996.
Originations and Purchases. The Company originates and purchases loans
through both wholesale and retail channels. Wholesale originations and
purchases are through independent mortgage brokers, and represented 71.8% of
the Company's total originations and purchases in 1998. Retail originations
are made through the Company's network of retail offices and through its
Primewest subsidiary, and represented 28.2% of the Company's total
originations and purchases in 1998.
The Typical Borrower. The Company's borrowers generally have substantial
equity in the property securing their loan, but have impaired or limited
credit profiles or higher debt-to-income ratios than traditional mortgage
lenders allow. The Company's borrowers also include individuals who, due to
self-employment or other circumstances, have difficulty verifying their income
through conventional methods, and who prefer the prompt and personalized
service provided by the Company. These types of borrowers are generally
willing to pay higher loan origination fees and interest rates than those
charged by conventional lending sources.
Underwriting. Although the Company's underwriting guidelines include five
levels of credit risk classification, approximately 69.6% of the principal
balance of the loans originated and purchased by the Company in 1998 were to
borrowers within the Company's two highest credit grades. Approximately 88.7%
of its loans originated or purchased during 1998 were secured by borrowers'
primary residences. The average loan-to-value ratio on loans originated and
purchased by the Company in 1998 was approximately 78.2%. Approximately 97.0%
of the loans originated and purchased by the Company during 1998 were secured
by first mortgages, and the remainder of the loans the Company originated and
purchased for such period was secured by second mortgages. Approximately 78.2%
of the loans originated and purchased by the Company in 1998 were refinances
of existing loans, while the remaining 21.8% represented loans for a
borrower's purchase of a residential property.
Loan Sales and Securitizations. The Company sells virtually all of its loan
production through a combination of securitizations and bulk sales of whole
loans to institutional purchasers. In 1998, whole loan sales accounted for
39.5% of total loan sales, and securitizations accounted for the balance.
Servicing. The Company also receives revenue from servicing its loans on
behalf of the loan purchasers. At the end of 1998, the Company's servicing
portfolio, including loans held for sale, totaled $3.8 billion, of which
$457.3 million was being sub-serviced by a third party.
Net Interest Income. In 1998 the Company earned $7.3 million in net interest
income, which represented approximately 14% of the Company's pre-tax earnings.
Net interest income is earned on loans held in inventory for sale.
GROWTH AND OPERATING STRATEGIES
Improving Volume and Profitability of Retail Production. The Company intends
to continue to emphasize the growth of retail loan production during 1999
through geographic expansion and increased consumer marketing efforts. At the
same time, the Company intends to focus on improving the profitability of its
existing retail sales offices by controlling costs. In 1998 the Company opened
30 retail offices and closed 26 retail offices, for a net increase of four
offices.
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The Company targets markets for expansion based on demographics and its
ability to recruit sales office managers and other qualified personnel in
particular markets. The Company has not yet identified the exact locations of
its planned additional retail sales offices. The Company intends to coordinate
the opening of each new retail office with direct mail advertising and
telemarketing with the goals of generating revenues for each such office
within 60 to 90 days after opening, and achieving break-even operations within
five to eight months. In the event new retail offices do not meet these goals,
the Company intends to close them.
The Company also intends to increase its consumer marketing, which includes
the use of direct mail, a centralized retail originations program,
telemarketing and more traditional marketing methods, such as referrals and
individual loan officer sales efforts. The Retail Division and the Company's
Primewest subsidiary are also expanding efforts to receive loan applications
through the internet. Finally, the Company is in the early stages of planning
a broader regional and national marketing effort focused on increasing
consumer recognition of the New Century brand name. See "--Marketing."
Continuing Growth of Wholesale Production. The Company intends to continue
the growth of its Wholesale Division, primarily through geographic expansion
and greater penetration in existing markets by providing continued high levels
of service to brokers. By providing prompt, consistent service to its brokers,
the Company seeks to maximize the number of potential loans closed in the
short term and establish the basis for repeat business, referrals and other
future lending opportunities. To this end, the Company has placed decision-
makers closer to local brokers, enabling the Company to refine its procedures
to reflect local market practices and conditions and enabling the Company to
provide a higher level of service to brokers. The Company expects to further
improve service to brokers by (i) continuing improvements in the Company's
computer and other support systems, which are expected to improve the
Company's speed, efficiency and consistency in processing loan applications,
and (ii) expanding product offerings to provide brokers with a broader
selection of borrowing alternatives for their customers.
Reducing All-In Acquisition Costs Per loan. The "all-in acquisition cost"
per loan is the sum of points and fees received from retail borrowers, fees
paid to wholesale brokers and correspondents, and direct loan origination
costs (including commissions and corporate overhead costs) divided by total
production volume. During 1998, the Company was able to reduce the all-in
acquisition cost from 4.11% to 3.22% of the average original principal balance
of the Company's loans. During 1999, the Company intends to emphasize reducing
all-in acquisition costs further. The principal strategies to achieve this
goal are (i) increasing the origination fees received on retail loan
originations, (ii) decreasing the points and fees paid to wholesale brokers,
and (iii) decreasing corporate overhead and commission expenses. The increase
in retail origination fees and decrease in the points and fees paid to brokers
is expected to be achieved through pricing adjustments on loans and through
the establishment of incentive programs for the sales staff. The decrease in
the cost of origination is expected to be achieved by the increase in
productivity of relatively new retail branches and wholesale regions and by
closing or reducing staff in unprofitable offices and production units.
Diversifying Financing Sources. In 1998 a number of businesses in the
industry suffered severe liquidity problems when their principal financing
relationships reduced or withdrew their financing commitments. In 1999 the
Company intends to diversify its financing sources by identifying and entering
into relationships with additional investment or commercial banks who can
provide various forms of financing for the Company, including funding loan
originations, financing the Company's inventory of loans held for sale, and
financing residual interests received by the Company in its securitization
transactions.
Diversifying Loan Sales and Securitization Channels. In 1998 approximately
30.5% of the Company's loan sales and securitizations represented whole loan
sales to an affiliate of Salomon Smith Barney, Inc. In addition, all of the
Company's 1998 securitizations were effected through Salomon Smith Barney,
Inc. In 1999, the Company intends to continue its efforts to identify and
solicit bids from other purchasers of whole loans, and to explore establishing
relationships with other investment banks which underwrite and distribute
securitized loans.
Managing Cash Flow. The Company's objective is to achieve and then maintain
cash neutral operations. The Company's strategies for managing cash flow
include (i) reducing the all-in acquisition cost of the
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Company's loans, (ii) continuing to sell a significant portion of the
Company's production for cash in whole loan sales, (iii) obtaining financing
secured by the Company's loans and residual interests in securitizations, (iv)
increasing the cash generated by the Company's servicing operations, and (v)
selling residual interests in securitizations through excess cash flow private
placement transactions. For the year ended December 31, 1998, the Company's
operations used approximately $68.6 million in cash, which is primarily
attributable to cash invested in the over-collateralization accounts of the
Company's securitizations. As a result of its strategy to grow its loan
origination, purchase and securitization programs, the Company expects that
its operating uses of cash may continue to exceed its operating sources of
cash.
Increase Value of Loan Production. The Company intends to continue its
efforts to develop a system of communicating secondary market conditions to
its retail and wholesale production units so that loan officers and account
executives will have the incentive to produce loans with a strong secondary
market value and a disincentive to produce loans that are less profitable.
Because the demands in the secondary market evolve continually, New Century
believes it will have a competitive advantage if it can effectively
communicate the changing secondary market conditions to its production units.
The Company also continues to focus on ways to reduce the number of loans that
must be sold at a loss because of documentation errors, borrower fraud and
other reasons.
Implementing the U.S. Bancorp Strategic Alliance. The Company plans to
implement in 1999 the various aspects of its November 1998 strategic alliance
with U.S. Bancorp and its affiliates. 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.
Making Selective Acquisitions and Strategic Alliances. On January 12, 1998,
the Company acquired Primewest Funding Corporation ("Primewest") a retail
originator of loans and one of the Company's largest correspondents. In 1998,
Primewest was responsible for $99.3 million in loan origination volume. In May
1998 the Company entered into a strategic alliance with Qualified Financial
Services, Inc. ("QFS"), a California-based mortgage broker. The Company
provided QFS with working capital financing. In exchange, the Company received
a loan production commitment from QFS, a small equity stake, and warrants to
purchase up to 30% of QFS. In 1998, the Company purchased a total of $31.3
million in loans from QFS pursuant to the strategic alliance. In 1999, the
Company will continue to evaluate potential acquisitions and strategic
alliances with mortgage originators.
MARKETING
Retail Division. The Company's Retail Division and Primewest emphasize high-
volume targeted direct mail and outbound telemarketing to attract borrowers.
Using database screening, they select the potential customers to whom they
send direct mail. The database screening involves a detailed marketing
analysis intended to identify current homeowners who are likely to be
qualified candidates for the Company's loan products. In identifying
homeowners for their mailing lists, the Retail Division and Primewest consider
factors including the length of time the homeowner has owned the home and the
individual's credit profile. Longer periods of home ownership increase the
likelihood that the homeowner has substantial equity in the home and will
satisfy the Company's loan-to-value requirements. Aspects of an individual's
credit profile, such as credit problems, limited credit history and prior
borrowings from consumer finance companies, also indicate that the individual
is a likely candidate for the Company's loan programs.
The Company tracks the success of its marketing efforts and regularly
assesses the accuracy of its database screening in identifying likely
candidates for its products. By limiting the mailing of direct mail pieces to
likely borrowers, the Company believes it derives more benefit from its
marketing expenditures.
Under the Company's centralized retail originations program, the Company
utilizes its direct marketing methodology to market where the Company does not
currently maintain a sales office. As part of this program,
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the Retail Division is attempting to improve and expand its capability to
receive inquiries and applications through its web-site. The Company also
continues to emphasize retail loan generation through more traditional
marketing methods, such as referrals and individual loan officer sales
efforts, and provides each sales office with a promotional budget to support
these activities.
Wholesale Division. The Company's wholesale marketing strategy is focused on
the sales efforts of its account executives, supported by the Company's
commitment to providing prompt, consistent service to brokers and their
customers. The Company expects that its growth in wholesale originations will
stem primarily from increasing the number of account executives, increasing
the number of markets served by such account executives and continuing efforts
to improve the service provided to brokers and their customers.
Brand Development. In addition to the targeted efforts of the Retail and
Wholesale Divisions, in 1999 the Company intends to begin a broader marketing
effort to build recognition of the "New Century" brand among potential
borrowers and mortgage brokers.
LOAN ORIGINATIONS AND PURCHASES
The Company originates and purchases loans through its Wholesale and Retail
Divisions and through its Primewest subsidiary. The Wholesale Division
originates and purchases loans through a network of independent mortgage
brokers and correspondents. The Retail Division and Primewest solicit loans
directly from prospective borrowers. During 1997, the Company also purchased
loans through bulk acquisitions from mortgage bankers and financial
institutions, but discontinued this origination channel in early 1998. All of
the Company's loans are secured by first or second mortgages on one-to-four
single family residences.
Wholesale Division. The Wholesale Division funded $2.4 billion in loans, or
71.8% of the Company's total loan production, during 1998. As of December 31,
1998, the Wholesale Division was operating through four regional operating
centers located in Southern California, Northern California, Chicago and
Atlanta and through 67 additional sales offices located in Arizona (2),
Arkansas, California (4), Colorado, Florida (8), Georgia, Hawaii, Idaho,
Indiana, Kentucky, Louisiana (2), Massachusetts (2), Maryland, Michigan (2),
Minnesota, Missouri (2), Mississippi, Montana, Nevada, New Jersey, New Mexico,
New York, North Carolina (3), Ohio (3), Oklahoma (2), Oregon (2), Pennsylvania
(2), South Carolina (2), Tennessee (3), Texas (4), Utah, Virginia (4),
Washington (2) and Wisconsin (2), employing a total of 182 account executives.
As of December 31, 1998, the Company had approximately 7,500 approved mortgage
brokers and during 1998 originated loans through approximately 4,000 brokers.
During 1998, New Century's ten largest producing brokers originated
approximately 9.1% of the Company's loans, with the largest broker, Qualified
Financial Services, accounting for approximately 1.8% of the division's
production.
In wholesale originations, the broker's role is to identify the applicant,
assist in completing the loan application form, gather necessary information
and documents and serve as the Company's liaison with the borrower through the
lending process. The Company reviews and underwrites the applications
submitted by the broker, approves or denies the application, sets the interest
rate and other terms of the loan and, upon acceptance by the borrower and
satisfaction of all conditions imposed by the Company, funds the loan. Because
brokers conduct their own marketing and employ their own personnel to complete
loan applications and maintain contact with borrowers, originating loans
through the Wholesale Division allows the Company to increase its loan volume
without incurring the higher marketing, labor and other overhead costs
associated with increased retail originations.
Loan applications generally are submitted by mortgage brokers to an account
executive in one of the Company's sales offices. The application is then
forwarded to the closest regional operating center where the loan is logged-in
for RESPA and other regulatory compliance purposes, underwritten and, in most
cases, conditionally approved or denied within 24 hours of receipt. Because
mortgage brokers generally submit individual loan files to several prospective
lenders simultaneously, the Company attempts to respond to each application as
quickly as possible. If approved, the Company issues a "conditional approval"
to the broker with
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a list of specific conditions to be met (for example, credit verifications and
independent third-party appraisals) and additional documents to be supplied
prior to the funding of the loan. An account manager and the originating New
Century account executive will work directly with the submitting mortgage
broker to collect the requested information and to meet the underwriting
conditions and other requirements. In most cases, the Company funds loans
within 30 days after approval of the loan application.
The Wholesale Division also purchases closed loans on an individual or
"flow" basis from independent mortgage brokers and financial institutions. The
Company reviews an application for approval from each lender seeking to sell
the Company a closed loan. The Company analyzes the mortgage broker's
underwriting guidelines and financial condition, including its licenses and
financial statements. The Company requires each mortgage broker to enter into
a purchase and sale agreement with customary representations and warranties
regarding the loans such mortgage broker will sell to the Company, thereby
providing the Company with representations and warranties that are comparable
to those given by the Company to its loan purchasers.
The following table sets forth selected information relating to wholesale
loan originations and purchases during the periods shown:
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FOR THE QUARTERS ENDED
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MARCH
31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
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<S> <C> <C> <C> <C>
Principal balance (in
thousands)..................... $432,138 $587,425 $672,275 $696,116
Average principal balance per
loan
(in thousands)................. $102 $103 $98 $97
Combined weighted average
initial
loan-to-value ratio............ 76.3% 78.4% 79.6% 79.5%
Percent of first mortgage loans. 97.1% 98.1% 98.7% 98.2%
Property securing loans:
Owner occupied................ 88.9% 87.2% 86.6% 86.1%
Non-owner occupied............ 11.1% 12.8% 13.4% 13.9%
Weighted average interest rate:
Fixed-rate.................... 9.8% 9.9% 10.1% 10.3%
ARMs.......................... 9.6% 9.7% 9.7% 9.8%
Margin--ARMs.................. 5.9% 6.1% 6.2% 6.2%
</TABLE>
Retail Division and Primewest. During 1998 the Company originated $837.6
million in loans, or 25.2% of its total loan production, through its Retail
Division and $99.3 million in loans, or 3.0% of its total loan production,
through its Primewest subsidiary. As of December 31, 1998, the Retail Division
employed 276 retail loan officers, located in 78 sales offices in Arizona (4),
California (22), Colorado (2), Delaware, Florida (6), Georgia, Hawaii (2),
Idaho, Illinois (3), Louisiana, Maryland, Massachusetts, Michigan, Minnesota
(2), Missouri (2), Montana, Nevada, New Jersey, New Mexico, North Carolina
(2), Ohio (4), Oklahoma, Oregon, Pennsylvania (2), Tennessee, Texas (8), Utah,
Virginia, Washington (2) and Wisconsin. As of December 31, 1998, Primewest
employed 35 loan officers at its headquarters in Irvine, California.
By creating a direct relationship with the borrower, retail lending provides
a more sustainable loan origination franchise and greater control over the
lending process while generating loan origination fees to offset the higher
costs of retail lending, which may contribute to profitability and cash flow.
The Company's Direct Mail Activities. The Company's direct mail programs are
managed by a centralized staff who create a targeted mailing list for each
branch market and oversee the completion of mailings by a third party mailing
vendor. All calls or written inquiries from potential borrowers which result
from the mailings are received at each branch location and handled by branch
loan officers. Under the Central Telemarketing Program, the telemarketing
staff solicits prospective borrowers, makes a preliminary evaluation of the
borrower's credit and the value of the collateral property and refers
qualified leads to loan officers in the retail branch closest to
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the customer. With the Direct Origination Center, direct mail is sent to areas
not serviced by retail branches which generates calls and inquiries to a
centralized staff of loan officers. In addition, the telemarketing staff
refers qualified leads to those central loan officers who work with the
borrower using telephone, fax and mail and who utilize document and signing
services to close the loan.
For the year ended December 31, 1998, the Retail Division's loan
originations and purchases included $42.2 million in loans funded through the
Company's Service Provider Program. Under that program, the Company
establishes relationships with banks and other financial institutions across
the country. The goal is to encourage participating financial institutions to
identify potential borrowers who do not qualify for a loan from the respective
financial institution but do meet the Company's target borrower profile.
Participating financial institutions are compensated by the Company based on
the level of services performed by the institution. As of December 31, 1998,
the Company had service provider relationships with 182 banks and other
financial institutions, 51 of which were producing loan volume for the
Company.
The following table sets forth selected information relating to retail loan
originations, including Primewest, during the periods shown:
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FOR THE QUARTERS ENDED
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MARCH
31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
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<S> <C> <C> <C> <C>
Principal balance (in
thousands)..................... $222,812 $231,483 $241,990 $240,617
Average principal balance per
loan
(in thousands)................. $ 92 $ 88 $ 86 $ 85
Combined weighted average
initial
loan-to-value ratio............ 76.7% 77.0% 77.6% 76.8%
Percent of first mortgage loans. 94.6% 94.3% 94.5% 95.3%
Property securing loans:
Owner occupied................ 94.0% 93.4% 93.2% 92.4%
Non-owner occupied............ 6.0% 6.6% 6.8% 7.6%
Weighted average interest rate:
Fixed-rate.................... 9.4% 9.8% 10.0% 10.1%
ARMs.......................... 9.2% 9.5% 9.4% 9.4%
Margin--ARMs.................. 5.9% 6.4% 6.4% 6.4%
</TABLE>
FINANCING LOAN ORIGINATIONS AND LOANS HELD FOR SALE
The Company requires access to credit facilities in order to originate or
purchase mortgage loans, and to hold them pending their sale or
securitization. The Company relies on a $320 million short-term warehouse
credit facility led by U.S. Bank National Association to fund its originations
and purchases. The Company also relies on a $603 million aggregation facility
with Salomon Brothers Realty Corp. to finance the loans pending their sale or
securitization. See "--Management's Discussion and Analysis of Financial
Condition and Results of Operations Liquidity and Capital Resources."
PRODUCT TYPES
The Company offers both fixed-rate and adjustable-rate loans ("ARMs"), as
well as loans with an interest rate that is initially fixed for a period of
time and subsequently converts to an adjustable rate. Most of the ARMs
originated by the Company are offered at a low initial interest rate,
sometimes referred to as a "start rate." At each interest rate adjustment
date, the Company adjusts the rate, subject to certain limitations on the
amount of any single adjustment, until the rate charged equals the fully
indexed rate. There can be no assurance, however, that the interest rate on
these loans will reach the fully indexed rate if the loans are pre-paid or in
cases of foreclosure.
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The Company's borrowers fall into five sub-prime risk classifications and
products are available at different interest rates and with different
origination and application points and fees depending on the particular
borrower's risk classification (see "Business--Underwriting Standards").
Borrowers may choose to increase or decrease their interest rate through the
payment of different levels of origination fees and many of the Company's
fixed-rate borrowers, in particular, choose to "buy down" their interest rate
through the payment of additional origination fees. The Company's maximum loan
amounts are generally $500,000 with a loan-to-value ratio of up to 90%. The
Company does, however, offer larger loans with lower loan-to-value ratios on a
case-by-case basis, and also offers products that permit a loan-to-value ratio
of up to 95% for selected borrowers with a Company risk classification of "A+"
or "A-."
Loans originated or purchased by the Company in 1998 had an average loan
amount of approximately $96,008 and an average loan-to-value ratio of
approximately 78.2%. Unless prohibited by state law or otherwise waived by the
Company, the Company generally imposes a prepayment penalty on the borrower.
Approximately 72.7% of the loans the Company originated or purchased during
1998 provided for the payment by the borrower of a prepayment charge in
limited circumstances on certain full or partial prepayments and the duration
of the prepayment penalty coverage was an average of 2.72 years.
UNDERWRITING STANDARDS
New Century originates or purchases its mortgage loans in accordance with
the underwriting criteria (the "Underwriting Guidelines") described below. The
loans the Company originates or purchases generally do not satisfy
conventional underwriting standards, such as those utilized by the Federal
National Mortgage Association ("FNMA") and the Federal Home Loan Mortgage
Corporation ("FHLMC"); therefore, the Company's loans are likely to result in
rates of delinquencies and foreclosures that are higher, and may be
substantially higher, than those rates experienced by portfolios of mortgage
loans underwritten in a more traditional manner.
The Underwriting Guidelines are intended to evaluate the credit history of
the potential borrower, the capacity of the borrower to repay the proposed
loan, the value of the security property and the adequacy of such property as
collateral for the proposed loan. Based upon the underwriter's review of the
loan application and related data and application of the Underwriting
Guidelines, the loan terms, including interest rate and maximum loan-to-value,
are determined.
Each loan applicant completes an application that includes information with
respect to the applicant's liabilities, income, credit history, employment
history and personal information. The Underwriting Guidelines require a credit
report on each applicant from a credit reporting company. The report typically
contains information relating to such matters as credit history with local and
national merchants and lenders, installment debt payments and any record of
defaults, bankruptcies, repossessions or judgments. All mortgaged properties
are appraised by qualified independent appraisers prior to funding of the
loan. Such appraisers inspect and appraise the subject property and verify
that such property is in acceptable condition. Following each appraisal, the
appraiser prepares a report which includes a market value analysis based on
recent sales of comparable homes in the area and, when deemed appropriate,
replacement cost analysis based on the current cost of constructing a similar
home. All appraisals are required to conform to the Uniform Standards of
Professional Appraisal Practice adopted by the Appraisal Standards Board of
the Appraisal Foundation and are generally on forms acceptable to FNMA and
FHLMC. The Underwriting Guidelines require a review of the appraisal by a
qualified employee of the Company or by a qualified appraiser retained by the
Company.
The Underwriting Guidelines currently include two levels of applicant
documentation requirements, referred to as the "Full Documentation" and
"Stated Income Documentation" programs. Under each of the programs, the
Company reviews the applicant's source of income, calculates the amount of
income from sources indicated on the loan application or similar
documentation, reviews the credit history of the applicant, calculates the
debt service-to-income ratio to determine the applicant's ability to repay the
loan, reviews the type and use of the property being financed, and reviews the
property. In determining the ability of the applicant to repay the loan, the
Company's underwriters use a qualifying rate that is equal to (i) the lesser
of the fully indexed interest rate on the loan being applied for or one
percent above the initial interest rate on such loan (in the case of
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six-month LIBOR loans that do not provide for a delayed first adjustment) or
(ii) the initial interest rate on such loan (in the case of other LIBOR-based
loans). The Underwriting Guidelines require that mortgage loans be
underwritten in a standardized procedure which complies with applicable
federal and state laws and regulations and requires the Company's underwriters
to be satisfied that the value of the property being financed, as indicated by
an appraisal and a review of the appraisal, currently supports the outstanding
loan balance. In general, the maximum loan amount for mortgage loans
originated under the programs is $500,000. The Underwriting Guidelines permit
loans on one-to-four-family residential properties to have (i) a loan-to-value
ratio at origination of up to 90%, with respect to non-conforming first liens,
(ii) a combined loan-to-value ratio at origination of up to 90% with respect
to non-conforming second liens and (iii) a combined loan-to-value ratio at
origination of up to 100% with respect to conforming second liens, in each
case depending on, among other things, the purpose of the mortgage loan, a
borrower's credit history, repayment ability and debt service-to-income ratio,
as well as the type and use of the property. With respect to mortgage loans
secured by mortgaged properties acquired by a borrower under a "lease option
purchase," the loan-to-value of the related mortgage loan is based on the
lower of the appraised value at the time of origination of such mortgage loan
or the sale price of the related mortgaged property if the "lease option
purchase price" was set less than twelve months prior to origination and is
based on the appraised value at the time of origination if the "lease option
purchase price" was set twelve months or more prior to origination.
The Underwriting Guidelines require that the income of each applicant be
verified. The specific income documentation required for the Company's various
programs is as follows: under the Full Documentation program, applicants
generally are required to submit two written forms of verification of stable
income for at least twelve months; under the Stated Income Documentation
program, an applicant may be qualified based upon monthly income as stated on
the mortgage loan application if the applicant meets certain criteria. All the
foregoing programs require that, with respect to salaried employees, there be
a telephone verification of the applicant's employment. Verification of the
source of funds (if any) required to be deposited by the applicant into escrow
in the case of a purchase money loan is required when the loan-to-value ratio
is greater than 70%.
In evaluating the credit quality of borrowers, the Company utilizes credit
bureau risk scores (a "FICO score"), a statistical ranking of likely future
credit performance developed by Fair, Isaac & Company and the three national
credit data repositories--Equifax, TransUnion and Experian.
9
<PAGE>
The Company's Underwriting Guidelines for first lien mortgage loans have the
following categories and criteria for grading the potential likelihood that an
applicant will satisfy the repayment obligations of a mortgage loan:
SUMMARY OF PRINCIPAL
UNDERWRITING GUIDELINES(1)
<TABLE>
<CAPTION>
A+ RISK A- RISK B RISK C RISK C- RISK
------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Existing mortgage Maximum one Maximum three Maximum one Maximum of Maximum of
history................ 30-day late 30-day late 60-day late one 90-day two 90-day
payment and payments and payment late payment late
no 60-day no 60-day within last within last payments and
late late 12 months; 12 months; one 120-day
payments payments must be less must be less late payment
w/in last 12 w/in last 12 than 60 days than 90 days w/in last 12
mos.; mos.; late at late at months; less
required to required to funding. funding. than 90 days
be current be current late at
at funding; at funding. funding. No
must have a current NOD.
LTV of 90%
or less.
Other credit............ FICO score of FICO score of FICO score of Significant Significant
640 or 620 or 600 or prior defaults
higher; no higher; higher; some defaults acceptable;
open minor prior acceptable; generally,
collection derogatory defaults generally, not more
accounts or items acceptable; not more than $5,000
charge-offs allowed; not not more than $2,500 in open
open after more than than $1,000 in open charge-offs
funding. $500 in open in open collection or
collection collection accounts or collection
accounts or accounts or charge-offs accounts may
charge-offs charge-offs open after remain open
open after open after funding; on after
funding. funding. a case by funding; on
case basis. a case by
case basis.
Bankruptcy filings...... Generally, no Generally, no Generally, no Generally, no Generally, no
bankruptcy bankruptcy bankruptcy bankruptcy bankruptcy
or notice of filings in or notice of or notice of or notice of
default last 2 years default default default
filings in or notice of filings in filings in filings
last 3 default last 2 last 12 allowed in
years. filings in years. months. last 12
last 3 months from
years. discharge
date.
Debt service to income 42% to 45% 50% or less 55% or less 59% or less 59% or less
ratio..................
Maximum loan-to-value
ratio ("LTV"):(2)
Owner occupied:
single family.......... 90% 90% 80% 75% 70%
Owner occupied:
condo/two-to-four unit. 85% 85% 75% 70% 65%
Non-owner occupied..... 85% 85% 75% 70% 65%
</TABLE>
- -------
(1) The letter grades applied to each risk classification reflect the
Company's internal standards and do not necessarily correspond to the
classifications used by other mortgage lenders. "LTV" means loan-to-value
ratio.
(2) The maximum LTV set forth in the table is for borrowers providing full
documentation. The LTV is reduced 5% for stated income applications, if
applicable. Additionally, if the borrower's FICO score meets or exceeds
the risk category and debt ratio guidelines, consumer credit may be
disregarded.
10
<PAGE>
Mortgage Credit Only Program. In addition to the five risk grade categories
described above, the Company also has a Mortgage Credit Only program. The
Mortgage Credit Only program allows no more than three 30-day late payments
and no 60-day late payments within the last 12 months on an existing mortgage
loan. An existing mortgage loan is not required to be current at the time the
application is submitted. Derogatory credit report items are allowed as to
non-mortgage credit. Mortgage Credit Only loans are not available under the
Stated Income Documentation program. No bankruptcy or notice of default
filings may have occurred during the preceding two years; provided, however,
that if the borrower's bankruptcy has been discharged during the past two
years and the borrower has re-established a credit history otherwise complying
with the credit parameters set forth in this paragraph, the borrower may then
qualify under the Mortgage Credit Only program. The mortgaged property must be
in at least average condition. A maximum loan-to-value of 75% is permitted for
a mortgage loan on a single family owner-occupied property. A maximum loan-to-
value of 70% is permitted for a mortgage loan on a non-owner occupied
property, second home, owner-occupied condominium, or two- to four-family
residential property. The debt service-to-income ratio is generally limited to
a maximum of 55%.
Home Saver Program. The Company has established a sub-category of its C-
credit grade (the "Home Saver Program") for borrowers faced with at least one
of the following credit scenarios: (i) the borrower has an existing mortgage
currently in foreclosure, (ii) the borrower is subject to a notice of default
filing, (iii) the borrower has had a serious mortgage delinquency for more
than one 120 day period in the last 12 months or is more than 90 days late at
the time of funding, or (iv) the borrower is in an open Chapter 13 or Chapter
11 bankruptcy. The Home Saver Program is available only to Full Documentation
borrowers and permits a maximum loan-to-value of 65% and a maximum debt
service-to-income ratio of 59%. The maximum loan is $250,000 and all
derogatory credit report items must either be brought current or paid through
the loan proceeds. A maximum of 3% of the loan proceeds may be paid to the
borrower in cash. If the borrower is in an open Chapter 13 or Chapter 11
bankruptcy, the bankruptcy must be discharged though the proceeds of the loan.
Exceptions. The categories and criteria described in the above table are
guidelines only. On a case-by-case basis, the Company may determine that an
applicant warrants a loan-to-value exception, a debt service-to-income ratio
exception, or another exception to the Underwriting Guidelines. The Company
may allow such an exception if the application reflects certain compensating
factors such as low LTV, pride of ownership, a maximum of one 30-day late
payment on all mortgage loans during the last 12 months, and stable employment
or ownership of current residence for five or more years. The Company may also
allow an exception if the applicant places a down payment through escrow of at
least 20% of the purchase price of the mortgage property or if the new loan
reduces the applicant's monthly aggregate mortgage payment by 25% or more.
The Company evaluates its Underwriting Guidelines on an ongoing basis and
periodically modifies the Underwriting Guidelines to reflect the Company's
current assessment of various issues related to an underwriting analysis. The
Company also maintains separate underwriting guidelines appropriate to its
conforming and non-conforming second lien mortgage loans, and adopts new
underwriting guidelines appropriate to new loan products offered by the
Company.
11
<PAGE>
LOAN PRODUCTION BY BORROWER RISK CLASSIFICATION
The following table sets forth information concerning the Company's
principal balance of fixed rate and adjustable rate loan production by
borrower risk classification for the periods shown:
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
---------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
A+ Risk Grade:
Percent of total purchases and
originations.................... 38.0% 38.8% 37.6% 37.3%
Combined weighted average initial
loan-to-value ratio............. 79.4 80.6 81.8 82.1
Weighted average interest rate:
Fixed-rate..................... 9.3 9.5 9.5 9.7
ARMs........................... 9.2 9.3 9.3 9.3
Margin--ARMs................... 5.6 5.8 5.9 5.8
A- Risk Grade:
Percent of total purchases and
originations.................... 33.8% 31.8% 31.8% 30.0%
Combined weighted average initial
loan-to-value ratio............. 76.8 78.8 79.8 80.3
Weighted average interest rate:
Fixed-rate..................... 9.4 9.6 9.8 9.9
ARMs........................... 9.3 9.5 9.5 9.6
Margin--ARMs................... 5.9 6.1 6.2 6.2
B Risk Grade:
Percent of total purchases and
originations.................... 15.9% 14.9% 15.6% 15.5%
Combined weighted average initial
loan-to-value ratio 74.8 76.6 77.9 77.1
Weighted average interest rate:
Fixed-rate..................... 10.0 10.2 10.3 10.4
ARMs........................... 9.7 9.9 9.8 9.9
Margin--ARMs................... 6.1 6.4 6.4 6.4
C Risk Grade:
Percent of total purchases and
originations.................... 7.7% 9.9% 10.9% 11.3%
Combined weighted average initial
loan-to-value ratio............. 70.5 72.4 73.7 73.3
Weighted average interest rate:
Fixed-rate..................... 10.6 10.9 11.2 11.4
ARMs........................... 10.3 10.5 10.5 10.6
Margin--ARMs................... 6.4 6.5 6.6 6.7
C- Risk Grade:
Percent of total purchases and
originations.................... 4.6% 4.6% 4.1% 5.9%
Combined weighted average initial
loan-to-value ratio............. 65.6 67.2 65.8 66.1
Weighted average interest rate:
Fixed-rate..................... 11.7 11.6 12.3 11.7
ARMs........................... 10.9 11.2 11.6 11.5
Margin--ARMs................... 6.5 6.6 6.7 6.6
</TABLE>
12
<PAGE>
GEOGRAPHIC DISTRIBUTION
The following table sets forth aggregate dollar amounts (in thousands) and
the percentage of all loans originated or purchased by the Company by state
for the periods shown:
<TABLE>
<CAPTION>
FOR THE QUARTERS ENDED
--------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998 1998
-------------- -------------- -------------- --------------
$ % $ % $ % $ %
-------- ----- -------- ----- -------- ----- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California..... $242,271 37.0% $273,640 33.4% $283,798 31.0% $278,100 29.7%
Illinois....... 66,072 10.1% 68,284 8.3% 76,736 8.4% 73,551 7.9%
Florida........ 29,226 4.5% 43,571 5.3% 51,048 5.6% 55,999 6.0%
Texas.......... 16,842 2.6% 37,356 4.6% 35,993 3.9% 45,272 4.8%
Ohio........... 31,800 4.9% 41,329 5.0% 49,604 5.4% 42,839 4.6%
Minnesota...... 21,353 3.3% 22,749 2.8% 30,127 3.3% 32,106 3.4%
Washington..... 16,442 2.5% 28,035 3.4% 32,144 3.5% 31,358 3.3%
Pennsylvania... 18,254 2.8% 21,831 2.7% 27,637 3.0% 26,268 2.8%
Colorado....... 24,430 3.7% 27,812 3.4% 26,192 2.9% 25,132 2.7%
Arizona........ 20,075 3.1% 22,997 2.8% 23,617 2.6% 17,481 1.9%
Other.......... 168,185 25.5% 231,304 28.3% 277,369 30.4% 308,626 32.9%
-------- ----- -------- ----- -------- ----- -------- -----
Total......... $654,950 100.0% $818,908 100.0% $914,265 100.0% $936,732 100.0%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
LOAN SALES AND SECURITIZATIONS
The Company sells the loans it originates or purchases through both
securitizations and bulk sales to institutional purchasers of whole loans. In
order to better track the performance of its business segments, in December
1998 the Company restructured its operations so that all secondary marketing
functions are performed by a separate subsidiary, NC Capital Corporation. NC
Capital buys loans from the Wholesale and Retail Divisions of New Century
Mortgage Corporation and Primewest within a week or two after origination. The
purchase price approximates the secondary market value of the loans based on
current market conditions. NC Capital is then responsible for determining when
and through what channel to sell the loans, and bears the risks of market
fluctuations in the period between purchase and sale.
Whole Loan Sales. In a whole loan sale, the Company sells loans in bulk to a
purchaser for a cash price that represents a premium over the principal
balance of the loans sold. The sale may include releasing to the purchaser the
servicing rights to the loans (a "servicing-released" sale) or the Company may
retain the servicing rights (a "servicing-retained" sale). Until February
1997, the Company sold all loans through servicing-released whole loan sales.
In February 1997, the Company began to sell loans through securitization and
retain the servicing rights, while it continued to sell loans through whole
loan sales on a servicing-released basis. In December 1997, the Company began
selling loans through whole loan sales on a servicing-retained basis.
In 1998, whole loan sales accounted for $1.48 billion, or 39.5% of the
Company's total loan sales. Of this amount, 65.5% were sold servicing-retained
and 34.5% were sold servicing-released. In the servicing-retained sales, the
purchaser retained the Company to service the loans for a fee of 0.50% per
year of the outstanding principal balance of the loans. The weighted average
sales price of the Company's 1998 whole loans sales was equal to 104.3% of the
original principal balance of the loans sold.
The Company seeks to maximize its premium on whole loan sale revenue by
closely monitoring institutional purchasers' requirements and focusing on
originating or purchasing the types of loans that meet those requirements and
for which institutional purchasers tend to pay higher premiums. During 1998,
the Company sold loans to more than 20 institutional purchasers, including
Salomon Brothers Realty Corp., which accounted for 30.5% of total loan sales
and securitizations.
Whole loan sales are made on a non-recourse basis pursuant to a purchase
agreement containing customary representations and warranties by the Company
regarding the underwriting criteria applied by the Company and the origination
process. The Company, therefore, may be required to repurchase or substitute
loans in the event
13
<PAGE>
of a breach of its representations and warranties. In addition, the Company
sometimes commits to repurchase or substitute a loan if a payment default
occurs within the initial months following the date the loan is funded, unless
other arrangements are made between the Company and the purchaser. The Company
is also required in some cases to repurchase or substitute a loan if the loan
documentation is alleged to contain fraudulent misrepresentations made by the
borrower.
Securitizations. The Company completed the sale of loans through five
securitization transactions during 1998. All of the Company's 1998
securitizations were underwritten by Salomon Smith Barney, Inc.
In a securitization, the Company sells a pool of loans to a special trust
for the following: (i) a cash purchase price and (ii) certificates evidencing
its "residual interest" ownership in the trust. The trust raises the cash
portion of the purchase price by selling senior certificates representing
senior interests in the loans in the trust. Following the securitization,
purchasers of senior certificates receive the principal collected, including
prepayments, on the loans in the trust. In addition, they receive a portion of
the interest on the loans in the trust equal to the specified "investor pass-
through interest rate" on the principal balance. The Company receives the cash
flows from the residual interests, after payment of servicing fees, guarantor
fees and other trust expenses, and provided the specified over-
collateralization requirements are met.
The Company recognizes gain on sale of the loans, which represents the
excess of the estimated fair value of the residual interests, less closing and
underwriting costs, over the carrying value of the loans sold, in the fiscal
quarter in which such loans are sold. At the same time as the Company
recognizes the gain on sale, the Company records the residual interests as
assets on its balance sheet. The recorded values of these residual interests
are amortized as distributions and are received from the trust holding the
respective loan pool.
One of the 1998 securitizations was credit enhanced by an insurance policy
provided through a monoline insurance company. The other four securitizations
were credit enhanced through the use of subordinated certificates instead of
an insurance policy. The Company used credit enhancements in each of its
securitizations to allow the senior certificates in the related trusts to
receive ratings of "AAA" from Standard & Poor's Rating Services and "Aaa" from
Moody's Investors Service, Inc. The Company also provides credit enhancement
in the form of an over-collateralization account.
There is no assurance that actual performance of any of the Company's
securitized loan portfolios will be consistent with the Company's estimates
and assumptions. To the extent that actual prepayment speeds, losses or market
discount rates materially differ from the Company's estimates, the estimated
value of its residuals may increase or decrease, which may have a material
impact on the Company's results of operations, financial condition and
liquidity.
To date, the Company's overall cash flows on its residual interests are
higher than the Company had projected. However, three of the early 1997
securitizations (1997 NC-1, NC-2 and NC-3) have experienced high prepayment
speeds resulting in a remaining principal balance substantially lower than
projected. In addition, in 1998 the Company elected to repurchase certain
delinquent loans from these three securitizations, which further increased the
prepayment speeds of these three securitizations. Because the Company believes
the future cash flows from these securitizations will be less than modeled
cash flows, the Company recorded a $5.9 million reduction in the value of the
residual interests from these three transactions in the fourth quarter of
1998. See "--Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations."
NIM-Excess Cash Flow Private Placements. In May 1998, the Company completed
its first "net interest margin" or "excess cash flow" private placement (a
"NIM" transaction) with respect to its residual interests in four of its prior
securitizations. In a NIM transaction the Company contributes and/or sells one
or more residual interests from prior securitizations to a special purpose
subsidiary. The subsidiary in turn sells the residual interests to a trust.
The trust pays for the residual interest partly in cash and partly with an
Owner Trust Certificate representing an ownership interest in the trust. The
trust raises the cash by selling bonds that represent
14
<PAGE>
senior interests in the residual securities that were deposited into the
trust. In addition to the May 1998 NIM transaction, the Company also completed
a NIM transaction in December 1998, selling the residual interest from the
1998 NC-5 securitization.
While the Company is holding residual interests from securitizations, it is
able to pledge those interests to a lender in order to borrow against them.
The Company is able to pay down those borrowings with the proceeds of a NIM
transaction, thereby reducing its leverage ratios.
The Company completed its third NIM transaction in February 1999 with
respect to all of the remaining residual interests it was holding from prior
securitizations. The Company believes these transactions to be an important
part of its overall loan sales strategy, and expects to continue to pursue
them with its future residual interests if market conditions permit, in order
to improve liquidity and decrease borrowings.
LOAN SERVICING AND DELINQUENCIES
Servicing. Until February 1997, the Company sold all of its loan
originations and purchases on a servicing-released basis. Beginning with its
first securitization in February 1997, the Company has retained the servicing
rights on loans sold through its securitizations. In addition, during the
period from the date the Company originates or purchases loans and the date
the Company sells these loans, which generally ranges from thirty to ninety
days (the "Interim Period"), the Company is responsible for servicing the
loans it originates and purchases. Starting in December 1997, the Company also
began selling the majority of its whole loans on a servicing-retained basis.
Even as to those whole loan sales transactions in which the loans are sold
on a servicing-released basis, in some cases, whole loan purchasers may
request that the Company continue to service the loans purchased for an
interim period following the sale. Servicing includes collecting and remitting
loan payments, making required advances, accounting for principal and
interest, holding escrow or impound funds for payment of taxes and insurance,
and, if applicable, contacting delinquent borrowers and supervising
foreclosures and property dispositions in the event of unremedied defaults in
accordance with the Company's guidelines.
Advanta. Prior to September 1997, the Company outsourced substantially all
of its servicing operations to Advanta Mortgage Corp. USA ("Advanta"), an
approved third party sub-servicer. Advanta currently sub-services loans sold
through each of the Company's first five securitizations pursuant to the
Advanta Securitization Agreement. Under the Advanta Securitization Agreement,
the Company is obligated to pay Advanta a monthly servicing fee on the
declining principal balance of each loan serviced. Advanta is required to pay
all expenses related to the performance of its duties under the Advanta
Securitization Agreement, however the Company will reimburse Advanta for
certain expenses in accordance with the terms of the Advanta Securitization
Agreement.
If the Company terminates the Advanta Securitization Agreement without cause
or transfers the servicing of any amount of the mortgage loans serviced by
Advanta to another servicer, the Company must pay Advanta certain penalties,
fees and costs. With respect to mortgage loans securitized by the Company's
first five securitizations, the Company is not permitted to terminate the sub-
servicer without the approval of the trustee for such securitization.
Comerica. In September 1997, the Company began boarding loans on a joint
servicing platform with Comerica (the "Comerica Agreement"). Under the
Comerica Agreement, Comerica agreed to act as a sub-servicer for the Company,
providing certain servicing functions with respect to the Company's mortgage
loans. From September 1997 until June 1998, the Company boarded substantially
all of its loans on the joint servicing platform with Comerica, including the
loans it securitized in the fourth quarter of 1997 and the first quarter of
1998.
In early 1998 Comerica announced its intention to discontinue its loan
servicing operations. As a result, in July 1998 the Company and Comerica
mutually agreed to terminate their joint servicing platform. By that time the
Company had established the infrastructure necessary to perform all of the
servicing functions relating to its
15
<PAGE>
loans previously serviced on the joint platform. Except for the loans in its
first five securitizations, which are still being sub-serviced by Advanta, the
Company now performs all servicing functions relating to its securitizations,
loans held for sale and loans sold on a servicing-retained basis. The Company
expects to begin servicing the loans currently sub-serviced by Advanta in the
second or third quarter of 1999. The Company may be required to pay Advanta a
small penalty for terminating the sub-servicing arrangement.
As of December 31, 1998, the Company's servicing portfolio consisted of
38,710 loans with an aggregate principal balance of approximately $3.8
billion, of which 3,907 loans with an aggregate principal balance of $357.5
million were held for sale and serviced on an interim basis, 34,704 loans with
an aggregate principal balance of $3.4 billion were serviced for trusts
created from the Company's securitizations, and 99 loans with an aggregate
principal balance of $13.1 million were serviced on behalf of the whole loan
purchasers thereof.
As of December 31, 1998, approximately $457.3 million, or 12.1%, of the
loans in the Company's servicing portfolio were serviced by Advanta, and
approximately $3.4 billion, or 87.9% of the loans in the Company's servicing
portfolio were serviced on the Company's own platform.
Delinquencies and Foreclosures. Loans originated or purchased by the Company
are secured by mortgages, deeds of trust, security deeds or deeds to secure
debt, depending upon the prevailing practice in the state in which the
property securing the loan is located. Depending on local law, foreclosure is
effected by judicial action or non-judicial sale, and is subject to various
notice and filing requirements. In general, the borrower, or any person having
a junior encumbrance on the real estate, may cure a monetary default by paying
the entire amount in arrears plus other designated costs and expenses incurred
in enforcing the obligation during a statutorily prescribed reinstatement
period. Generally, state law controls the amount of foreclosure expenses and
costs, including attorneys fees, which may be recovered by a lender. After the
reinstatement period has expired without the default having been cured, the
borrower or junior lien-holder no longer has the right to reinstate the loan
and may be required to pay the loan in full to prevent the scheduled
foreclosure sale. Where a loan has not yet been sold or securitized, the
Company will generally allow a borrower to reinstate the loan up to the date
of foreclosure sale.
Although foreclosure sales are typically public sales, third-party
purchasers rarely bid in excess of the lender's lien because of the difficulty
of determining the exact status of title to the property, the possible
deterioration of the property during the foreclosure proceedings and a
requirement that the purchaser pay for the property in cash or by cashier's
check. Thus, the foreclosing lender often purchases the property from the
trustee or referee for an amount equal to the sum of the principal amount
outstanding under the loan, accrued and unpaid interest and the expenses of
foreclosure. Depending on market conditions, the ultimate proceeds of the sale
may not equal the lender's investment in the property.
New Century commenced receiving applications for mortgage loans under its
regular lending program in February 1996 and during 1996 sold all of its loans
on a whole loan, servicing-released basis. The Company began selling loans
through securitizations in 1997 and in connection with these securitizations
has established reporting systems to track historical delinquency, bankruptcy,
foreclosure and default experience for the loans included in its
securitizations as well as the Company's total portfolio of loans. Because
most of the Company's securitized loans have been outstanding for a short
period of time, current delinquency and loss information is not necessarily
representative of future delinquencies and losses.
16
<PAGE>
The following tables set forth certain delinquency statistics as of December
31, 1998 for the Company's 1997 and 1998 securitized loans (dollars in
thousands):
Securities Issued in 1997
<TABLE>
<CAPTION>
DELINQUENCY (% OF CURRENT
BALANCE BY RISK GRADE)
---------------------------
ORIGINAL CURRENT 60-89 90+ FORECL./
RISK GRADE BALANCE WALTV* BALANCE DAYS DAYS REO TOTAL REPURCHASE % **
---------- -------- ------ ------- ----- ---- -------- ----- ---------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A+...................... $ 323,194 73.52% $210,220 0.11% 0.98% 2.50% 3.59% $ 1,786 0.85%
A- ..................... 410,273 73.68% 281,603 1.04% 1.36% 3.62% 6.02% 2,449 0.87%
B....................... 208,564 72.73% 133,404 1.59% 1.71% 4.35% 7.65% 2,173 1.63%
C....................... 98,916 68.07% 60,583 1.55% 3.66% 10.29% 15.50% 1,674 2.76%
C- ..................... 83,669 68.24% 47,342 2.69% 7.88% 14.83% 25.40% 2,013 4.25%
---------- ----- -------- ---- ---- ----- ----- ------- ----
$1,124,616 72.19% $733,152 1.02% 1.92% 4.71% 7.65% $10,095 1.38%
</TABLE>
Securities Issued in 1998
<TABLE>
<CAPTION>
DELINQUENCY (% OF CURRENT
BALANCE BY RISK GRADE)
---------------------------
ORIGINAL CURRENT 60-89 90+ FORECL./
RISK GRADE BALANCE*** WALTV* BALANCE DAYS DAYS REO TOTAL REPURCHASE % **
---------- ---------- ------ ------- ----- ---- -------- ----- ---------- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A+...................... $1,030,782 78.04% $ 976,802 0.13% 0.08% 0.97% 1.19% $ -- 0.00%
A- ..................... 929,750 77.09% 889,154 0.15% 0.07% 1.52% 1.75% -- 0.00%
B....................... 441,472 74.29% 419,569 0.28% 0.30% 2.57% 3.15% -- 0.00%
C....................... 282,514 70.24% 269,519 0.48% 0.66% 3.65% 4.79% -- 0.00%
C- ..................... 137,232 64.88% 127,404 0.77% 0.69% 5.67% 7.12% -- 0.00%
---------- ----- ---------- ---- ---- ---- ---- ------ ----
$2,821,750 75.72% $2,682,448 0.23% 0.20% 1.90% 2.32% $ -- 0.00%
</TABLE>
- -------
*Weighted Average Loan-to-Value Ratio
**Repurchases as a % of Current Balance
***Includes loans sold in whole loan sale transactions that were securitized
by the purchasers.
The foregoing tables indicate that, as anticipated, the Company is
experiencing higher rates of delinquency on lower credit grade loans. In
addition, as indicated, the Company has repurchased loans from its first three
1997 securitizations. The agreements governing the securitizations permit such
repurchases, but only to the extent the loans being repurchased are more than
90 days delinquent. The Company elected to make the repurchases in order to
avoid disruption of cash flow from the 1997 NC-1, NC-2 and NC-3 trusts and to
provide the Company with maximum flexibility in resolving problem loans. The
Company may make additional repurchases from those or other securitizations in
1999 for the same reasons.
In order to provide the Company additional flexibility in trying to maximize
recovery on its delinquent loans and loans in foreclosure, the Company amended
its aggregation facility with Salomon Smith Barney to include financing of a
limited number of such loans at a reduced financing rate based on the value of
the underlying property. In addition, the Company entered into a $3 million
facility with a Salomon affiliate to finance real property owned ("REO") by
the Company upon foreclosure on delinquent loans. This facility allows the
Company additional flexibility in disposing of those properties for the
highest possible price.
U.S. BANCORP INVESTMENT AND STRATEGIC ALLIANCE
In November 1998, U.S. Bancorp purchased 20,000 shares of the Company's
Series 1998-A Convertible Preferred Stock for an aggregate purchase price of
$20 million. U.S. Bancorp is a bank holding company with assets of
approximately $76 billion at December 31, 1998. Each share of U.S. Bancorp's
Preferred Stock is convertible into 136.24 shares of the Company's Common
Stock that, upon conversion, will represent approximately 16% of the Company's
total outstanding
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Common Stock. The Preferred Stock is also entitled to a liquidation preference
as well as a dividend payable quarterly at a rate of 7.5% per year. In
addition, as part of the transaction, U.S. Bancorp has the right to designate
nominees to the Company's Board of Directors roughly in proportion to its
ownership interest in the Company.
In addition to the investment, the Company and U.S. Bancorp agreed to work
to establish a multi-faceted strategic alliance. The principal aspects of the
alliance are that (i) the Company will assist U.S. Bank in originating loans
to bank customers who would not qualify for the loans under U.S. Bank's
traditional credit guidelines, (ii) the Company will provide some servicing
functions with respect to sub-prime mortgage loans originated by U.S. Bank,
(iii) the Company will receive referrals from U.S. Bank of its customers who
were turned down for mortgage loans, but who qualify for a loan under New
Century's underwriting guidelines, and (iv) U.S. Bank will bid on the
Company's whole loan sales. The parties are now implementing the various
aspects of the strategic alliance, and in February 1999 the Company originated
its first few loans resulting from U.S. Bank referrals. There can be no
assurance that the parties will be able to successfully implement all features
of the proposed alliance.
In late December 1998 U.S. Bancorp purchased 500,000 shares of the Company's
Common Stock in a privately negotiated transaction with a third party. After
giving effect to conversion of the Preferred Stock, U.S. Bancorp's ownership
stake in the Company is approximately 19% as of December 29, 1998.
COMERICA STRATEGIC ALLIANCE
In May 1997, the Company sold 545,000 shares of Common Stock of the Company
to Comerica for $4,087,500. Comerica is a bank holding company which had
assets of approximately $34 billion at December 31, 1998 and is the parent of
Comerica Bank. In connection with the sale of stock to Comerica, the Company
and Comerica agreed to enter into certain arrangements concerning servicing
and other strategic relationships. See "--Loan Servicing and Delinquencies."
In order to increase the likelihood of success of such strategic
relationships, the Company issued warrants, at an exercise price of $11.00 per
share, to purchase an aggregate of 100,000 shares of Common Stock to Comerica
and agreed to issue Comerica warrants to purchase an additional 233,333 shares
of Common Stock, subject to the completion by Comerica of certain performance
events related to the strategic relationships.
In 1998 the Company and Comerica discontinued their joint loan servicing
platform and also mutually agreed to terminate other aspects of their
strategic alliance. As a result, during 1998 Comerica forfeited its rights to
183,333 warrants that were to be issued upon completion of certain strategic
alliance performance events. As of December 31, 1998, Comerica held 545,000
shares of Common Stock as well as warrants to purchase an additional 150,000
shares.
INTEREST RATE RISK MANAGEMENT
The Company's profits depend, in part, on the difference, or "spread,"
between the effective rate of interest received by the Company on the loans it
originates or purchases and the interest rates payable by the Company under
its warehouse and aggregation financing facilities. The spread can be
adversely affected because of interest rate increases during the period from
the date the loans are originated or purchased until the closing of the sale
or securitization of such loans.
The Company from time to time may use various hedging strategies to provide
a level of protection against interest rate risks on its fixed-rate mortgage
loans. These strategies may include forward sales of mortgage loans or
mortgage-backed securities, interest rate caps and floors and buying and
selling of futures and options on futures. The Company's management determines
the nature and quantity of hedging transactions based on various factors,
including market conditions and the expected volume of mortgage loan
originations and purchases.
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As of December 31, 1998, the Company did not have any open hedge positions.
While the Company believes hedging strategies are cost-effective and provide
some protection against interest rate risk, no hedging strategy can completely
protect the Company from such risks.
COMPETITION
Despite the recent bankruptcies of several of the Company's competitors, the
Company continues to face intense competition in the business of originating,
purchasing and selling mortgage loans. The Company's competitors in the
industry include other consumer finance companies, mortgage banking companies,
commercial banks, credit unions, thrift institutions, credit card issuers and
insurance finance companies. Many of these competitors are substantially
larger and have considerably greater financial, technical and marketing
resources than the Company. In addition, many financial services organizations
that are much larger than the Company have formed national loan origination
networks offering loan products that are substantially similar to the
Company's loan programs. Competition among industry participants can take many
forms, including convenience in obtaining a loan, customer service, marketing
and distribution channels, amount and term of the loan, loan origination fees
and interest rates. Additional competition may lower the rates the Company can
charge borrowers, thereby potentially lowering gain on future loan sales and
securitizations. To the extent any of the Company's competitors significantly
expand their activities in the Company's markets, the Company could be
materially adversely affected. Fluctuations in interest rates and general
economic conditions may also affect the Company's competition. During periods
of rising rates, competitors that have locked in low borrowing costs may have
a competitive advantage. During periods of declining rates, competitors may
solicit the Company's customers to refinance their loans. The Company believes
that low interest rates combined with increased competition in the industry
have contributed to an increase in prepayment rates, which adversely impacts
the value of the Company's residual interests in its securitizations.
The Company believes that one of its key competitive strengths is its
employees, with their strong commitment to customer service and their team-
oriented approach. In addition to the strength of the Company's work force,
the Company believes that its competitive strengths include: (i) providing a
high level of service to brokers and their customers; (ii) offering
competitive loan programs for borrowers whose needs are not met by
conventional mortgage lenders; (iii) the Company's high-volume targeted direct
mail marketing program and database screening methodology; and (iv) its
performance-based compensation structure which allows the Company to attract,
retain and motivate qualified personnel.
REGULATION
The mortgage lending industry is a highly regulated industry. The Company's
business is subject to extensive and complex rules and regulations of, and
examinations by, various federal and state government authorities. These
regulations impose obligations and restrictions on the Company's loan
origination, loan purchase and servicing activities. In addition, these
regulations may limit the interest rates, finance charges and other fees the
Company may assess, mandate extensive disclosure to the Company's customers,
prohibit discrimination and impose multiple qualification and licensing
obligations on the Company. Failure to comply with these requirements may
result in, among other things, loss of approved licensing status, demands for
indemnification or mortgage loan repurchases, certain rights of rescission for
mortgage loans, class action lawsuits, administrative enforcement actions and
civil and criminal liability. Management of the Company believes that the
Company is in compliance with these rules and regulations in all material
respects.
The Company's loan origination and loan purchase activities are subject to
the laws and regulations in each of the states in which those activities are
conducted. For example, state usury laws limit the interest rates the Company
can charge on its loans. As of December 31, 1998, the Company was licensed or
exempt from licensing requirements by the relevant state banking or consumer
credit agencies to originate first mortgages in 49 states and the District of
Columbia and second mortgages in 48 states and the District of Columbia. The
Company's lending activities are also subject to various federal laws,
including the Truth in Lending Act, Homeownership and Equity Protection Act of
1994, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the
Real Estate Settlement Procedures Act and the Home Mortgage Disclosure Act,
and their implementing regulations.
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The Company is subject to certain disclosure requirements under the Truth in
Lending Act ("TILA") and Regulation Z promulgated under TILA. TILA is designed
to provide consumers with uniform, understandable information with respect to
the terms and conditions of loan and credit transactions. TILA gives
consumers, among other things, a three business day right to rescind certain
refinance loan transactions originated by the Company.
The Company is also subject to the Homeownership and Equity Protection Act
of 1994 (the "High Cost Mortgage Act"), which amends TILA. The High Cost
Mortgage Act generally applies to consumer credit transactions secured by the
consumer's principal residence, other than residential mortgage transactions,
reverse mortgage transactions or transactions under an open end credit plan,
in which the loan has either (i) total points and fees upon origination in
excess of the greater of eight percent of the loan amount or $441, or (ii) an
annual percentage rate of more than ten percentage points higher than United
States Treasury securities of comparable maturity ("Covered Loans"). The High
Cost Mortgage Act imposes additional disclosure requirements on lenders
originating Covered Loans. In addition, it prohibits lenders from, among other
things, originating Covered Loans that are underwritten solely on the basis of
the borrower's home equity without regard to the borrower's ability to repay
the loan and including prepayment fee clauses in Covered Loans to borrowers
with a debt-to-income ratio in excess of 50% or Covered Loans used to
refinance existing loans originated by the same lender. The High Cost Mortgage
Act also restricts, among other things, certain balloon payments and negative
amortization features. The Company did not originate or purchase Covered Loans
in 1996, but the Company commenced originating and purchasing Covered Loans
during 1997. In 1998, Covered Loans accounted for approximately 3.68% of the
Company's total loan originations and purchases.
The Company is also required to comply with the Equal Credit Opportunity Act
of 1974, as amended ("ECOA") and Regulation B promulgated thereunder, the Fair
Credit Reporting Act, as amended, the Real Estate Settlement Procedures Act of
1974, as amended, and Regulation X promulgated thereunder and the Home
Mortgage Disclosure Act of 1975, as amended. ECOA prohibits creditors from
discriminating against applicants on the basis of race, color, sex, age,
religion, national origin or marital status, because all or part of the
applicant's income is derived from a publicly assisted program; or because the
applicant has in good faith exercised any right under the Consumer Credit
Protection Act. Regulation B restricts creditors from requesting certain types
of information from loan applicants. The Fair Credit Reporting Act, as
amended, requires lenders, among other things, to supply an applicant with
certain information if the lender denied the applicant credit. The Real Estate
Settlement Procedures Act mandates certain disclosures concerning settlement
fees and charges and mortgage servicing transfer practices. It also prohibits
the payment or receipt of kickbacks or referral fees in connection with the
performance of settlement services. In addition, beginning with loans
originated in 1997, the Company must file an annual report with the Department
of Housing and Urban Development pursuant to the Home Mortgage Disclosure Act,
which requires the collection and reporting of statistical data concerning
mortgage loan transactions.
In the course of its business, the Company may acquire properties securing
loans that are in default. There is a risk that hazardous or toxic waste could
be found on such properties. In such event, the Company could be held
responsible for the cost of cleaning up or removing such waste, and such cost
could exceed the value of the underlying properties.
Because the Company's business is highly regulated, the laws, rules and
regulations applicable to the Company are subject to regular modification and
change. There are currently proposed various laws, rules and regulations
which, if adopted, could impact the Company. There can be no assurance that
these proposed laws, rules and regulations, or other such laws, rules or
regulations, will not be adopted in the future which could make compliance
much more difficult or expensive, restrict the Company's ability to originate,
broker, purchase or sell loans, further limit or restrict the amount of
commissions, interest and other charges earned on loans originated, brokered,
purchased or sold by the Company, or otherwise adversely affect the business
or prospects of the Company.
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EMPLOYEES
At December 31, 1998, the Company employed 1,404 full-time employees and 13
part-time employees. None of the Company's employees is subject to a
collective bargaining agreement. The Company believes that its relations with
its employees are satisfactory.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth the name, age and position with the Company
of each person who is an executive officer or key employee of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS:
Robert K. Cole.......... 52 Chairman of the Board, Chief Executive Officer, Director
Brad A. Morrice......... 42 Vice Chairman, President, Secretary, Director
Edward F. Gotschall..... 44 Vice Chairman, Chief Financial Officer, Director
Steven G. Holder........ 41 Vice Chairman, Chief Operating Officer Production/Operations,
Director
Patrick J. Flanagan..... 34 Executive Vice President of the Company; Director, Executive
Vice President and Chief Operating Officer, New Century
Mortgage(1), and President, NC Capital(2)
KEY EMPLOYEES:
George Anderson......... 58 President Retail Operations, New Century Mortgage(1)
Shahid S. Asghar........ 36 Director, President Wholesale Operations, New Century
Mortgage(1)
Paul L. Rigdon.......... 38 Director, Executive Vice President Retail Operations, New Century
Mortgage(1)
</TABLE>
- --------
(1) New Century Mortgage Corporation ("New Century Mortgage") is a wholly-
owned subsidiary of the Company.
(2) NC Capital Corporation ("NC Capital") is a wholly-owned subsidiary of New
Century Mortgage.
ROBERT K. COLE has been the Chairman of the Board and Chief Executive
Officer of the Company since December 1995 and a director of the Company since
November 1995. Mr. Cole also serves as a director on the Board of Directors of
New Century Mortgage. From February 1994 to March 1995, he was the President
and Chief Operating Officer-Finance of Plaza Home Mortgage Corporation ("Plaza
Home Mortgage"), a publicly-traded savings and loan holding company
specializing in the origination and servicing of residential mortgage loans.
In addition, Mr. Cole served as a director of Option One Mortgage Corporation
("Option One"), a subsidiary of Plaza Home Mortgage specializing in the
origination, sale and servicing of sub-prime mortgage loans. From June 1990 to
January 1994, Mr. Cole was the President of Triple Five, Inc., an
international real estate development company. Previously, Mr. Cole was the
President of operating subsidiaries of NBD Bancorp and Public Storage, Inc.
Mr. Cole received a Masters of Business Administration degree from Wayne State
University.
BRAD A. MORRICE has been Vice Chairman of the Company since December 1996
and President, Secretary and a director of the Company since November 1995.
Mr. Morrice also served as the Company's General Counsel from December 1995 to
December 1997. In addition, Mr. Morrice serves as Co-Chairman of the Board and
Chief Executive Officer of New Century Mortgage. From February 1994 to March
1995, he was the President and Chief Operating Officer-Administration of Plaza
Home Mortgage, after serving as its Executive
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Vice President, Chief Administrative Officer since February 1993. In addition,
Mr. Morrice served as General Counsel and a director of Option One. From
August 1990 to January 1993, Mr. Morrice was a partner in the law firm of
King, Purtich & Morrice, where he specialized in the legal representation of
mortgage banking companies. Mr. Morrice previously practiced law at the firms
of Fried, King, Holmes & August and Manatt, Phelps & Phillips. He received his
law degree from the University of California, Berkeley (Boalt Hall) and a
Masters of Business Administration degree from Stanford University.
EDWARD F. GOTSCHALL has been Vice Chairman of the Company since December
1996, Chief Financial Officer since August 1998, Chief Operating Officer
Finance/Administration of the Company from December 1995 to August 1998 and a
director of the Company since November 1995. Mr. Gotschall also serves as
Chief Financial Officer and a director of New Century Mortgage. From April
1994 to July 1995, he was the Executive Vice President/Chief Financial Officer
of Plaza Home Mortgage and a director of Option One. In December 1992, Mr.
Gotschall was one of the co-founders and principal architect of the initial
business plan for Option One and served as its Executive Vice President/Chief
Financial Officer until April 1994. From January 1991 to July 1992, he was the
Executive Vice President and Chief financial Officer of The Mortgage Network,
Inc., a retail mortgage banking company. Mr. Gotschall received his Bachelors
of Science Degree in Business Administration from Arizona State University and
received his CPA designation during his employment term with Touche Ross (now
Deloitte & Touche) in Phoenix, Arizona.
STEVEN G. HOLDER has been Vice Chairman of the Company since December 1996,
Chief Operating Officer Loan Production/Operations of the Company since
December 1995 and a director of the Company since November 1995. Mr. Holder
also serves as Co-Chairman of the Board and Chief Executive Officer of
New Century Mortgage. From February 1993 to August 1995, he was the Executive
Vice President of Long Beach Mortgage Company ("Long Beach Mortgage"). From
July 1991 to February 1993, Mr. Holder was the Vice President for Business
Development of Transamerica Financial Services. From 1985 to 1990, he was a
Regional Vice President for Nova Financial Services, a startup consumer
finance subsidiary of First Interstate Bank. Mr. Holder has over 21 years
experience in the consumer finance and mortgage business.
PATRICK J. FLANAGAN has been Executive Vice President of the Company since
August 1998. He has been President of NC Capital since December 1998 and a
director of New Century Mortgage since May 1997. Since January 1997, Mr.
Flanagan has also served as Executive Vice President and Chief Operating
Officer of New Century Mortgage. Mr. Flanagan initially joined New Century
Mortgage in May 1996 as Regional Vice President of Midwest Wholesale and
Retail operations. From August 1994 to April 1996, Mr. Flanagan was a Regional
Manager with Long Beach Mortgage. From July 1992 to July 1994, he was an
Assistant Vice President for First Chicago Bank, from February 1989 to
February 1991, he was Assistant Vice President for Banc One in Chicago and
from February 1991 to July 1992, he was a Business Development Manager for
Transamerica Financial Services. Mr. Flanagan received his Bachelor of Arts
degree from Monmouth College.
GEORGE ANDERSON has been President-Retail Lending of New Century Mortgage
since August 1998. From 1994 to July 1998, Mr. Anderson was the President and
CEO of Advanta Finance Corporation. From 1990 to 1994, Mr. Anderson served as
Executive Vice President for Transamerica Financial Services and from 1984 to
1990, Mr. Anderson served as President and CEO of Nova Financial Services
where he was responsible for the full spectrum of start-up activities
associated with building a multi-state consumer finance company. In 1990, Nova
was acquired by Transamerica Financial Services. From 1959 to 1984, Mr.
Anderson served as Area Vice President for Transamerica Financial Services and
was responsible for the mid-west and east coast operations of the company. Mr.
Anderson has over 35 years experience in the consumer finance and mortgage
business.
SHAHID S. ASGHAR has been President-Wholesale Lending of New Century
Mortgage since August 1998. He previously served as Senior Vice President-
Wholesale Lending from January 1996 to August 1998 and a director of New
Century Mortgage since May 1997. Mr. Asghar initially joined New Century
Mortgage as Vice President, Mortgage Banking Operations and he served in this
position from December 1995 to January 1996. From June 1995 to November 1995,
Mr. Asghar was the Southern California District Manager for Ford Consumer
Finance. From September 1992 to March 1995, he was an Area Sales Manager for
Long Beach
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Mortgage and from June 1988 to September 1992, he was a Business Development
Manager for Transamerica Financial Services. Mr. Asghar received his Bachelor
of Science degree from California State University at Northridge.
PAUL L. RIGDON has been Executive Vice President-Retail Lending of New
Century Mortgage since August 1998. Mr. Rigdon served previously as Senior
Vice President-Retail Lending from February 1997 to August 1998 and a director
of New Century Mortgage since May 1997. Mr. Rigdon initially joined New
Century Mortgage as the Regional Manager in charge of expansion in the
Northwest Retail Region and served in this position from September 1996 to
February 1997. From May 1995 to September 1996, he was a District Manager for
Advanta Finance. From March 1990 to May 1995, he was an Area Manager for Long
Beach Mortgage. Mr. Rigdon received his Bachelor of Science degree in Business
Administration and Finance from San Jose State University.
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RISK FACTORS
Stockholders and prospective purchasers of the Company's Common Stock should
consider carefully the following factors, as well as the other information
appearing elsewhere in this Form 10-K, in evaluating an investment in the
Company. This Form 10-K may contain forward-looking statements which involve
risks and uncertainties. The Company's actual results could differ materially
from those anticipated in these forward-looking statements as a result of
certain factors, including those set forth in the following risk factors and
elsewhere in this Form 10-K.
LIQUIDITY; ACCESS TO FUNDING SOURCES
The Company's business requires substantial cash to support its operating
activities and growth plans. At present, the Company's operating uses of cash
continue to exceed its operating sources of cash.
The Company requires access to short-term warehouse and aggregation credit
facilities in order to fund loan originations and purchases pending the
pooling and sale of such loans. The Company also has a residual financing
agreement with Salomon pursuant to which Salomon will provide the Company with
financing upon the Company's retention of residual interests in
securitizations and NIM transactions on which Salomon is the lead underwriter
or placement agent. The amount of financing provided to the Company under its
aggregation credit facility and its residual financing agreement depends in
large part on Salomon's valuation of the mortgage loans and residual
interests, respectively, securing the financings. Salomon has the right to
reevaluate the collateral securing the Company's outstanding borrowings at any
time and, in the event it determines that the value of the collateral has
decreased, it has the right to initiate a margin call. A margin call would
require the Company to provide Salomon with additional collateral or to repay
the outstanding borrowings. Any such margin call could have a material adverse
effect on the Company's results of operations, financial condition and
business prospects.
In addition, to the extent that the Company is unable to renew or expand its
access to credit facilities, the Company may have to undertake larger and/or
more frequent capital markets financings than anticipated. Capital markets
financings may result in greater than anticipated interest expense and shares
outstanding, which may have a dilutive impact on operating earnings or have a
negative effect on the Company's financial condition.
As a result of concerns about the ability of sub-prime mortgage lenders to
sell their loans in the secondary market on favorable terms or at all, as well
as concerns about the value of the residual interests retained in
securitizations, a number of institutions have curtailed their lending to the
sub-prime mortgage industry. Consequently, there can be no assurance that the
Company will be able to renew, replace or add to its existing credit
facilities, or that it will be able to undertake capital markets financings on
favorable terms, if at all. To the extent that the Company is unable to access
adequate capital to fund its loan production or to the extent that the Company
is unable to access adequate capital to complete the desired level of
securitizations, the Company may have to curtail its loan origination,
purchase and securitization activities, which would have a material adverse
impact on the Company's results of operations, financial condition and
business prospects.
DEPENDENCE ON SECURITIZATIONS FOR FUTURE EARNINGS
The Company plans to continue pooling and selling through securitizations a
majority of the loans it originates or purchases and expects that the gain on
sale from such securitizations will represent a significant portion of the
Company's future revenues and net earnings. The Company's ability to complete
securitizations of its loans will depend on a number of factors, including
conditions in the securities markets generally, conditions in the asset-backed
securities market specifically, the performance of the Company's portfolio of
securitized loans and the Company's ability to obtain credit enhancement from
monoline insurance companies. In the fourth quarter of 1998 the market for
mortgage-backed securities contracted. As a result, the Company had to offer
higher yields on its mortgage-backed securities, which in turn reduced
somewhat the gain recognized by the Company on the securitizations. Although
the Company has continued to sell its loans through
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<PAGE>
securitizations, unlike many of its competitors, there can be no assurance
that it will continue to be able to do so. If the Company were unable to
securitize profitably a sufficient number of its loans in a particular
quarter, then the Company's revenues for such quarter would decline, which
could result in lower earnings or a loss reported for such quarter.
DEPENDENCE ON WHOLE LOAN SALES FOR FUTURE EARNINGS AND CASH
The gain on sale generated by whole loan sales also represents a source of
the Company's future earnings and a significant source of cash for the
Company. Due to the recent bankruptcies of a number of the Company's
competitors, there has been a large number of sub-prime mortgage loans for
sale on a whole loan basis, which has adversely affected the pricing of such
loans. In 1998, the Company sold 39.5% of its loan originations and purchases
in the secondary market to a limited number of institutional purchasers,
including Salomon Brothers Realty Corp., which accounted for 30.5% of all
purchases. There can be no assurance that such purchasers will continue to
purchase the Company's loans at favorable prices or at all and, to the extent
that the Company could not successfully replace such loan purchasers, the
Company's results of operations, financial condition and business prospects
could be materially adversely affected.
RESIDUAL INTERESTS IN SECURITIZATIONS
A substantial portion of the Company's revenues and earnings is derived by
recognizing gain on sale of loans through securitizations. In view of the
Company's limited loan performance data, it is extremely difficult to validate
the Company's loss or prepayment assumptions used to calculate its gain on
sale in connection with its securitizations. If the Company's actual
experience differs materially from the assumptions used in the determination
of the present value of the residual interests it retains in the
securitizations, future cash flows and earnings could be negatively impacted.
The Company could also be required to reduce the fair value of its residual
interests on its balance sheet, which could decrease the residual financing
available to the Company under the Salomon residual financing facility.
RISKS RELATED TO LOWER CREDIT GRADE BORROWERS
Loans made to lower credit grade borrowers, including credit-impaired
borrowers, may entail a higher risk of delinquency and higher losses than
loans made to borrowers with better credit. Virtually all of the Company's
loans are made to borrowers who do not qualify for loans from conventional
mortgage lenders and approximately 15.0% and 16.3% of the loans originated or
purchased by the Company during 1998 and 1997, respectively, were made to
borrowers in the Company's two lowest credit grade classifications. No
assurance can be given that the Company's underwriting criteria or methods
will afford adequate protection against the higher risks associated with loans
made to lower credit grade borrowers. The Company continues to be subject to
the risks of default and foreclosure following the sale of loans through
securitization to the extent such losses reduce the residual interest
distributions. Any such reduction in the Company's cash flows could have a
material adverse effect on the Company's results of operations, financial
condition and business prospects.
CHANGES IN INTEREST RATES
The Company's profitability may be directly affected by changes in interest
rates, which affect the Company's ability to earn a spread between the
interest received on its loans and its funding costs. The revenues of the
Company may be adversely affected during any period of unexpected or rapid
change in interest rates. For example, a substantial and sustained increase in
interest rates could adversely affect borrower demand for the Company's
products. During periods of rising interest rates, the value and profitability
of the Company's loans may also be negatively impacted from the date of
origination or purchase until the date the Company sells or securitizes such
loans. In addition, the Company's adjustable rate mortgage loans have a life
rate cap above which the interest rate on the loan may not rise. In the event
of general interest rate increases, the rate of interest on these mortgage
loans could be limited, while the rate payable on the senior certificates
representing interests in a securitization trust into which such loans are
sold may be uncapped, which would reduce the amount of
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<PAGE>
cash the Company receives over the life of its residual interests, thereby
reducing the fair value of such residual interests. Furthermore, a significant
decrease in interest rates could increase the rate at which loans are prepaid,
which would also reduce the amount of cash the Company receives over the life
of its residual interests. Either of these events could require the Company to
write down the carrying value of its residual interests, which would have a
material adverse effect on the Company's results of operations, financial
condition and business prospects.
ECONOMIC SLOWDOWN OR RECESSION
The risks associated with the Company's business are more acute during
periods of economic slowdown or recession because these periods may be
accompanied by decreased demand for consumer credit and declining real estate
values. Declining real estate values reduce the ability of borrowers to use
home equity to support borrowings by negatively affecting loan-to-value ratios
of the home equity collateral. In addition, because the Company makes a
substantial number of loans to credit-impaired borrowers, the actual rates of
delinquencies, foreclosures and losses on such loans could be higher during
economic slowdowns. Any sustained period of increased delinquencies,
foreclosures or losses could adversely affect the Company's ability to sell
loans or the prices the Company receives for its loans.
COMPETITION
The Company faces intense competition in the business of originating,
purchasing and selling mortgage loans. Many of the Company's competitors are
substantially larger and have considerably greater financial, technical and
marketing resources than the Company. In the future, the Company may also face
competition from government-sponsored entities, such as the Federal National
Mortgage Association and the Federal Home Loan Mortgage Corporation, which may
target potential customers in the Company's highest credit grades, who
constitute a significant portion of the Company's customer base.
Certain large finance companies and conforming mortgage originators have
begun to originate non-conforming mortgage loans, and some of these large
mortgage companies, thrifts and commercial banks have begun offering non-
conforming loan products to customers similar to the borrowers targeted by the
Company. Competitors with lower costs of capital have a competitive advantage
over the Company. In addition, establishing a broker-sourced loan business
requires a substantially smaller commitment of capital and human resources
than a direct-sourced loan business. This relatively low barrier to entry
permits new competitors to enter this market quickly and compete with the
Company's wholesale lending business.
DEPENDENCE ON WHOLESALE BROKERS
The Company depends primarily on independent mortgage brokers and, to a
lesser extent, on correspondent lenders, for the origination and purchase of
its wholesale mortgage loans, which constitute a significant portion of the
Company's loan production. These independent mortgage brokers deal with
multiple lenders for each prospective borrower and are not obligated by
contract or otherwise to do business with the Company. The Company competes
with these lenders for the independent brokers' business on pricing, service,
loan fees, costs and other factors. The Company's future results of operations
and financial condition may be vulnerable to changes in the volume and cost of
its wholesale loans resulting from, among other things, competition from other
lenders and purchasers of such loans.
RISKS ASSOCIATED WITH SERVICING
In 1998, the Company established in-house servicing operations to service
the loans it originates and purchases, the loans in its securitizations, and
loans sold on a servicing-retained basis. There can be no assurance that the
Company will anticipate and respond effectively to all of the demands that
servicing its loans will have on the Company's management, infrastructure and
personnel. The failure of the Company to meet the challenges of servicing its
loans could have a material adverse effect on the Company's results of
operations, financial
26
<PAGE>
condition and business prospects. For example, many of the Company's borrowers
require notices and reminders to keep their loans current and to prevent
delinquencies and foreclosures. Any failure of the Company to adequately
service its loans could cause a substantial increase in the Company's
delinquency or foreclosure rate, which could adversely impact the value of the
residual interests held by the Company and affect the Company's ability to
access equity or debt capital resources.
CONTINGENT RISKS
In connection with its securitizations, the Company is required to
repurchase or substitute loans in the event of a breach of a representation or
warranty made by the Company. Likewise, in connection with its whole loan
sales, the Company enters into agreements which generally require the Company
to repurchase or substitute loans in the event of a breach of a representation
or warranty made by the Company to the loan purchaser, any misrepresentation
during the mortgage loan origination process or, in some cases, upon any fraud
or early default on such mortgage loans. The remedies available to a purchaser
of mortgage loans from the Company are generally broader than those available
to the Company against the sellers of such loans, and if a purchaser enforces
its remedies against the Company, the Company may not be able to enforce
whatever remedies the Company may have against such sellers.
ANTI-TAKEOVER PROVISIONS
The Company's Certificate of Incorporation (the "Certificate of
Incorporation") and its Bylaws (the "Bylaws") include provisions that could
delay, defer or prevent a takeover attempt that may be in the best interest of
stockholders. These provisions include the ability of the Board of Directors
to issue up to 7,500,000 shares of preferred stock (the "Preferred Stock")
without any further stockholder approval, a classified Board of Directors and
requirements that (i) stockholders give advance notice with respect to certain
proposals they may wish to present for a stockholder vote, (ii) stockholders
act only at annual or special meetings and (iii) two-thirds of all directors
approve a change in the number of directors of the Company. Issuance of
Preferred Stock could also discourage bids for the Common Stock at a premium
as well as create a depressive effect on the market price of the Common Stock.
In addition, under certain conditions, Section 203 of the Delaware General
Corporation Law (the "DGCL") would prohibit the Company from engaging in a
"business combination" with an "interested stockholder" (in general, a
stockholder owning 15% or more of the Company's outstanding voting stock) for
a period of three years unless the business combination is approved in a
prescribed manner. Finally, certain provisions in the Company's transaction
with U.S. Bancorp in 1998, including the stockholder agreements entered into
by the four founding managers, may discourage takeover attempts by third
parties.
POSSIBLE VOLATILITY OF STOCK PRICE; EFFECT OF FUTURE OFFERINGS ON MARKET PRICE
OF COMMON STOCK
The market price of the Common Stock may experience fluctuations that are
unrelated to the operating performance of the Company. In particular, the
price of the Common Stock may be affected by general market price movements as
well as developments specifically related to the consumer finance industry and
the financial services sector such as, among other things, interest rate
movements, quarterly variations or changes in financial estimates by
securities analysts and a significant reduction in the price of the stock of
another participant in the consumer finance industry. For example, in
September and October of 1998, the price of the Company's Common Stock
decreased dramatically based primarily on industry-related concerns about
liquidity and the bankruptcies of several competitors.
ITEM 2. PROPERTIES
The Company's executive and administrative offices are located in Irvine,
California and consist of approximately 143,000 square feet. The two leases
covering the executive and administrative offices expire in June 2002 and
December 2002 and the combined monthly rent is $224,240.
The Company leases space for its regional operating centers in Chicago,
Illinois, Atlanta, Georgia, Rancho Bernardo, California, and San Ramon,
California. The Company also leases space for its sales offices.
27
<PAGE>
As of December 31, 1998, these facilities had an annual aggregate base rental
of approximately $4,322,883 and the sales offices ranged in size from 100 to
13,615 square feet with lease terms typically ranging from one to five years.
As of December 31, 1998, annual base rents for the sales offices ranged from
approximately $1,800 to $349,728. In general, the terms of these leases vary
as to duration and rent escalation provisions and the leases expire between
March 1999 and January 2004 and provide for rent escalations dependent upon
either increases in the lessors' operating expenses or fluctuations in the
consumer price index in the relevant geographical area.
ITEM 3. LEGAL PROCEEDINGS
The Company occasionally becomes involved in litigation arising in the
normal course of business. Management believes that any liability with respect
to such legal actions, individually or in the aggregate, will not have a
material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's stockholders during the
fourth quarter of 1998.
28
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq National Market under the
symbol "NCEN." The high and low bid prices of the Company's Common Stock
during each quarter since the Company's Common Stock began trading on June 26,
1997 were as follows:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997
------------ -------------
QUARTER HIGH LOW HIGH LOW
------- ------ ----- ------ ------
<S> <C> <C> <C> <C>
Fourth............................................ $13.13 $3.44 $19.50 $ 9.63
Third............................................. $11.50 $7.38 $19.25 $14.13
Second(1)......................................... $12.50 $8.50 $14.25 $13.63
First............................................. $11.50 $8.38 N/A N/A
</TABLE>
- --------
(1) 1997 Second Quarter information represents trading from June 26, 1997 to
June 30, 1997
As of March 19, 1999 the closing sales price of the Company's Common Stock,
as reported on the Nasdaq National Market, was $11.13.
The Company has never declared or paid any cash dividends on its Common
Stock. The Company currently intends to retain any earnings for use in its
business and does not anticipate paying any cash dividends on its Common Stock
in the foreseeable future. In addition, the Company is prohibited from paying
dividends under certain of its credit facilities without the prior approval of
the lenders.
As of March 19, 1999 the number of holders of record of the Company's Common
Stock was approximately 56, and as of March 19, 1999 there were approximately
1,193 beneficial owners of the Company's Common Stock.
RECENT SALES OF UNREGISTERED STOCK
On January 12, 1998, the Company issued 112,890 shares of Common Stock to
Kirk Redding and 75,260 shares of Common Stock to Paul Akers representing
$2,000,000 of the purchase price for the acquisition of PWF Corporation. The
sale and issuance of the shares were exempt from the registration requirements
of the Securities Act by virtue of Section 4(2) of the Securities Act and
Regulation D thereunder.
On April 15, 1998, the Company issued 8,102 shares of restricted stock to
each of Mr. Cole and Mr. Morrice. The shares represented partial payment of
the bonus each was entitled to receive under the Company's Founding Managers'
Incentive Award Plan based on the Company's performance in 1997. The shares
vest in three equal installments on the first three anniversaries of the grant
date. The sale and issuance of the shares of restricted stock was exempt from
registration by virtue of Section 4(2) of the Securities Act and Regulation D
thereunder.
On September 17, 1998, the Company issued to Mr. Forster a non-qualified
option to purchase 10,000 shares of the Company's 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. This option terminates 10 years from the date of
grant. The sale and issuance of the non-qualified stock option was exempt from
registration by virtue of Section 4(2) of the Securities Act and Regulation D
thereunder.
On November 24, 1998, the Company issued 20,000 shares of Series 1998A
Convertible Preferred Stock to U.S. Bancorp for an aggregate cash
consideration of $20,000,000. The sale and issuance of the shares were exempt
from the registration requirements of the Securities Act by virtue of Section
4(2) of the Securities Act and Regulation D thereunder. Each share of
Preferred Stock is convertible at any time at the election of U.S. Bancorp
into 136.24 shares of the Company's Common Stock.
29
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated statements of operations and balance sheet
data for the years ending December 31, 1998, 1997, 1996 and the period from
November 17, 1995 (inception) to December 31, 1995 have been derived from the
Company's consolidated financial statements audited by KPMG LLP, independent
auditors. Such selected financial data should be read in conjunction with
consolidated financial statements and the notes thereto as of December 31, 1998
and 1997 and for the years ending December 31, 1998, 1997, and 1996, and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" also included elsewhere herein.
<TABLE>
<CAPTION>
FOR THE PERIOD
FROM INCEPTION
(NOVEMBER 17,
FOR THE YEAR FOR THE YEAR FOR THE YEAR 1995) THROUGH
ENDED DECEMBER 31, ENDED DECEMBER 31, ENDED DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995
------------------ ------------------ ------------------ --------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Gain on sale of loans. $105,060 $67,939 $11,630 $ --
Interest income....... 47,655 25,071 2,846 14
Servicing income...... 23,692 5,623 29 --
-------- ------- ------- ------
Total revenues...... 176,407 98,633 14,505 14
Operating expenses.... 124,099 68,041 12,200 95
-------- ------- ------- ------
Earnings (loss) before
income taxes......... 52,308 30,592 2,305 (81)
Income taxes.......... 21,193 12,849 970 1
-------- ------- ------- ------
Net earnings (loss) .. $ 31,115 $17,743 $ 1,335 $ (82)
======== ======= ======= ======
Basic earnings (loss)
per share............ $ 2.20 $ 2.18 $ 2.53 $(0.16)
======== ======= ======= ======
Diluted earnings
(loss) per share..... $ 2.03 $ 1.40 $ 0.20 $(0.16)
======== ======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Loans receivable held for
sale, net................. $356,975 $276,506 $57,990 $ --
Residual interests in
securitizations........... 205,395 97,260 -- --
Total assets............... 624,727 398,128 64,638 3,151
Borrowings under warehouse
lines of credit........... 191,931 184,426 41,702 --
Borrowings under
aggregation lines of
credit ................... 153,912 70,937 13,957 --
Residual financing......... 122,298 53,427 -- --
Other borrowings........... 3,985 3,222 1,326 --
Total stockholders' equity. 114,613 60,836 4,403 3,068
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
AS OF OR FOR THE AS OF OR FOR THE AS OF OR FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1996
---------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
OPERATING STATISTICS:
Loan origination and
purchase activities:
Wholesale originations.... $2,387,954 $1,265,133 $290,452
Retail originations....... 936,902 578,674 66,487
Bulk acquisitions......... -- 120,794 --
---------- ---------- --------
Total loan originations
and purchases.......... $3,324,856 $1,964,601 $356,939
========== ========== ========
Average principal balance
per loan................... $ 96 $ 102 $ 106
Percent of loans secured by
first mortgages............ 97.0% 96.9% 97.3%
Weighted average initial
loan-to-value ratio........ 78.2% 74.0% 71.5%
Originations by product
type: .....................
ARMs...................... $1,920,686 $1,394,133 $264,510
Fixed-rate mortgages...... 1,404,170 570,468 92,429
Weighted average interest
rates:
Fixed-rate mortgages...... 10.0% 9.8% 10.4%
ARMs...................... 9.7% 9.5% 9.3%
Margin-ARMs............... 6.1% 7.0% 7.0%
Loan Sales:
Loans sold through whole
loan transactions........ $1,477,225 $ 680,900 $298,713
Loans sold through
securitizations.......... 2,265,700 1,123,618 --
Loans acquired to
securitize............... (544,704) (63,718) --
---------- ---------- --------
Net loan sales............ $3,198,221 $1,740,800 $298,713
========== ========== ========
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and the accompanying Notes.
GENERAL
New Century is a specialty finance company engaged in the business of
originating, purchasing, selling and servicing sub-prime mortgage loans
secured primarily by first mortgages on single family residences. The Company
originates and purchases loans through its Wholesale and Retail Divisions and
through its Primewest subsidiary. New Century's borrowers generally have
substantial equity in the property securing the loan, but have impaired or
limited credit profiles or higher debt-to-income ratios than traditional
mortgage lenders allow. The Company's borrowers also include individuals who,
due to self-employment or other circumstances, have difficulty verifying their
income, as well as individuals who prefer the prompt and personalized service
provided by the Company.
LOAN ORIGINATION AND PURCHASES
As of December 31, 1998, the Company's Wholesale Division was operating
through four regional operating centers located in Southern California,
Northern California, Atlanta and Chicago, and through 67 additional sales
offices located in 35 states. The Wholesale Division funded $2.4 billion in
loans, or 71.8%, of the Company's total loan production during the year ended
December 31, 1998. As of December 31, 1998, the Retail Division was operating
through 22 retail sales offices in California, and 56 retail sales offices in
29 other states. The Retail Division funded $837.6 million in loans, or 25.2%,
of total loan production during the year ended December 31, 1998. The Company
also funded $99.3 million in loans, or 3.0% of the Company's total loan
production during the year ended December 31, 1998, through its Primewest
subsidiary.
31
<PAGE>
The following table summarizes the Company's loan originations and purchases
for the periods shown.
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998 FOR THE YEAR ENDED DECEMBER 31, 1997
------------------------------------------ ------------------------------------------
WHOLESALE RETAIL PRIMEWEST TOTAL WHOLESALE RETAIL BULK TOTAL
---------- -------- --------- ---------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal balance (in
thousands)............. $2,387,954 $837,594 $99,308 $3,324,856 $1,265,133 $578,674 $120,794 $1,964,601
Number of loans......... 23,946 9,653 1,032 34,631 11,855 6,139 1,269 19,263
Average principal
balance (in thousands). $ 100 $ 87 $ 96 $ 96 $ 107 $ 94 $ 95 $ 102
Weighted average
interest rates:
Fixed-rate............. 10.0% 9.9% 9.6% 10.0% 9.8% 9.7% 11.0% 9.8%
ARMs................... 9.7% 9.4% 9.3% 9.7% 9.6% 9.0% 10.4% 9.5%
Margin-ARMs............ 6.1% 6.2% 6.5% 6.1% 7.0% 7.0% 6.6% 7.0%
Weighted average initial
loan-to-value
ratios(1).............. 78.7% 77.3% 74.7% 78.2% 73.6% 74.7% 75.9% 74.0%
Percentage of loans:
ARMs................... 68.1% 26.8% 70.0% 56.6% 79.1% 52.7% 73.4% 71.0%
Fixed-rate............. 31.9% 73.2% 30.0% 43.4% 20.9% 47.3% 26.6% 29.0%
Percentage of loans
secured by first and
second mortgages:
Percentage of loans
secured by first
mortgages............. 98.1% 94.0% 95.9% 97.0% 98.7% 93.7% 93.7% 96.9%
Percentage of loans
secured by second
mortgages............. 1.9% 6.0% 4.1% 3.0% 1.3% 6.3% 6.3% 3.1%
</TABLE>
- --------
(1) The weighted average initial loan-to-value ratio of a loan secured by a
first mortgage is determined by dividing the amount of the loan by the
appraised value of the mortgage property at origination. The weighted
average initial loan-to-value ratio of a loan secured by a second
mortgage is determined by taking the sum of the first and second
mortgages and dividing by the appraised value of the mortgaged property
at origination.
The Company continued to increase its loan origination volume on a quarterly
basis during 1998 as a result of the significant geographic expansion of the
Wholesale and Retail Divisions, as well as the maturing of offices opened in
1997. The following table sets forth the quarterly loan production results,
the number of office locations and the number of sales professionals at the
end of each quarter by division:
<TABLE>
<CAPTION>
AS OF OR FOR THE QUARTERS ENDED
--------------------------------------------
MARCH JUNE 30, SEPTEMBER 30, DECEMBER 31,
31, 1998 1998 1998 1998
-------- -------- ------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
WHOLESALE
Volume.......................... $432,138 $587,425 $672,275 $696,116
Offices (including regional
operating centers)............. 45 49 62 71
Account Executives.............. 127 132 188 182
RETAIL (INCLUDING PRIMEWEST)
Volume.......................... $222,812 $231,483 $241,990 $240,617
Offices......................... 87 91 84 78
Loan Officers................... 344 394 443 311
TOTAL
Volume.......................... $654,950 $818,908 $914,265 $936,733
Offices......................... 132 140 146 149
</TABLE>
LOAN SALES AND SECURITIZATIONS
The Company's loan sale strategy includes both securitizations and whole
loan sales in order to advance the Company's goal of enhancing profits while
managing cash flows. Loan sales through securitizations permit the Company to
enhance operating profits and to benefit from future cash flows generated by
the residual interests retained by the Company. Whole loan sale transactions
enable the Company to generate current cash flow, protect against the
potential volatility of the securitization market and reduce the risks
inherent in retaining residual interests in securitizations.
32
<PAGE>
The Company's primary source of revenue is the recognition of gains from the
sale of its loans through whole loan sales and securitizations. In a whole
loan sale, the Company recognizes and receives a cash gain upon sale. In a
securitization, the Company recognizes a gain on sale at the time the loans
are sold, but receives corresponding cash flows, represented by the over-
collateralization amount ("OC") and the Net Interest Receivable ("NIR"), over
the actual life of the loans. The OC represents the portion of the loans which
are held by the trust as over-collateralization for the senior and junior
certificate holders, and generally consists of the excess of the principal
balance of the mortgage loans sold to the trust, less the principal balance of
the certificates sold to investors. The NIR represents the difference between
the interest received from the loans sold and (i) interest required to be
passed through to the senior and junior certificate holders, (ii) all
servicing fees, (iii) estimated losses to be incurred on the portfolio of
loans, and (iv) other expenses and revenues, including anticipated prepayment
penalties. At the time of securitization, the Company capitalizes the OC and
the NIR, based upon certain prepayment and loan loss assumptions and a
discount rate the Company believes is consistent with what market participants
would use for similar financial instruments. The capitalized assets are
recorded on the Company's balance sheet as residual interests in
securitizations. A gain or loss is recorded on the income statement for the
value of the residual certificates created by the securitization in excess of
the allocated cost basis of the loans sold, less transaction expenses. As a
result of timing differences in receiving cash from whole loan sales versus
securitizations, the relative percentage of whole loan sales to
securitizations will impact the Company's operating cash flow. For the year
ended December 31, 1998, 60.5% of the Company's total loan sales were in the
form of securitizations.
The Company has, to date, elected to fund the required OC at the closing of
each securitization for all but two securitizations. An OC is created within
each securitization trust, as required by the rating agencies or the bond
insurance companies. The over-collateralization requirement ranges from two to
five percent of the initial securitization bond debt principal balance or four
to nine percent of the remaining principal balance after thirty to thirty-six
months of principal amortization. When funding all of the OC up front, the
Company begins to receive cash flow from the NIR immediately, and in those
cases where a portion of the OC is funded up front, the Company will begin to
receive cash flow from the NIR more quickly than in cases where no initial
funding is undertaken, in both cases subject to certain delinquency or credit
loss tests, as defined by the rating agencies or the bond insurance companies.
Over time, the Company will also receive the OC, subject to the performance of
the mortgage loans in each securitization.
In connection with the origination and purchase of loans, the Company may
either receive or pay origination fees. These fees, referred to as "points" or
"premiums" in the mortgage industry, are dependent on the source of loan
production and typically correspond to the amount of further processing
required for a loan to be funded and are determined as a percentage of the
loan amount. The points received from the origination of loans and the
premiums paid to originate and acquire loans are included in the gain
recognized from the sale of loans in the income statement.
The following table sets forth loan sales and securitizations for the periods
indicated:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Securitizations......... $2,265,700 $1,123,618 $ --
Whole loan sales........ 1,477,225 680,900 298,713
---------- ---------- --------
Subtotal................ 3,742,925 1,804,518 298,713
Less: Loans acquired to
securitize(1).......... (544,704) (63,718) --
---------- ---------- --------
Net loan sales........ $3,198,221 $1,740,800 $298,713
========== ========== ========
</TABLE>
- --------
(1) Loans acquired to securitize represent loans acquired by the Company from
whole loan investors, for the purpose of securitizing those loans. These loan
acquisitions are effected at current market prices for such loans.
33
<PAGE>
As part of its overall securitization strategy in 1998, the Company also
completed two NIM excess cash flow private placements with respect to its
residual interests from five of the Company's securitization transactions.
These transactions allowed the Company to reduce its borrowings under its
residual financing facilities. The Company completed an additional NIM
transaction in February 1999 that included all of the Company's remaining
residual interests in its prior securitizations. If market conditions permit,
the Company expects that NIM transactions will continue to be part of the
Company's overall securitization strategy.
Recent Developments in Secondary Market. During the second half of 1998,
whole loan prices fell to levels significantly lower than the prices received
by the Company in earlier periods. These lower prices have persisted into the
first quarter of 1999. The Company believes a significant reason for the lower
prices is the large inventory of mortgage loans being sold by financially-
troubled mortgage companies at unusually low prices. The Company does not know
whether these lower prices will persist, and for how long. Continuing lower
whole loan prices will affect the Company's secondary marketing strategy, cash
flow and profitability.
From an economic perspective, under current market conditions the Company
believes that it would benefit from securitizing a greater portion of its loan
production since the Company believes that it can prudently recognize gains at
levels higher than whole loan sale prices. However, from a cash flow
perspective, the Company would need to sell a greater portion of loans in
whole loan sales in order to generate the same level of cash gains as were
generated in prior periods.
If the Company's financing arrangements do not remain adequate to
accommodate higher securitization volume and residual financing, the Company
may need to alter its secondary marketing strategies in succeeding months to
generate sufficient cash from whole loan sales to fund the Company's
continuing operations and expansion. Under current whole loan sale pricing
conditions, this strategy could reduce the Company's overall margins, thereby
causing a material adverse effect on the Company's results of operations.
RESULTS OF OPERATIONS
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
The Company originated and purchased $3.3 billion in loans for the year
ended December 31, 1998, compared to $2.0 billion for the year ended December
31, 1997. Loans originated and purchased through the Company's Wholesale
Division were $2.4 billion, or 71.8%, of total originations and purchases for
the year ended December 31, 1998. Loans originated through the Company's
Retail Division were $837.6 million, or 25.2%, of total originations and
purchases for the year ended December 31, 1998. Loans originated through the
Company's Primewest subsidiary were $99.3 million, or 3.0%, of total
originations and purchases for the year ended December 31, 1998. For the same
period in 1997, Wholesale and Retail originations and purchases totaled $1.3
billion, or 64.4%, and $578.7 million, or 29.5%, respectively, of total
originations and purchases for such period. The Company also acquired loans
through bulk acquisitions totaling $120.8 million, or 6.1%, of total
originations and purchases for the ended December 31, 1997.
Total revenues for the year ended December 31, 1998 increased to $176.4
million, or 78.9%, from $98.6 million for the year ended December 31, 1997,
due primarily to the increase in loan originations and purchases and sales in
1998. Gain on sale of loans increased to $105.1 million, or 54.6%, for the
year ended December 31, 1998, from $67.9 million for the year ended December
31, 1997 due to the increase in loan sales in 1998.
The Company sold $3.7 billion in loans for the year ended December 31, 1998,
of which $1.5 billion were sold through whole loan sale transactions and $2.2
billion were sold through securitizations. Loans sold through securitization
include $544.7 million in loans that were acquired by the Company from a whole
loan investor in the fourth quarter of 1998 for the purpose of securitizing
the loans.
34
<PAGE>
The components of the gain on sale of loans are illustrated in the following
table:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Gain from whole loan sale
transactions......................... $ 58,001 $ 27,707
Non-cash gain from securitizations.... 168,065 89,770
Non-cash gain from servicing asset.... 8,791 --
Cash gain (loss) from
securitizations/NIM transactions..... (4,664) 6,105
Securitization expenses............... (13,664) (5,624)
Accrued interest...................... (11,818) (7,188)
Write-down of NIR..................... (5,900) (5,175)
General valuation provision for NIR... (7,500) (3,000)
Provision for losses.................. (6,400) (3,986)
Non-refundable loan fees.............. 47,933 24,514
Premiums, net......................... (58,816) (24,739)
Origination costs..................... (62,783) (28,716)
Hedging losses........................ (6,185) (1,729)
-------- --------
Gain on sale of loans................. $105,060 $ 67,939
======== ========
</TABLE>
Whole loan sales for the year ended December 31, 1998, increased to $1.5
billion, or 117.0%, from $680.9 million for the corresponding period in 1997.
This increase is the result of the increase in loan originations and
purchases.
Interest income for the year ended December 31, 1998 increased to $47.7
million, or 90.1%, from $25.1 million for the same period in 1997. Interest
income is earned on loans held in inventory for sale. Such interest income
accrues during periods when loans are accumulated for future sales, and
increases as loan originations and purchases increase. The increase in
interest income for the year ended December 31, 1998 is the result of a higher
average inventory of loans held for sale compared to the corresponding period
in 1997. The average inventory held for sale for the year ended December 31,
1998, based on quarter-end balances, was $302.6 million, compared to $189.7
million for the corresponding period in 1997.
Servicing income for the year ended December 31, 1998, increased to $23.7
million, or 321.3%, from $5.6 million for the year ended December 31, 1997, as
a result of the increase in the servicing portfolio. Servicing income reflects
servicing fees received on loans sold through servicing-retained whole loan
sales or securitizations, as well as income recognized on residual cash flows
from securitizations. The increase in servicing income for the year ended
December 31, 1998 is also attributable to the increase in residual interests
in securitizations, which increased from $97.3 million at December 31, 1997 to
$205.4 million at December 31, 1998. In 1999, the Company expects to assume
all servicing responsibilities that the Company is currently delegating to
Advanta Mortgage Corp. as sub-servicer. The Company may be required to pay a
relatively small penalty in connection with terminating the sub-servicing
arrangement. At December 31, 1998, $457 million of the Company's $3.4 billion
portfolio of loans serviced for others was being sub-serviced by Advanta.
35
<PAGE>
RESIDUAL SECURITIES
The carrying value of the Company's residual securities at December 31, 1998
and 1997 is summarized below:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Carrying value of securities............................ $215,895 $100,260
Less: General valuation allowance for NIR............... 10,500 3,000
-------- --------
Net book value...................................... $205,395 $ 97,260
======== ========
</TABLE>
In establishing the net book value of the residual securities, management
reviews on a quarterly basis the underlying assumptions used to value each
residual security. The specific values set forth above were established and
tested by a) changing prepayment speed assumptions and loss assumptions for
each security to reflect actual experience and future expectations, and b)
performing sensitivity analyses on the assumptions to assess the potential
impact of a higher prepayment and lower loss scenario, and the potential
impact of a lower prepayment and higher loss scenario.
The following table summarizes the cash flow performance of the Company's
securities:
<TABLE>
<CAPTION>
LIFE TO DATE FY 1998 4TH QTR 1998
------------ ------- ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Actual cash received..................... $54.1 $44.6 $16.9
Projected cash flow...................... 50.8 42.7 16.1
----- ----- -----
Excess cash received..................... $ 3.3 $ 1.9 $ 0.8
===== ===== =====
</TABLE>
To date, the Company's overall cash flows on its residual interests are
higher than the Company had projected. However, three of the early 1997
securitizations (1997 NC-1, NC-2 and NC-3) have experienced high prepayment
speeds resulting in a remaining principal balance substantially lower than
projected. In addition, in 1998 the Company repurchased certain delinquent
loans and REO properties from these three securitizations due to delinquencies
or defaults, which further increased the prepayment speeds of these three
securitizations. Because the Company believes the future cash flows from these
securitizations will be less than modeled cash flows, the Company recorded a
$5.9 million reduction in the value of the residual securities from these
three transactions in the fourth quarter of 1998.
Total expenses for the year ended December 31, 1998, increased to $124.1
million, or 82.4%, from $68.0 million for the year ended December 31, 1997.
Interest expense increased due to the higher level of loan inventory and
corresponding warehouse and aggregation borrowings. All other expense
components increased from 1997 to 1998 due primarily to (i) higher loan
origination volume in the year ended December 31, 1998 compared to the same
period in 1997; (ii) an increase in staffing from 1,151 employees at December
31, 1997 to 1,417 employees at December 31, 1998; and (iii) the addition of 34
wholesale sales offices and four retail sales offices from December 31, 1997
to December 31, 1998.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
The Company began lending operations in February 1996. Accordingly, results
for the year ended December 31, 1996 do not reflect a full year of operation.
The Company originated and purchased $2.0 billion in loans for the year
ended December 31, 1997, compared to $356.9 million for the year ended
December 31, 1996. Loans originated and purchased through the Company's
Wholesale Division were $1.3 billion, or 64.4%, of total originations and
purchases for the year ended December 31, 1997. Loans originated through the
Company's Retail Division were $578.7 million, or 29.5%, of total originations
and purchases for the year ended December 31, 1997. Loans purchased through
bulk
36
<PAGE>
acquisition were $120.8 million, or 6.1% of total originations and purchases
for the year ended December 31, 1997. For the same period in 1996, Wholesale
and Retail originations and purchases totaled $290.4 million, or 81.4% and
$66.5 million, or 18.6%, respectively, of total originations and purchases for
such period. There were no bulk acquisitions in the year ended December 31,
1996.
Total revenues for the year ended December 31, 1997 increased to $98.6
million, from $14.5 million for the year ended December 31, 1996, due
primarily to the increase in loan originations and purchases and sales in
1997. Gain on sale of loans increased to $67.9 million for the year ended
December 31, 1997, from $11.6 million for the year ended December 31, 1996 due
to the increase in loans sales in 1997.
The Company sold $1.8 billion in loans for the year ended December 31, 1997,
of which $1.1 billion, or 62.3%, were sold through loan securitizations and
the remainder represented whole loan sales. Securitizations included $63.7
million in loans that were acquired from a whole loan investor for the purpose
of securitizing the loans.
The components of the gain on sale of loans are illustrated in the following
table:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------ ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Gain from whole loan sale
transactions......................... $ 27,707 $15,335
Non-cash gain from securitizations.... 89,770 --
Cash gain (loss) from
securitizations/NIM transactions..... 6,105 --
Securitization expenses............... (5,624) --
Accrued interest...................... (7,188) --
Write-down of NIR..................... (5,175) --
General valuation provision for NIR... (3,000) --
Provision for losses.................. (3,986) (706)
Non-refundable loan fees.............. 24,514 3,548
Premiums, net......................... (24,739) (1,973)
Origination costs..................... (28,716) (4,291)
Hedging losses........................ (1,729) (283)
-------- -------
Gain on sale of loans................. $ 67,939 $11,630
======== =======
</TABLE>
During the fourth quarter of 1997, the Company experienced a shortfall in
expected cash flows from its first five residuals as a result of (i) increases
in prepayment speeds on loans, (ii) increases in the one-month LIBOR index
used to calculate the monthly remittance to holders of the senior securities,
and (iii) shortfalls in actual prepayment penalty income compared to expected
prepayment penalty income. While initial prepayment speeds were not
significantly different than the original assumptions used to record the
residuals, the Company revised its assumptions to reflect the recent
prepayment trends experienced to date and to take into consideration the high
prepayment speeds that the Company anticipates to continue for the immediate
future. The new assumptions, summarized below, resulted in a write-down of the
residuals during the fourth quarter of 1997 of $5.2 million:
<TABLE>
<CAPTION>
SECURITIZATIONS AS OF DECEMBER 31, 1997
-------------------------------------------------------------------
NC-1 NC-2 NC-3 NC-4 NC-5 NC-6 NC-7
------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Origination principal
balance of collateral.. $99,119 $129,337 $103,521 $279,368 $178,377 $164,990 $169,165
Weighted avg. life
(years)................ 3.15 3.32 3.41 3.39 3.49 4.28 4.28
Cumulative loss estimate
as a percentage of
original principal
balance................ 1.91% 1.91% 1.97% 1.98% 1.97% 2.08% 2.08%
Discount rate........... 12% 12% 12% 12% 12% 12% 12%
</TABLE>
37
<PAGE>
In addition, the Company established an additional $3 million general
valuation allowance due to the inherent uncertainties in estimating the fair
value of residuals, including the lack of historical prepayment data on the
collateral, the uncertainty created by the recent prepayment experience of the
Company's first five securitizations and the level of the prepayments
experienced by the sub-prime industry in general.
The gain on securitization recorded by the Company represents the present
value of the Company's estimate of future excess cash flows and is the NIR
gain component of the residuals in the consolidated balance sheet.
Accordingly, a comparison of the actual cash flows received to those projected
cash flows used in estimating the fair of the residuals is the most
significant measure of potential impairment of the residual. In future
periods, the Company will recognize additional revenue from residuals if the
actual performance of the mortgage loans is higher than the original estimate
or the Company may increase the estimated fair value of the residuals. If the
actual performance of the mortgage loans is lower than the original estimate,
then an adjustment to the carrying value may be required if the estimated fair
value of the residuals is less than the carrying value.
During the year ended December 31, 1997 the Trusts received $11,376,000 in
cash flows which, based on the revised assumptions discussed above, is
$477,000, or approximately 5.3%, in excess of the cash flows estimated to be
received by the Trusts in this period. Cash released by the Trusts to the
Company for the year ended December 31, 1997 was $10,597,000. Five of the
Company's securitizations are at the required credit enhancement level and
none of the Company's securitizations have violated any of the performance
measures that would require an increase in the credit enhancement levels.
Whole loan sales increased to $680.9 million for the year ended December 31,
1997, from $298.7 million for the corresponding period in 1996. This increase
is the result of the increase in loan originations and purchases.
Interest income increased to $25.1 million for the year ended December 31,
1997, from $2.8 million for the same period in 1996, primarily due to
increased interest income from loans held for sale. Interest income is earned
on loans held in inventory for sale. Such interest income accrues during the
periods when loans are accumulated for future sales, and increases as loan
originations and purchases increase. The increase in interest income for the
year ended December 31, 1997 is the result of higher average inventory of
loans held for sale compared to the corresponding period in 1996. The average
inventory of loans held for sale for the year ended December 31, 1997, based
on quarter-end balances, was $189.7 million, compared to $32.4 million for the
corresponding period in 1996.
Servicing income increased to $5.6 million for the year ended December 31,
1997, from $29,000 for the year ended December 31, 1996, as a result of the
increase in securitizations, pursuant to which the Company retains ownership
of the servicing rights. Servicing income reflects servicing fees received on
loans sold or securitized by the Company of approximately $400,000, as well as
income recognized on residual cash flows from securitizations of approximately
$5.0 million. The increase in servicing income for the year ended December 31,
1997 is due to the fact that the Company securitized $1.1 billion in loans and
retained the servicing rights, while the Company sold substantially all of its
loans through whole loan sale transactions on a servicing-released basis in
1996.
Total expenses increased to $68.0 million for the year ended December 31,
1997, from $12.2 million for the year ended December 31, 1996. Interest
expense increased due to the higher level of loan inventory and corresponding
warehouse borrowing. All other expense components increased from 1996 to 1997
due primarily to (i) higher loan origination volume in the year ended December
31, 1997 compared to the same period in 1996; (ii) an increase in staffing
from 333 employees at December 31, 1996 to 1,151 employees at December 31,
1997; and (iii) the addition of 22 wholesale sales offices and 54 retail sales
offices from December 31, 1996 to December 31, 1997.
LIQUIDITY AND CAPITAL RESOURCES
Principal Financing Facilities. The Company requires access to short-term
warehouse and aggregation credit facilities in order to fund loan originations
and purchases pending the securitization and sale of such loans.
38
<PAGE>
As of December 31, 1998, the Company had a $320.0 million warehouse line of
credit led by U.S. Bank National Association which expires in May 1999 and
bears interest at a rate equal to the one month LIBOR plus 1.25%. At December
31, 1998, the balance outstanding under the warehouse line of credit was
$191.9 million.
Borrowings under the warehouse line are generally secured by first mortgages
funded through the facility. Within seven business days of funding, the
Company is required to deposit the mortgage note and file with U.S. Bank to be
held as collateral. If the file is incomplete, U.S. Bank ceases to count the
loan in calculating the Company's available borrowing capacity. As a
consequence, the Company is essentially forced to use its own cash to carry
the loan until the file defect can be cured and the loan can be resubmitted
under the warehouse line. As of December 31, 1998, the Company's "zero-
collateral" balance was not material, and did not affect the Company's
liquidity.
As of December 31, 1998, the Company also had a $600 million aggregation
facility with Salomon Smith Barney ("Salomon"), which is subject to renewal by
Salomon on a monthly basis and bears interest at a rate generally equal to the
one month LIBOR plus 1.25%. At December 31, 1998, the balance outstanding
under the aggregation facility was $152.1 million. In November 1998, the
Company established a $3.0 million credit facility with an affiliate of
Salomon secured by a newly-formed special purpose subsidiary of the Company
that will hold residential properties owned by the Company from time to time
pending their liquidation. This facility bears interest at a rate equal to the
one month LIBOR plus 2.50%. As of December 31, 1998, the balance outstanding
under this facility was $1.8 million.
The Company's $250.0 million aggregation facility with Greenwich Capital
matured on March 31, 1998 and the Company opted not to renew the facility. The
Company also had a $100 million longer term aggregation facility with Salomon
that it opted not to renew.
The Company utilizes the U.S. Bank warehouse line to finance the actual
funding of its loan originations and purchases. After loans are funded by the
Company using the warehouse line and all loan documentation is complete, the
loans are generally transferred to the aggregation facility. The aggregation
facility is paid down with the proceeds of loan sales and securitizations.
The Company also has residual financing arrangements with Salomon, whereby
Salomon provides financing of the Company's residual interests in
securitizations as well as its residual interest from NIM transactions. The
amount of residual financing provided upon each securitization is determined
pursuant to formulas set forth in the respective agreements and is generally
subject to repayment as a result of changes in the market value of the
residual interest or the formula used by the lead underwriter to determine the
market value (which the underwriter may adjust in its discretion). The
facilities bear interest at a rate based on the one month LIBOR. At December
31, 1998, the balance outstanding under these facilities was $122.3 million.
The Company's business requires substantial cash to support its operating
activities and growth plans. As a result, the Company is dependent on the U.S.
Bank warehouse facility, the Salomon aggregation line and the residual
financing facility in order to finance its continued operations. If either
Salomon or U.S. Bank decided not to renew its credit facility with the
Company, the loss of borrowing capacity would have a material adverse impact
on the Company's results of operations unless the Company found a suitable
alternative source.
Industry Liquidity Environment. In the third and fourth quarters of 1998,
the financing environment for sub-prime mortgage lenders like the Company
became more difficult. Some investment and commercial banks withdrew or
substantially curtailed their warehouse and/or aggregation financing
commitments. Others continued lending to sub-prime originators, but on less
favorable terms. Partly as a consequence of these liquidity problems, several
relatively large sub-prime mortgage lenders have declared bankruptcy since the
third quarter of 1998. The Company believes that as a result of these
bankruptcies, some investment and commercial banks will be less willing to
renew or expand their remaining commitments to sub-prime mortgage lenders.
Strategy for 1999. In 1999, the Company intends to diversify its financing
sources in order to reduce its reliance on single sources of warehouse,
aggregation and residual financing. The Company may also moderately
39
<PAGE>
expand its borrowing capacity if needed to finance expanded levels of loan
production and securitization, although at present the Company believes its
existing credit facilities are large enough to accommodate its current
production levels.
Because of the difficult liquidity environment in the sub-prime mortgage
industry, there can be no assurance that the Company will be able to establish
alternative credit facilities on terms comparable to those in its existing
Salomon and U.S. Bank facilities. In addition, Salomon Smith Barney has
recently experienced professional staff changes and structural reorganizations
in the division responsible for providing the Company's aggregation and
residual financing. As a consequence, there can be no assurance that Salomon
will continue to renew its aggregation and residual financing facilities on
terms as favorable as the Company's current borrowing terms.
Cash Flow. The Company's negative cash flow position is primarily a function
of its securitization strategy and rapid growth. The Company records a
residual interest in securitization and recognizes a gain on sale when it
effects a securitization, but only receives the cash representing such gain
over the life of the loans securitized. In order to support its loan
origination, purchase and securitization programs, the Company is required to
make significant cash investments that include the funding of: (i) fees paid
to brokers and correspondents in connection with generating loans through
wholesale and correspondent lending activities; (ii) fees and expenses
incurred in connection with the securitization and sale of loans including
over-collateralization requirements for securitization; (iii) commissions paid
to sales employees to originate loans; (iv) any difference between the amount
funded per loan and the amount advanced under its current warehouse facility;
(v) principal and interest payments on residual financing secured by the NIM
residual bonds, for which the Company does not expect to receive cash flows
during 1999; and (vi) income tax payments arising from the recognition of gain
on sale of loans. The Company also requires cash to fund ongoing operating and
administrative expenses, including capital expenditures and debt service. The
Company's sources of operating cash flow include: (i) the premium advance
component of the aggregation facility; (ii) premiums obtained in whole loan
sales; (iii) mortgage origination income and fees; (iv) interest income on
loans held for sale; (v) excess cash flow from securitization trusts; and (vi)
servicing income. For the year ended December 31, 1998, the Company's
operations used approximately $68.6 million in cash, which is primarily
attributable to cash invested in the OC Accounts. As a result of its strategy
to grow its loan origination, purchase and securitization programs, the
Company expects that its operating uses of cash may continue to exceed its
operating sources of cash.
Other Borrowings. The Company has a discretionary, non-revolving $5.0
million line of credit with an affiliate of U.S. Bank secured by the Company's
furniture and equipment. Advances under this facility are made periodically at
the discretion of the lender, and bear interest at a fixed rate established at
the time of each advance for a term of three years. As of December 31, 1998,
the balance outstanding under this facility was $4.0 million, and the
weighted-average interest rate was 8.8%.
The Company had a $4.0 million unsecured line of credit with U.S. Bank for
working capital purposes, which was terminated in June 1998. The new terms of
the U.S. Bank warehouse line allow borrowings secured by the Company's
servicing-related advances, as well as additional borrowing capacity on the
Company's inventory of loans receivable held for sale. These new terms
effectively replaced the working capital line of credit.
The Company had various non-revolving operating lease agreements totaling
$14.1 million at December 31, 1998, for purposes of financing office property
and equipment. Advances under these facilities are made periodically and a
financing rate is established at the time of each advance. As of December 31,
1998, the Company had fully utilized the financing available under these
facilities.
In November 1998, in connection with the sale of 20,000 shares of Series
1998A Convertible Preferred Stock, the Company received $20.0 million in cash
from U.S. Bank, the proceeds of which were used to pay down outstanding
borrowings under the warehouse line of credit. Long-term, the proceeds are
expected to provide the Company some flexibility in its secondary marketing
strategy, because the decision to sell loans in the whole loan market rather
than through securitization will be based on current market conditions rather
than the need to create cash flow.
40
<PAGE>
Subject to the various uncertainties described above, the Company
anticipates that its current liquidity, credit facilities and capital
resources will be sufficient to fund its operations for the foreseeable
future.
INCOME TAXES
The Company accounts for income taxes by using the asset and liability
method. Under the asset and liability method, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
ACCOUNTING CONSIDERATIONS
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 (SFAS No. 133), "Accounting for Derivative Securities and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments imbedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (i) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment,
(ii) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (iii) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available for sale security, or a foreign currency-denominated forecasted
transaction.
Under SFAS No. 133, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods
must be consistent with the entity's approach to manage risk. Management is in
the process of assessing the impact of implementing SFAS No. 133, which is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999.
In October 1998, the FASB issued Statement of Financial Accounting Standards
No. 134 (SFAS No. 134), "Accounting for Mortgage-Backed Securities after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." SFAS No. 134 amends SFAS No. 65 to require that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify in accordance with the provisions of SFAS No. 115
the resulting mortgage-backed securities or other retained interests based on
its ability and intent to sell or hold those investments. However, a mortgage
banking enterprise must classify as trading any retained mortgage-backed
securities that it commits to sell before or during the securitization
process. This Statement is effective for the first fiscal quarter beginning
after December 15, 1998. Management has determined that application of this
statement should not have a material impact on the Company's financial
condition or results of operations.
YEAR 2000
THE YEAR 2000 ISSUE
The Year 2000 issue is the result of computer hardware and software being
designed with the year field being set for two digits instead of four digits.
Computer programs and systems with this problem will be unable to properly
distinguish between the year 2000 and the year 1900. As a result the programs
could fail or yield incorrect results.
The Company's business, as well of those of its principal vendors, is
dependent on the ability of a variety of software and hardware systems to
function. Less visible, but also important, are the many non-information
41
<PAGE>
technology (Non-IT) systems which have computer chips embedded in them.
Failure of one or more of these IT and Non-IT systems of the Company or an
important vendor could disrupt the Company's operations and cause a material
adverse impact on the Company's business, results of operations and financial
condition.
THE COMPANY'S YEAR 2000 STRATEGY
The Company is in the midst of implementing its plan (the "Y2K Plan" or the
"Plan") to prepare for the Year 2000 issue. The Plan consists of (i)
evaluating the Company's exposure to Year 2000 problems, (ii) having its major
systems certified and tested as Year 2000 ready, (iii) obtaining
certifications and/or responses to detailed questionnaires from its major
vendors regarding their Year 2000 readiness, and (iv) establishing contingency
plans. The Company believes it will complete implementation of the Plan by
June 30, 1999.
PROGRESS REPORT
In order to spearhead implementation of the Year 2000 effort, in 1998 the
Company established a Year 2000 Task Group (the "Group"). The Group divided
the Plan implementation process into four categories: 1) Hardware, 2) Non-
Information Technology (e.g., telephone systems, pagers, etc.), 3) Software,
and 4) Outside Vendors.
Hardware--The Company's most important hardware systems are its computer
file servers located at the Company's headquarters and regional operating
centers. The Group has contacted the manufacturers of those systems in order
to obtain certification of Year 2000 readiness. Because the Company was not
formed until late 1995 and did not commence lending operations until February
1996, most of these systems are relatively new and were manufactured to be
Year 2000 ready. The Group expects to complete the process of obtaining the
certificates by early April 1999.
In addition, in March 1999, the Group commenced testing of each of the
hardware systems to confirm that they are able to function properly in a Year
2000 simulation. The Group currently expects that the hardware testing process
will be complete by the end of April 1999. Any repair or replacement of
systems that are found to be unready will take place by the end of the second
quarter of 1999.
Non-Information Technology--The Group is also in the process of contacting
the vendors of its principal Non-IT systems in order to obtain certificates of
Year 2000 readiness. The Company's material Non-IT systems include its
telephone, paging, voice-mail and telemarketing systems. Because most of these
systems were purchased after 1995, the majority of these systems were designed
and manufactured to be Year 2000 ready. To date, the Company has received
certifications of Year 2000 readiness with respect to its telephone, voice-
mail and telemarketing systems, and is awaiting similar certification for its
paging systems. The Group currently expects to receive Year 2000 readiness
certification with respect to its remaining material Non-IT systems by the end
of the second quarter. If the manufacturer of any such system is not willing
to provide the requested certification, the Group will decide whether or not
to replace that system.
Software--The Group is in the process of evaluating all material software
applications for Year 2000 readiness. The Company's material software
applications include its loan origination, accounting and servicing software,
as well as the general word processing and spreadsheet programs used by the
majority of the Company's employees. Because most of the Company's material
software applications were purchased in the last three years, most of this
software was designed to be Year 2000 ready.
The Company has commenced testing each material software system for Year
2000 readiness, and expects to complete this process by the middle of the
second quarter of 1999. The Group currently expects to complete the process of
bringing non-compliant software into Year 2000 readiness by the end of the
second quarter of 1999.
Outside Vendors--The Group has identified its outside vendor relationships
as a significant area of uncertainty with respect to Year 2000 readiness. The
Company is dependent on many vendors, both for the
42
<PAGE>
origination of loans and for their subsequent sale or securitization. If one
or more of the Company's principal vendors experiences significant business
disruption as a result of the Year 2000 issue, it could have a material
adverse effect on the Company's business, results of operations and financial
condition.
For example, if the Company's warehouse line of credit is not functioning
properly, the Company may be unable to fund loans. Similarly, if other major
origination-related vendors such as credit reporting agencies, title
companies, appraisers and county recorders are not operating, the Company's
ability to originate loans could be significantly impaired.
In order to mitigate the risks related to outside vendors, the Group is
developing a detailed questionnaire to be distributed by early in the second
quarter of 1999 to the Company's principal vendors who have not provided
satisfactory Year 2000 readiness certificates. Based on the responses, the
Group may need to develop contingency plans to replace those vendors whose
ability to certify Year 2000 readiness is in doubt. The Group expects that the
process of evaluating and working with outside vendors will continue into the
second quarter of 1999.
CONTINGENCY PLANNING
The Group is in the process of formulating a contingency plan in the event
that any material system or vendor will not be Year 2000 ready in a timely
manner. This contingency plan is scheduled to be substantially complete by the
end of the second quarter of 1999, although it will be reviewed and refined
thereafter as the Group continues to evaluate the Company's systems and
vendors.
COSTS
The Company has budgeted up to $1,000,000 for implementation of the Plan to
cover the costs of evaluating systems, upgrading or replacing non-compliant
systems and hiring an outside Year 2000 consultant. Although the Group
believes this amount will be sufficient to meet the costs of the Company's
Year 2000 readiness efforts, there can be no assurance that the costs to
implement the Plan will not significantly exceed the Company's current
estimates. To date, expenditures for Year 2000 readiness have been
approximately $150,000.
RISKS
At present, the Company perceives that its greatest Year 2000 risks relate
to its dependence on outside vendors. Even if the Company can satisfy itself
that the principal IT and Non-IT systems of its main vendors are Year 2000
ready, those vendors in turn rely on a myriad of suppliers to operate their
businesses. It is conceivable that Year 2000-related failures far removed from
the Company could trigger a chain event that could materially harm the
Company's business.
A separate and equally difficult risk posed to the Company by the Year 2000
issue is that disruptions in its customers' financial condition will reduce
demand for its products. If consumer confidence is impaired, loan originations
might decline. Similarly, if the financial institutions who are purchasers of
the Company's whole loans or mortgage-backed securities suffer business
disruptions from the Year 2000-related problems, the secondary market demand
and pricing for the Company's loans may decline.
In short, while the Company is committed to attempt to prevent Year 2000-
related harms, there can be no assurance that Year 2000 problems will not have
a material adverse effect on the Company's business, results of operations or
financial condition.
SAFE HARBOR STATEMENT
The preceding "Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" sections contain certain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 (the "Securities Act") and Section 21E of the Securities Exchange
Act of 1934 (the "Exchange Act"), and the Company intends that such forward-
looking statements be subject to the safe
43
<PAGE>
harbors created thereby. These forward-looking statements generally include
the plans and objectives of management for future operations, including plans
and objectives relating to the Company's future economic performance. The
forward-looking statements and associated risks may include or relate to: (i)
the Company's ability to increase retail loan production through geographical
expansion and increased consumer marketing efforts, (ii) the Company's
intention to focus on improving the Retail Division's profitability by
controlling costs, (iii) the Company's plan of opening new retail offices with
direct mail and telemarketing, and closing the new offices if they do not
reach break-even operations within five to eight months, (iv) the Company's
ability to increase consumer marketing, expand Internet loan origination
efforts and initiate a broader national marketing program to increase brand
recognition, (v) the belief that the Company will be able to expand its
Wholesale Division through geographic expansion and greater penetration in
existing markets and by improving computer and other support systems and
expanding product offerings, (vi) the Company's ability to continue to reduce
the "all-in acquisition cost" per loan, (vii) the Company's intention to
diversify its financing sources, (viii) the Company's plan to diversify whole
loan sale and securitization channels, (ix) the Company's objective of
reaching cash-neutral operations, (x) the Company's plan to improve
communication of secondary marketing conditions to its production units, (xi)
the Company's plan to reduce the number of loans the Company is forced to sell
at a loss, (xii) the Company's ability to successfully implement the various
aspects of the U.S. Bancorp strategic alliance, (xiii) the Company's intention
to continue to evaluate potential acquisitions and strategic alliances with
mortgage originators, (xiv) the Company's ability to periodically modify its
Underwriting Guidelines to reflect market conditions, (xv) the success of the
Company's recent restructuring to isolate its secondary marketing operations
in NC Capital Corporation, (xvi) the adequacy of the write-down in the value
of the residual securities from 1997-NC-1, NC-2 and NC-3, (xvii) the intention
that the Company will continue to execute NIM private placement transactions
as part of its overall securitization strategy, (xviii) the expectation that
the Company will take over servicing of the loans currently being sub-serviced
by Advanta by the second or third quarter of 1999, (xix) the intention that
the Company may repurchase additional loans from its securitizations if
necessary to avoid disruption of cash flow to the Company, (xx) the Company's
intention to mitigate interest rate risk through hedging, (xxi) the belief
that the Company's practices comply with applicable rules and regulations in
all material respects, (xxii) the belief that the Company's relations with its
employees are satisfactory, (xxiii) the belief that the Company's litigation,
individually or in the aggregate, will not have a material adverse effect on
the Company's financial position or results of operations, (xxiv) the
Company's intention to continue to pursue a balanced secondary marketing
strategy consisting of both whole loan sales and securitizations, (xxv) the
accuracy of the Company's assumptions underlying valuation of its residual
securities and their effect on the anticipated returns and future cash flow to
the Company from its residual securities, (xxvi) the Company's ability to
maintain adequate financing to fund its operations, (xxvii) the Company's
belief that its existing credit facilities are large enough to accommodate its
current production levels, (xxviii) the belief that the Company will complete
implementation of its Year 2000 Plan by June 30, 1999, and (xxix) the
expectation that the amount budgeted for implementation of the Year 2000 Plan
will be adequate.
The forward-looking statements are further qualified by important factors
that could cause actual results to differ materially from these in the
forward-looking statements, including, without limitation, the following:
(i) the Company's access to funding sources and its ability to renew, replace
or add to its existing credit facilities on terms comparable to the current
terms; (ii) the condition of the secondary market for whole loans, (iii) the
condition of the markets for mortgage-backed securities and the senior bonds
issued in NIM transactions, (iv) an increase in the prepayment speed or
default rate of the Company's borrowers; (v) management's ability to manage
the Company's past growth and planned expansion; (vi) the effect of changes in
interest rates; (vii) the effect of the competitive pressures from other sub-
prime lenders or suppliers of credit in the Company's market; (viii) the
negative impact of economic slowdowns or recessions; (ix) the ability of the
Company to attract, retain and motivate qualified personnel; and (x) the
ability of the Company's servicing operations to absorb the growing volume of
loans being serviced by the Company. Results actually achieved may differ
materially from expected results in these statements. Several of these risks
are discussed in greater detail in the "Risk Factors" section of the preceding
"Business" section. Any of the factors described above in the "Risk Factors"
section could cause the Company's financial results, including its net income
or growth in net income, to differ materially from prior results.
44
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company carries interest-sensitive assets on its balance sheet that are
financed by interest-sensitive liabilities. Since the interval for re-pricing
of the assets and liabilities is not matched, the Company is subject to
interest-rate risk. A sudden, sustained increase or decrease in interest rates
would impact the Company's net interest income, as well as the fair value of
its residual interests in securitizations and interest-only strips. The
Company employs hedging strategies from time to time to manage the interest-
rate risk inherent in its assets and liabilities. These strategies are
designed to create gains when movements in interest rates would cause the
value of the Company's assets to decline, and result in losses when movements
in interest rates cause the value of the Company's assets to increase.
The following table illustrates the timing of the re-pricing of the
Company's interest-sensitive assets and liabilities as of December 31, 1998.
Management has made certain assumptions in determining the timing of re-
pricing of such assets and liabilities. One of the more significant
assumptions is that all of the Company's loans receivable held for sale will
be sold in the first six months of 1999. In addition, the timing of re-pricing
or maturity of the Company's residual interests in securitizations is based on
certain prepayment and loss assumptions (See "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations" for further details).
<TABLE>
<CAPTION>
ZERO TO SIX SIX MONTHS 1-2 3-4 5-6
DESCRIPTION MONTHS TO ONE YEAR YEARS YEARS YEARS THEREAFTER TOTAL
----------- ----------- ----------- ------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE
ASSETS:
Cash and cash
equivalents............ $ 30,875 $ -- $ -- $ -- $ -- $ -- $ 30,875
Loans receivable held
for sale, net.......... 367,836 -- -- -- -- -- 367,836
Residual interests in
securitizations........ 58,593 16,283 84,596 13,071 6,557 26,295 205,395
Interest only strips.... 546 528 768 495 321 2,369 5,027
-------- ------- ------- -------- -------- -------- --------
TOTAL INTEREST-SENSITIVE
ASSETS................. 457,850 16,811 85,364 13,566 6,878 28,664 609,133
INTEREST-SENSITIVE
LIABILITIES:
Warehouse and
aggregation lines of
credit................. 345,843 -- -- -- -- -- 345,843
Residual financing
payable................ 122,298 -- -- -- -- -- 122,298
Notes payable........... 1,015 946 1,410 614 -- -- 3,985
-------- ------- ------- -------- -------- -------- --------
TOTAL INTEREST-SENSITIVE
LIABILITIES............ 469,156 946 1,410 614 -- -- 472,126
EXCESS OF INTEREST-
SENSITIVE ASSETS OVER
INTEREST-SENSITIVE
LIABILITIES............ (11,306) 15,865 83,954 12,952 6,878 28,664 137,007
-------- ------- ------- -------- -------- -------- --------
CUMULATIVE NET INTEREST-
SENSITIVITY GAP........ $(11,306) $ 4,559 $88,513 $101,465 $108,343 $137,007
======== ======= ======= ======== ======== ========
</TABLE>
Significant assumptions used to derive the figures in the table above
include (i) loans receivable held for sale are expected to be sold within six
months, (ii) residual interests in securitizations and interest only strips
are assumed to re-price when the underlying loans re-price, (iii) warehouse,
aggregation and residual financing facilities all re-price monthly, and (iv)
notes payable, which are fixed over their terms, re-price at maturity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information with respect to this item is set forth in "Index to Consolidated
Financial Statements."
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
45
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names and ages of the executive officers of the Company and the
positions each of them has held for the past five years are included in Part I
of this Form 10-K as permitted by the General Instruction G(3). The
information required by this item regarding the Company's directors will be
included in the Company's Proxy Statement with respect to its 1999 Annual
Meeting of Stockholders to be filed with the Commission within 120 days of
December 31, 1998, under the caption "Board of Directors and Committees of the
Board" and is incorporated herein by this reference as if set forth in full
herein.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be included in the Company's
Proxy Statement with respect to its 1999 Annual Meeting of Stockholders to be
filed with the Commission within 120 days of December 31, 1998 under the
captions "Executive Compensation," "Board of Directors and Committees of the
Board," "Report of Compensation Committee," "Performance Graph," and
"Compensation Committee Interlocks and Insider Participation" and is
incorporated herein by this reference as if set forth in full herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item will be included in the Company's
Proxy Statement with respect to its 1999 Annual Meeting of Stockholders to be
filed with the Commission within 120 days of December 31, 1998 under the
caption "Security Ownership of Principal Stockholders and Management," and is
incorporated herein by this reference as if set forth in full herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be included in the Company's
Proxy Statement with respect to its 1999 Annual Meeting of Stockholders to be
filed with the Commission within 120 days of December 31, 1998 under the
caption "Certain Relationships and Related Transactions," and is incorporated
herein by this reference as if set forth in full herein.
46
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)The following documents are filed as part of this report:
1. Consolidated Financial Statements--See "Index to Consolidated
Financial Statements"
2. Consolidated Financial Statement Schedule--See "Index to
Consolidated Financial Statements"
3. Exhibits--See "Exhibit Index"
(b) Reports on Form 8-K. On December 8, 1998 the Company filed a report on
Form 8-K regarding U.S. Bancorp's November 24, 1998 purchase of 20,000
shares of the Company's Series 1998A Convertible Preferred Stock.
47
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the Registrant has duly caused this Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
NEW CENTURY FINANCIAL CORPORATION
/s/ Brad A. Morrice
By: _________________________________
Brad A. Morrice
Vice Chairman, President and
Secretary
Each person whose signature appears below hereby authorizes Brad A. Morrice
and Edward F. Gotschall or either of them, as attorneys-in-fact to sign on his
behalf, individually, and in each capacity stated below and to file all
amendments and/or supplements to the Annual Report on Form 10-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Brad A. Morrice Vice Chairman, President, March 30, 1999
____________________________________ Secretary and Director
Brad A. Morrice
/s/ Edward F. Gotschall Vice Chairman, Chief March 30, 1999
____________________________________ Financial Officer and
Edward F. Gotschall Director
/s/ Robert K. Cole Chairman of the Board and March 30, 1999
____________________________________ Chief Executive Officer
Robert K. Cole
/s/ Steven G. Holder Vice Chairman, Chief March 30, 1999
____________________________________ Operating Officer
Steven G. Holder Production/Operations and
Director
/s/ John C. Bentley Director March 30, 1999
____________________________________
John C. Bentley
/s/ Fredric J. Forster Director March 30, 1999
____________________________________
Fredric J. Forster
/s/ Francis J. Partel, Jr. Director March 30, 1999
____________________________________
Francis J. Partel, Jr.
/s/ Michael M. Sachs Director March 30, 1999
____________________________________
Michael M. Sachs
/s/ Terrence P. Sandvik Director March 30, 1999
____________________________________
Terrence P. Sandvik
</TABLE>
48
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 Certificate of Incorporation(1)
3.2 First Amended and Restated Certificate of Incorporation of the
Company(1)
3.3 Certificate of Designation for Series 1998A Convertible Preferred
Stock(2)
3.4 Bylaws of the Company(1)
3.5 First Amended and Restated Bylaws of the Company(1)
4.1 Specimen Stock Certificate(1)
4.2 Specimen Series 1998A Convertible Preferred Stock Certificate
10.1 Form of Indemnity Agreement between the Company and each of its
executive officers and directors(1)
10.2 1995 Stock Option Plan, as amended (incorporated by reference from the
Company's Form S-8 Registration Statement (No. 333-53665) as filed
with the Securities and Exchange Commission on May 27, 1998)
10.3 Founding Managers' Incentive Compensation Plan(1)
10.4 Agreement by and between New Century Mortgage Corporation and Advanta
Mortgage Corporation USA dated April 4, 1996, as amended on January
1, 1997(1)
10.5 Sub-Servicing Agreement by and between New Century Mortgage
Corporation and Advanta Mortgage Corp. USA dated February 1, 1997(1)
10.6 Amended and Restated Credit Agreement by and between New Century
Mortgage Corporation and First Bank National Association dated
October 25, 1996, as amended on December 31, 1996, March 14, 1997,
March 28, 1997 and April 16, 1997(1)
10.7 Form of Warrant to Purchase Common Stock(1)
10.8 Pooling and Servicing Agreement by and among Salomon Brothers Mortgage
Securities VII, Inc. ("Salomon"), New Century Mortgage Corporation
and First Trust National Association, dated February 1, 1997,
incorporated by reference from the Form 8-K, dated February 27, 1997,
filed by Salomon with the Securities and Exchange Commission(1)
10.9 Agreement by and between Salomon Brothers Realty Corp. and New Century
Mortgage dated November 4, 1996(1)
10.10 Form of Founding Managers' Employment Agreement(1)
10.11 Office Building Lease by and between Koll Center Irvine Number Two and
New Century Financial Corporation dated April 11, 1997(1)
10.12 Registration Rights Agreement, dated May 30, 1997, by and between the
Company and certain stockholders of the Company(1)
10.13 Form of Equalization Option granted to two executive officers of the
Company(1)
10.14 Amended and Restated 1995 Stock Option Plan(1)
10.15 Stock Purchase Agreement, dated May 30, 1997, by and between the
Company and Comerica(1)
10.16 New Century Financial Corporation Comerica Warrant to Purchase Common
Stock issued to Comerica on May 30, 1997(1)
10.17 Fifth Amendment to the Amended and Restated Credit Agreement between
the Company and First Bank National Association, dated June 25, 1997
(incorporated by reference from the Company's Quarterly Report on
Form 10-Q as filed with the Securities and Exchange Commission on
August 13, 1997)
</TABLE>
49
<PAGE>
EXHIBIT INDEX--(CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.18 Second Amended and Restated Credit Agreement by and between the
Company and First Bank National Association, dated July 31, 1997
(incorporated by reference from the Company's Quarterly Report on
Form 10-Q as filed with the Securities and Exchange Commission on
November 13, 1997)
10.19 First Amendment to Second Amended and Restated Credit Agreement by
and between New Century Mortgage Corporation and First Bank National
Association, dated November 26, 1997(3)
10.20 Second Amendment to Second Amended and Restated Credit Agreement by
and between New Century Mortgage Corporation and First Bank National
Association, dated December 22, 1997(3)
10.21 Third Amendment to Second Amended and Restated Credit Agreement by
and between New Century Mortgage Corporation and First Bank National
Association, dated February 27, 1998(3)
10.22 Office Building Lease by and between AGBRI Cowan and New Century
Financial Corporation dated November 6, 1997(3)
10.23 Employee Stock Purchase Plan (incorporated by reference from the
Company's Form S-8 Registration Statement (No. 333-36129) as filed
with the Securities and Exchange Commission on September 22, 1997)
10.24 Merger Agreement, dated as of December 17, 1997, by and among New
Century, NC Acquisition Corp., PWF, Kirk Redding and Paul Akers
(incorporated by reference from the Company's Form 8-K as filed with
the Securities and Exchange Commission on January 26, 1998)
10.25 First Amendment to Merger Agreement, dated January 12, 1998, by and
among New Century, NC Acquisition Corp., PWF, Kirk Redding and Paul
Akers (incorporated by reference from the Company's Form 8-K as
filed with the Securities and Exchange Commission on January 26,
1998)
10.26 Master Loan and Security Agreement by and between New Century
Mortgage Corp. and Greenwich Capital Financing Products, Inc., dated
November 18, 1997(3)
10.27 Letter Agreement by and between New Century Mortgage Corp. and
Salomon Brothers Realty Corp., dated August 27, 1997(3)
10.28 Master Lease Agreement by and between New Century Mortgage
Corporation and General Electric Capital Corporation, dated as of
October 24, 1997(3)
10.29 Sub-Servicing Agreement by and between New Century Mortgage
Corporation and Comerica Mortgage Corporation, dated September 15,
1997(3)
10.30 First Amendment to Founding Managers' Incentive Compensation Plan
(incorporated by reference to the Company's Quarterly Report on Form
10-Q as filed with the Securities and Exchange Commission on May 15,
1998)
10.31 Letter Agreement dated March 31, 1998 among Salomon Brothers Realty
Corp., Salomon Brothers Inc and New Century Mortgage Corporation
(incorporated by reference to the Company's Quarterly Report on Form
10-Q as filed with the Securities and Exchange Commission on May 15,
1998)
10.32 Fourth Amendment to Second Amended and Restated Credit Agreement
between the Company and U.S. Bank National Association dated May 1,
1998 (incorporated by reference to the Company's Quarterly Report on
Form 10-Q as filed with the Securities and Exchange Commission on
August 14, 1998)
10.33 Third Amended and Restated Credit Agreement between the Company and
U.S. Bank National Association dated May 29, 1998 (incorporated by
reference to the Company's Quarterly Report on Form 10-Q as filed
with the Securities and Exchange Commission on August 14, 1998)
</TABLE>
50
<PAGE>
EXHIBIT INDEX--(CONTINUED)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
10.34 First Amendment to Third Amended and Restated Credit Agreement between
the Company and
U.S. Bank National Association dated July 27, 1998 (incorporated by
reference to the Company's Quarterly Report on Form 10-Q as filed
with the Securities and Exchange Commission on November 13, 1998)
10.35 Second Amendment to Third Amended and Restated Credit Agreement
between the Company and U.S. Bank National Association dated June 30,
1998(incorporated by reference to the Company's Quarterly Report on
Form 10-Q as filed with the Securities and Exchange Commission on
November 13, 1998)
10.36 Third Amendment to Third Amended and Restated Credit Agreement between
the Company and
U.S. Bank National Association dated November 23, 1998
10.37 Fourth Amendment to Third Amended and Restated Credit Agreement
between the Company and U.S. Bank National Association dated December
11, 1998
10.38 Termination Agreement by and among the Company, Comerica Mortgage
Corporation and Comerica Incorporated, dated as of June 26, 1998
(incorporated by reference to the Company's Quarterly Report on Form
10-Q as filed with the Securities and Exchange Commission on August
14, 1998)
10.39 Deferred Compensation Plan (incorporated by reference from the
Company's Form S-8 Registration Statement (No. 333-68467) as filed
with the Securities and Exchange Commission on December 7, 1998)
10.40 Schedule listing the securitization pools currently being serviced by
New Century Mortgage Corporation. Example of Current Form of Pooling
and Servicing Agreement by and among Salomon Brothers Mortgage
Securities VII, Inc. ("Salomon"), New Century Mortgage Corporation
and U.S. Bank National Association, dated September 1, 1998
(incorporated by reference from Salomon's Current Report on Form 8-K
as filed with the Securities and Exchange Commission on October 8,
1998)
10.41 Preferred Stock Purchase Agreement, dated as of October 18, 1998,
between the Company and
U.S. Bancorp(2)
10.42 Registration Rights Agreement, dated as of November 24, 1998, between
the Company and
U.S. Bancorp(2)
10.43 Flow Purchase Agreement, dated as of November 24, 1998, between New
Century Mortgage Corporation and U.S. Bank National Association,
ND(2)
10.44 Service Provider Agreement, dated as of November 24, 1998, between New
Century Mortgage Corporation and U.S. Bank National Association,
ND(2)
10.45 Form of Founding Managers' Shareholder Agreement, dated November 24,
1998
10.46 Form of Amendment No. 1 to Founding Managers' Employment Agreement,
dated November 24, 1998
10.47 Form of Founding Managers' Employment Agreement, dated January 1, 1999
10.48 Patrick Flanagan Employment Agreement, dated January 1, 1999
10.49 Letter Agreement by and between NC Capital Corporation, New Century
Mortgage Corporation and Salomon Brothers Realty Corp., dated
December 11, 1998
10.50 Non-qualified Stock Option Agreement dated September 17, 1998 between
the Company and Fredric J. Forster.
21.1 List of Subsidiaries
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule
</TABLE>
51
<PAGE>
- --------
(1) Incorporated by reference from the Company's Form S-1 Registration
Statement (No. 333-25483) as filed with the Securities and Exchange
Commission on June 23, 1997.
(2) Incorporated by reference from the Company's Form 8-K as filed with the
Securities and Exchange Commission on December 8, 1998.
(3) Incorporated by reference from the Company's Annual Report on Form 10-K
for the Fiscal Year ended December 31, 1997 on file with the Securities
and Exchange Commission.
52
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
REFERENCE
---------
<S> <C>
Independent Auditors' Report.......................................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997........ F-3
Consolidated Statements of Earnings for the years ended December 31,
1998, 1997 and 1996................................................ F-4
Consolidated Statements of Changes in Stockholders' Equity for the
years ended December 31, 1998, 1997 and 1996....................... F-5
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996............................................ F-6
Notes to Consolidated Financial Statements for the years ended
December 31, 1998 and 1997......................................... F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
New Century Financial Corporation:
We have audited the accompanying consolidated balance sheets of New Century
Financial Corporation and subsidiaries as of December 31, 1998 and 1997 and
the related consolidated statements of earnings, changes in stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1998. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of New
Century Financial Corporation and subsidiaries as of December 31, 1998 and
1997 and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998 in conformity with
generally accepted accounting principles.
KPMG LLP
Orange County, California
January 26, 1999
F-2
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997
-------- --------
ASSETS
------
<S> <C> <C> <C>
Cash and cash equivalents................................ $ 30,875 $ 12,701
Loans receivable held for sale, net (notes 2 and 7)...... 356,975 276,506
Residual interests in securitizations (notes 3 and 7).... 205,395 97,260
Mortgage servicing asset (note 4)........................ 8,665 --
Accrued interest receivable.............................. 1,536 3,974
Office property and equipment (notes 6 and 8)............ 3,644 4,289
Prepaid expenses and other assets (notes 5, 9 and 13).... 17,637 3,398
-------- -------- ---
$624,727 $398,128
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C> <C>
Warehouse and aggregation lines of credit (note 7)....... $345,843 $255,363
Residual financing payable (note 7)...................... 122,298 53,427
Notes payable (note 8)................................... 3,985 3,222
Income taxes payable (note 11)........................... 1,690 1,789
Accounts payable and accrued liabilities (notes 10 and
13)..................................................... 16,056 15,454
Deferred income taxes (note 11).......................... 20,242 8,037
-------- --------
510,114 337,292
-------- --------
Stockholders' equity (notes 13 and 14):
Preferred stock, $.01 par value. Authorized 7,500,000
shares:
Series 1998-A convertible preferred stock--issued and
outstanding 20,000 and 0 shares at December 31, 1998
and 1997, respectively.............................. -- --
Series B convertible preferred stock no shares--
issued and outstanding.............................. -- --
Common stock, $.01 par value. Authorized 45,000,000
shares; issued 14,517,242 and 14,165,974 shares and
outstanding 14,473,566 and 14,165,974 shares at
December 31, 1998 and 1997, respectively.............. 145 142
Additional paid-in capital............................. 65,241 43,486
Retained earnings, restricted.......................... 49,953 18,996
Deferred compensation costs............................ (726) (1,788)
-------- --------
Total stockholders' equity......................... 114,613 60,836
Commitments and contingencies (notes 10 and 12)..........
-------- --------
$624,727 $398,128
======== ======== ===
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Revenues:
Gain on sales of loans (note 2)..................... $105,060 $67,939 $11,630
Interest income (note 2)............................ 47,655 25,071 2,846
Servicing income (note 3)........................... 23,692 5,623 29
-------- ------- -------
Total revenues.................................... 176,407 98,633 14,505
-------- ------- -------
Expenses:
Personnel........................................... 41,345 24,840 6,083
General and administrative (note 15)................ 29,154 14,501 2,456
Interest............................................ 40,328 20,579 1,941
Advertising and promotion........................... 8,681 5,620 1,169
Servicing........................................... 1,840 1,536 269
Professional services............................... 2,751 965 282
-------- ------- -------
Total expenses.................................... 124,099 68,041 12,200
-------- ------- -------
Earnings before income taxes...................... 52,308 30,592 2,305
Income taxes (note 11)................................ 21,193 12,849 970
-------- ------- -------
Net earnings...................................... $ 31,115 $17,743 $ 1,335
======== ======= =======
Basic earnings per share (note 18).................... $ 2.20 $ 2.18 $ 2.53
======== ======= =======
Diluted earnings per share (note 18).................. $ 2.03 $ 1.40 $ 0.20
======== ======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
SERIES A SERIES B RETAINED
PREFERRED PREFERRED PREFERRED COMMON COMMON ADDITIONAL EARNINGS
SHARES STOCK STOCK SHARES STOCK PAID-IN (DEFICIT), DEFERRED
OUTSTANDING AMOUNT AMOUNT OUTSTANDING AMOUNT CAPITAL RESTRICTED COMPENSATION TOTAL
----------- --------- --------- ----------- ------ ---------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1995................... 5,820 $ 54 $ 4 529 $ 6 $ 3,086 $ (82) $ -- $ 3,068
Net earnings............ -- -- -- -- -- -- 1,335 -- 1,335
------ ----- ----- ------ ---- ------- ------- ------- --------
Balance, December 31,
1996................... 5,820 54 4 529 6 3,086 1,253 -- 4,403
Proceeds from issuance
of common stock........ -- -- -- 7,447 74 36,129 -- -- 36,203
Conversion of preferred
stock.................. (5,820) (54) (4) 5,820 58 -- -- -- --
Issuance of warrants.... -- -- -- -- -- 1,500 -- -- 1,500
Issuance of restricted
stock.................. -- -- -- 370 4 2,771 -- -- 2,775
Unamortized deferred
compensation........... -- -- -- -- -- -- -- (1,788) (1,788)
Net earnings............ -- -- -- -- -- -- 17,743 -- 17,743
------ ----- ----- ------ ---- ------- ------- ------- --------
Balance, December 31,
1997................... -- -- -- 14,166 142 43,486 18,996 (1,788) 60,836
Proceeds from issuance
of common stock........ -- -- -- 317 1 830 -- -- 831
Issuance of common stock
for acquisition of
subsidiary............. -- -- -- 19 2 1,998 -- -- 2,000
Proceeds from issuance
of preferred stock..... 20 -- -- -- -- 20,000 -- -- 20,000
Cancellation of
warrants............... -- -- -- -- -- (825) -- -- (825)
Issuance of restricted
stock.................. -- -- -- 16 -- 174 -- -- 174
Purchase of treasury
stock.................. -- -- -- (44) -- (422) -- -- (422)
Amortization of deferred
compensation........... -- -- -- -- -- -- -- 1,062 1,062
Net earnings............ -- -- -- -- -- -- 31,115 -- 31,115
Preferred stock
dividends.............. -- -- -- -- -- -- (158) -- (158)
------ ----- ----- ------ ---- ------- ------- ------- --------
Balance, December 31,
1998................... 20 $ -- $ -- 14,474 $145 $65,241 $49,953 $ (726) $114,613
====== ===== ===== ====== ==== ======= ======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings............................ $ 31,115 $ 17,743 $ 1,335
Adjustments to reconcile net earnings to
net cash provided by (used in)
operating activities:
Depreciation and amortization.......... 3,900 2,835 260
Deferred income taxes.................. 12,205 7,909 128
NIR gains.............................. (168,065) (89,770) --
Initial deposits to over-
collateralization accounts............ (64,942) (20,445) --
Deposits to over-collateralization
accounts.............................. (31,284) (11,376) --
Release of cash from over-
collateralization accounts............ 27,658 10,597 --
Non-cash servicing gains............... (8,791) -- --
Amortization of NIR.................... 15,935 5,559 --
Write down of NIR...................... 5,900 5,175 --
General valuation provision for NIR.... 7,500 3,000 --
Net proceeds from NIMS transactions.... 99,163 -- --
Provision for losses................... 6,400 3,986 706
Loans originated or acquired for sale.. (3,326,027) (1,968,842) (357,727)
Loan sales, net........................ 3,198,221 1,740,800 298,713
Principal payments on loans receivable
held for sale......................... 37,440 9,526 418
Increase in warehouse and aggregation
lines of credit....................... 90,480 199,704 55,659
Net increase (decrease) in other assets
and liabilities....................... (5,432) 5,439 1,028
----------- ----------- ---------
Net cash provided by (used in)
operating activities................ (68,624) (78,160) 520
----------- ----------- ---------
Cash flows from investing activities:
Purchase of office property and
equipment, net of sales................ (1,603) (3,706) (1,834)
Net assets acquired of subsidiary....... (1,642) -- --
----------- ----------- ---------
Net cash used in investing
activities.......................... (3,245) (3,706) (1,834)
----------- ----------- ---------
Cash flows from financing activities:
Net proceeds from residual financing.... 68,871 53,427 --
Net proceeds from notes payable......... 763 1,896 1,326
Proceeds from issuance of stock......... 20,831 36,203 --
Repurchase of treasury stock............ (422) -- --
----------- ----------- ---------
Net cash provided by financing
activities.......................... 90,043 91,526 1,326
----------- ----------- ---------
Net increase in cash and cash
equivalents......................... 18,174 9,660 12
Cash and cash equivalents at beginning of
period................................... 12,701 3,041 3,029
----------- ----------- ---------
Cash and cash equivalents at end of
period................................... $ 30,875 $ 12,701 $ 3,041
=========== =========== =========
Supplemental cash flow disclosure:
Interest paid........................... $ 40,467 $ 19,135 $ 1,738
Income taxes............................ 9,087 3,990 3
=========== =========== =========
Supplemental non-cash financing
activities:
Restricted stock issued to founding
managers............................... $ 174 $ 2,775 $ --
Stock issued in connection with
acquisition............................ 2,000 -- --
Warrants issued to Comerica............. -- 1,500 --
Conversion of preferred stock........... -- 58 --
=========== =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBISIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization
New Century Financial Corporation (the Company), a Delaware corporation, was
incorporated on November 17, 1995. New Century Mortgage Corporation, a wholly
owned subsidiary, commenced operations in February 1996 and is a specialty
finance company engaged in the business of originating, purchasing, selling
and servicing mortgage loans secured primarily by first and second mortgages
on single family residences. PWF Corporation (Primewest), a retail sub-prime
originator, is a wholly owned subsidiary acquired in January 1998. NC Capital
Corporation, a wholly owned subsidiary of New Century Mortgage Corporation,
was formed in December 1998 to conduct the secondary marketing activities of
the Company.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
the Company's wholly owned subsidiaries, New Century Mortgage Corporation and
Primewest Funding Corporation. All material intercompany balances and
transactions are eliminated in consolidation. The consolidated financial
statements have been prepared in conformity with generally accepted accounting
principles.
(c) Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
highly-liquid debt instruments with original maturities of three months or
less to be cash equivalents. Cash equivalents consist of cash on hand and due
from banks.
(d) Loans Receivable Held for Sale
Mortgage loans held for sale are stated at the lower of amortized cost or
market as determined by outstanding commitments from investors or current
investor-yield requirements calculated on an aggregate basis.
Interest on loans receivable held for sale is credited to income as earned.
Interest is accrued only if deemed collectible.
(e) Gain on Sales of Loans
Gains or losses resulting from sales or securitizations of mortgage loans
are recognized at the date of settlement and are based on the difference
between the selling price for sales or securitizations and the carrying value
of the related loans sold. Such gains and losses may be increased or decreased
by the amount of any servicing-released premiums received. Nonrefundable fees
and direct costs associated with the origination of mortgage loans are
deferred and recognized when the loans are sold.
Loan sales and securitizations are accounted for as sales when control of
these loans is surrendered, to the extent that consideration other than
beneficial interests in the loans transferred is received in the exchange.
Liabilities and derivatives incurred or obtained by the transfer of loans are
required to be measured at fair value, if practicable. Also, servicing assets
and other retained interests in the loans are measured by allocating the
previous carrying value between the loans sold and the interest retained, if
any, based on their relative fair values at the date of transfer.
F-7
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(f) Hedging
The Company uses various hedging strategies from time to time to provide
protection against interest rate risk on its fixed-rate mortgage loans. These
strategies include forward sales of mortgage loans or mortgage-backed
securities, interest rate caps and floors and buying and selling of futures
and options on futures. The Company recognizes the gain or loss on hedge
positions in the same period as the related asset hedged is sold. The Company
had no open hedge positions or unrecognized gains or losses at December 31,
1998.
(g) Allowance for Losses
The allowance for losses on loans sold relates to expenses incurred due to
the potential repurchase of loans or indemnification of losses based on
alleged violations of representations and warranties which are customary to
the mortgage banking industry. The allowance represents the Company's estimate
of the total losses expected to occur and is considered to be adequate.
Provisions for losses are charged to gain on sales of loans and credited to
the allowance and are determined to be adequate by management based upon the
Company's evaluation of the potential exposure related to the loan sale
agreements over the life of the associated loans sold.
(h) Office Property and Equipment
Office property and equipment are stated at cost. The straight-line method
of depreciation is followed for financial reporting purposes. Depreciation and
amortization are provided in amounts sufficient to relate the cost of assets
to operations over their estimated service lives or the lives of the
respective leases, whichever is shorter. The estimated service lives for
furniture and office equipment, computer hardware/software and leasehold
improvements are five years, three years and five years, respectively.
(i) Goodwill
Goodwill, recorded in connection with the January 1998 acquisition of
Primewest, totaled $3.6 million and is being amortized over a seven-year
period using the straight-line method. At December 31, 1998, accumulated
amortization was $503,000.
(j) Financial Statement Presentation
The Company prepares its financial statements using an unclassified balance
sheet presentation as is customary in the mortgage banking industry. A
classified balance sheet presentation would have aggregated current assets,
current liabilities and net working capital as of December 31, 1998 as follows
(dollars in thousands):
<TABLE>
<S> <C>
Current assets................................................. $403,341
Current liabilities............................................ 487,848
--------
Net working capital............................................ $(84,507)
========
</TABLE>
Current assets include the portion of the residual interests in
securitizations expected to be collected within one year, while current
liabilities include the entire balance of residual financing.
(k) Errors and Omissions Policy
In connection with the Company's lending activities, the Company has
Fidelity Bond and Errors and Omissions insurance coverage of $2.2 million each
at December 31, 1998.
F-8
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(l) Income Taxes
The Company files consolidated Federal and combined state tax returns. The
Company accounts for income taxes using the asset and liability method. Under
the asset and liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
(m) Residual Interests in Securitizations
Residual interests in securitizations (Residuals) are recorded as a result
of the sale of loans through securitizations and the sale of residual
interests in securitizations through what are sometimes referred to as net
interest margin securities (NIMS).
The loan securitizations are generally structured as follows: First, the
Company sells a portfolio of mortgage loans to a special purpose entity (SPE)
which has been established for the limited purpose of buying and reselling
mortgage loans. The SPE then transfers the same mortgage loans to a Real
Estate Mortgage Investment Conduit or Owners Trust (the REMIC or Trust), and
the Trust in turn issues interest-bearing asset-backed securities (the
Certificates) generally in an amount equal to the aggregate principal balance
of the mortgage loans. The Certificates are typically sold at face value and
without recourse except that representations and warranties customary to the
mortgage banking industry are provided by the Company to the Trust. One or
more investors purchase these Certificates for cash. The Trust uses the cash
proceeds to pay the Company the cash portion of the purchase price for the
mortgage loans. The Trust also issues a certificate representing a residual
interest in the payments on the securitized loans. In addition, the Company
may provide a credit enhancement for the benefit of the investors in the form
of additional collateral (over-collateralization account or OC Account) held
by the Trust. The OC Account is required by the servicing agreement to be
maintained at certain levels.
At the closing of each securitization, the Company removes from its
consolidated balance sheet the mortgage loans held for sale and adds to its
consolidated balance sheet (i) the cash received, (ii) the estimated fair
value of the interest in the mortgage loans retained from the securitizations
(Residuals), which consist of (a) the OC Account and (b) the net interest
receivable (NIR) and (iii) the estimated fair value of the servicing asset.
The NIR represents the discounted estimated cash flows to be received by the
Company in the future. The excess of the cash received and the assets retained
by the Company over the carrying value of the loans sold, less transaction
costs, equals the net gain on sale of mortgage loans recorded by the Company.
The NIMS are generally structured as follows: First, the Company sells or
contributes the Residuals to an SPE which has been established for the limited
purpose of receiving and selling asset-backed residual interests in
securitization certificates. Next, the SPE transfers the Residuals to an Owner
Trust (the Trust) and the Trust in turn issues interest-bearing asset-backed
securities (the bonds and certificates). The Company sells these Residuals
without recourse except that normal representations and warranties are
provided by the Company to the Trust. One or more investors purchase the bonds
and certificates and the proceeds from the sale of the bonds and certificates,
along with a residual interest certificate that is subordinate to the bonds
and certificates, represent the consideration to the Company for the sale of
the Residuals.
At closing of each NIMS, the Company removes from its consolidated balance
sheet the carrying value of the Residuals sold and adds to its consolidated
balance sheet (i) the cash received, and (ii) the estimated fair value of the
portion of the Residuals retained, which consists of a net interest receivable
(NIR). The excess of the cash received and assets retained over the carrying
value of the Residuals sold, less transaction costs, equals the net gain or
loss on the sale of Residuals recorded by the Company.
F-9
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company allocates its basis in the mortgage loans and residual interests
between the portion of the mortgage loans and residual interests sold through
the Certificates and the portion retained (the Residuals and servicing assets)
based on the relative fair values of those portions on the date of sale. The
Company may recognize gains or losses attributable to the changes in the fair
value of the Residuals, which are recorded at estimated fair value and
accounted for as "held-for-trading" securities. The Company is not aware of an
active market for the purchase or sale of Residuals and, accordingly, the
Company determines the estimated fair value of the Residuals by discounting
the expected cash flows released from the OC Account (the cash out method)
using a discount rate commensurate with the risks involved. The Company has
utilized an effective discount rate of approximately 12% on the estimated cash
flows released from the OC Account to value the Residuals through
securitization and approximately 14.4% on the estimated cash flows released
from the Trust to value Residuals through NIMS.
The Company receives periodic servicing fees for the servicing and
collection of the mortgage loans as master servicer of the securitized loans.
In addition, the Company is entitled to the cash flows from the Residuals that
represent collections on the mortgage loans in excess of the amounts required
to pay the Certificate principal and interest, the servicing fees and certain
other fees such as trustee and custodial fees. At the end of each collection
period, the aggregate cash collections from the mortgage loans are allocated
first to the base servicing fees and certain other fees such as trustee and
custodial fees for the period, then to the Certificateholders for interest at
the pass-through rate on the Certificates plus principal as defined in the
servicing agreements. If the amount of cash required for the above allocations
exceeds the amount collected during the collection period, the shortfall is
drawn from the OC Account. If the cash collected during the period exceeds the
amount necessary for the above allocation, and there is no shortfall in the
related OC Account, the excess is released to the Company. If the OC Account
balance is not at the required credit enhancement level, the excess cash
collected is retained in the OC Account until the specified level is achieved.
The cash and collateral in the OC Account is restricted from use by the
Company. Pursuant to certain servicing agreements, cash held in the OC
Accounts may be used to make accelerated principal paydowns on the
Certificates to create additional excess collateral in the OC Account which is
held by the Trusts on behalf of the Company as the Residual holder. The
specified credit enhancement levels are defined in the servicing agreements as
the OC Account balance expressed generally as a percentage of the current
collateral principal balance.
For NIMS transactions, the Company will receive cash flows once the holders
of the senior bonds and certificates created in the NIMS transaction are fully
repaid.
The Annual Percentage Rate (APR) on the mortgage loans is relatively high in
comparison to the pass-through rate on the Certificates. Accordingly, the
Residuals described above are a significant asset of the Company. In
determining the value of the Residuals, the Company must estimate the future
rates of prepayments, prepayment penalties to be received by the Company,
delinquencies, defaults and default loss severity as they affect the amount
and timing of the estimated cash flows. The Company uses an average annual
default rate estimate of 0.45% to 0.73% for adjustable rate first trust deeds,
an 0.35% to 0.65% annual default rate estimate for fixed rate first trust
deeds and 1.00% for second trust deeds. The Company's default rate estimates
result in average cumulative loss estimates as a percentage of the original
principal balance of the mortgage loans of 1.36% to 2.02% for adjustable rate
first trust deeds 1.38% to 1.98% for fixed rate first trust deeds and 2.88%
for second trust deeds. These estimates are based on historical loss data for
comparable loans and the specific characteristics of the loans originated by
the Company. The Company estimates prepayments by evaluating historical
prepayment performance of comparable mortgage loans and the impact of trends
in the industry. The Company has used a prepayment curve to estimate the
prepayment characteristics of the mortgage loans. The rate of increase,
duration, severity and decrease of the curve depends on the age and nature of
the mortgage loans, primarily whether the mortgage loans are fixed or
adjustable and the interest rate adjustment characteristics of the mortgage
loans (6 month, 1 year, 2 year, 3 year or 5 year adjustment periods). The
Company's prepayment
F-10
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
curve and default estimates have resulted in weighted average lives of between
2.31 to 3.45 years for its adjustable mortgage loans and 3.89 to 4.40 for its
fixed rate mortgage loans.
Due to the uncertainty associated with estimating future cash flows caused
by the lack of historical performance data on the mortgage loans and the
absence of an active market for the purchase and sale of Residuals, the
Company established a general valuation allowance of $3.0 million for the
Residuals during the year ended December 31, 1997 and added $7.5 million to
the allowance during the year ended December 31, 1998. The general valuation
allowance is based on the Company's periodic evaluation of the Residuals,
which takes into consideration trends in actual cash flow performance,
industry and economic developments, as well as other relevant factors. As a
result of its evaluation of the Residuals during the fourth quarter of 1998,
particularly prepayment trends in the 6-month LIBOR product, the Company wrote
down its NIR by $5.9 million to reduce the carrying values of the residual
interests in its first three securitizations.
The Bond and Certificate holders and their securitization trusts have no
recourse to the Company for failure of mortgage loan borrowers to pay when
due. The Company's Residuals are subordinate to the Bonds and Certificates
until the Bond and Certificate holders are fully paid.
(n) Mortgage Servicing Asset
The Company is designated as the master servicer for its securitizations and
receives a monthly fee based on the outstanding principal balance of the
mortgage loans. Historically, the Company has contracted with a subservicer to
perform the servicing and investor reporting of the mortgage loans in the
Company's first five securitizations. The subservicer charged a monthly fee
based on the outstanding principal balance of the mortgage loans. Commencing
in July of 1998, the Company began servicing all loans originated and certain
other loans on its in-house servicing platform.
The Company recognizes a servicing asset based on the excess of the fees
received for the servicing and collection of the mortgage loans as master
servicer of the securitized loans over the subservicer fees and the costs
incurred by the Company in performing the servicing functions. This servicing
asset is amortized over the estimated life of the related loans serviced.
For the purposes of measuring impairment, the Company stratifies the
mortgage loans it services using the type of loan as the primary risk.
Impairment is measured utilizing the current estimated fair value of the
mortgage servicing asset.
(o) Stock Option Plan
Prior to January 1, 1996, the Company accounted for its stock option plan in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25), and related
interpretations. As such, compensation expense would be recorded on the date
of grant only if the current market price of the underlying stock exceeded the
exercise price. On January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation"
(SFAS 123), which permits entities to recognize as expense over the vesting
period the fair value of all stock-based awards on the date of grant.
Alternatively, SFAS 123 also allows entities to continue to apply the
provisions of APB 25 and provide pro forma net earnings and pro forma net
earnings per share disclosures for employee stock options grants made in 1995
and future years as if the fair-value-based method defined in SFAS 123 had
been applied. The Company has elected to continue to apply the provisions of
APB 25 and provide the pro forma disclosure provisions of SFAS 123.
F-11
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(p) Earnings Per Share
The Company adopted, effective December 31, 1997, Statement of Accounting
Standards No. 128, "Earnings per Share" (SFAS 128). SFAS 128 simplifies the
standards for computing and presenting earnings per share (EPS) as previously
prescribed by Accounting Principles Board Opinion No. 15, "Earnings per
Share." SFAS 128 replaces primary EPS with basic EPS and fully-diluted EPS
with diluted EPS. Basic EPS excludes dilution and is computed by dividing
income available to common stockholders by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted from issuance
of common stock that then shared in earnings.
(q) Use of Estimates
Management of the Company has made certain estimates and assumptions
relating to the reporting of assets, liabilities, results of operations and
the disclosure of contingent assets and liabilities to prepare these financial
statements in accordance with generally accepted accounting principles. Actual
results could differ from these estimates.
(r) Advertising
The Company accounts for its advertising costs as nondirect response
advertising. Accordingly, advertising costs are expensed as incurred.
(s) Reclassification
Certain amounts for prior periods' presentation have been reclassified to
conform to the current year's presentation.
(t) Segment Reporting
The Company adopted, effective December 31, 1997, Statement of Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information," (SFAS 131). SFAS 131 establishes standards for reporting
financial and descriptive information about an enterprise's operating segments
in its annual financial statements and selected segment information in interim
financial reports.
The Company, through the branch network of its subsidiary, New Century
Mortgage Corporation, provides a broad range of mortgage products. While the
Company's chief decision makers monitor the revenue streams through wholesale
and retail loan originations, operations are managed and financial performance
is evaluated on a Company wide basis. Accordingly, all of the Company's
operations are considered by management to be aggregated in one reportable
operating segment.
(u) Recent Accounting Developments
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 (SFAS No. 133), "Accounting for Derivative Securities and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments imbedded in
other contracts (collectively referred to as derivatives) and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. If certain conditions are met, a derivative may be
specifically designated as (i) a hedge of the exposure to changes in the fair
value of a recognized asset or liability or an unrecognized firm commitment,
F-12
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(ii) a hedge of the exposure to variable cash flows of a forecasted
transaction, or (iii) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available for sale security, or a foreign currency-denominated forecasted
transaction.
Under SFAS No. 133, an entity that elects to apply hedge accounting is
required to establish at the inception of the hedge the method it will use for
assessing the effectiveness of the hedging derivative and the measurement
approach for determining the ineffective aspect of the hedge. Those methods
must be consistent with the entity's approach to managing risk. Management is
in the process of assessing the impact of implementing SFAS No. 133, which is
effective for all fiscal quarters of fiscal years beginning after June 15,
1999.
In October 1998, the FASB issued Statement of Financial Accounting Standards
No. 134 (SFAS No. 134), "Accounting for Mortgage-Backed Securities after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking
Enterprise." SFAS No. 134 amends SFAS No. 65 to require that after the
securitization of mortgage loans held for sale, an entity engaged in mortgage
banking activities classify in accordance with the provisions of SFAS No. 115
the resulting mortgage-backed securities or other retained interests based on
its ability and intent to sell or hold those investments. However, a mortgage
banking enterprise must classify as trading any retained mortgage-backed
securities that it commits to sell before or during the securitization
process. This Statement is effective for the first fiscal quarter beginning
after December 15, 1998. Management has determined that application of this
statement should not have a material impact on the Company's financial
condition or results of operations.
(2) LOANS RECEIVABLE HELD FOR SALE
A summary of loans receivable held for sale, at the lower of cost or market
at December 31, 1998 and 1997 follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Mortgage loans receivable:
First trust deeds.................................. $346,016 $261,819
Second trust deeds................................. 9,859 13,995
Net deferred origination costs..................... 1,100 692
-------- --------
$356,975 $276,506
======== ========
</TABLE>
At December 31, 1998 and 1997, the Company had loans receivable held for
sale of approximately $16.8 million and $21.7 million, respectively, on which
the accrual of interest had been discontinued. If these loans receivable had
been current throughout their terms, interest income would have increased by
approximately $721,000 and $1.1 million in the years ended December 31, 1998
and 1997, respectively.
(a) Interest Income
The following table presents the components of interest income for the years
ended December 31, 1998, 1997 and 1996 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Interest on loans receivable held for sale....... $46,409 $24,546 $2,801
Interest on cash and cash equivalents............ 1,246 525 45
------- ------- ------
$47,655 $25,071 $2,846
======= ======= ======
</TABLE>
F-13
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(b) Gain on Sales of Loans
Gain on sales of loans for the years ended December 31, 1998, 1997 and 1996
was comprised of the following components (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Gain from whole loan sale transactions....... $ 58,001 $ 27,707 $15,335
Non-cash gain from securitizations (NIR
gains)...................................... 168,065 89,770 --
Non-cash gain from servicing asset........... 8,791 -- --
Cash gain (loss) from securitizations/NIM
transactions................................ (4,664) 6,105 --
Securitization expenses...................... (13,664) (5,624) --
Accrued interest............................. (11,818) (7,188) --
Write down of NIR............................ (5,900) (5,175) --
General valuation allowance for NIR.......... (7,500) (3,000) --
Provision for losses......................... (6,400) (3,986) (706)
Nonrefundable fees........................... 47,933 24,514 3,548
Premiums, net................................ (58,816) (24,739) (1,973)
Origination costs............................ (62,783) (28,716) (4,291)
Hedging (losses)............................. (6,185) (1,729) (283)
-------- -------- -------
$105,060 $ 67,939 $11,630
======== ======== =======
</TABLE>
(c) Originations and Purchases
During the year ended December 31, 1998, approximately 32.4% and 8.6% of the
Company's total loan originations and purchases were in the states of
California and Illinois, respectively. During the year ended December 31,
1997, approximately 40.9% and 13.2% of total loan originations and purchases
were in the states of California and Illinois, respectively.
(d) Significant Customers
The Company has entered into a number of transactions with two customers
which accounted for more than 10% of the Company's total loan sales. During
the year ended December 31, 1998, the Company sold in whole loan sale
transactions a total of approximately 30.5% and 11.8% of the loans sold to
these two customers and recognized gross whole loan gains on sales of
approximately 22.4% and 8.7%, respectively, of the total gross gains. During
the year ended December 31, 1997, the Company sold in whole loan sale
transactions a total of approximately 14.4% and 13.3% of the loans sold to
these two customers and recognized gross whole loan gains on sales of
approximately 12.0% and 8.7%, respectively, of the total gross gains.
(3) RESIDUAL INTEREST IN SECURITIZATIONS
Residual interests in securitizations consist of the following components at
December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Over-collateralization amount.......................... $ 89,792 $21,224
Net interest receivable (NIR).......................... 115,603 76,036
-------- -------
$205,395 $97,260
======== =======
</TABLE>
F-14
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes activity in the over-collateralization
account at December 31, 1998 and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Balance, beginning of year........................... $ 21,224 $ --
Initial deposits to OC accounts...................... 64,942 20,445
Additional deposits to OC accounts................... 31,284 11,376
Release of cash from OC accounts..................... (27,658) (10,597)
-------- --------
$ 89,792 $ 21,224
======== ========
</TABLE>
The following table summarizes activity in NIR interests at December 31
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- -------
<S> <C> <C>
Balance, beginning of year............................ $ 76,036 $ --
NIR gains............................................. 168,065 89,770
NIR amortization...................................... (15,935) (5,559)
Sale of NIRs through NIMs............................. (99,163) --
Writedown of NIR...................................... (5,900) (5,175)
General valuation provision for NIR................... (7,500) (3,000)
-------- -------
$115,603 $76,036
======== =======
</TABLE>
Servicing Income
The following table presents the components of servicing income for the
years ended December 31, 1998, 1997 and 1996 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- ------- ----
<S> <C> <C> <C>
Servicing fees collected........................ $ 8,820 $ 427 $ 19
Amortization of mortgage servicing asset........ (126) -- --
Residual interest income........................ 30,555 10,597 --
NIR amortization................................ (15,935) (5,559) --
Prepayment penalties collected.................. 378 158 10
-------- ------- ----
$ 23,692 $ 5,623 $ 29
======== ======= ====
</TABLE>
(4) MORTGAGE SERVICING ASSET
The following table summarizes activity in mortgage servicing asset for the
year ended December 31, 1998 (dollars in thousands):
<TABLE>
<S> <C>
Beginning balance................................................ $ --
Additions........................................................ 8,791
Amortization..................................................... (126)
------
$8,665
======
</TABLE>
(5) GOODWILL
On January 12, 1998, the Company acquired all of the outstanding stock of
Primewest. The purchase price was $1.5 million in cash, and $2.0 million in
the Company's common stock. There were no assets or liabilities acquired,
therefore the entire purchase price, plus transaction costs of $142,000, was
recorded as goodwill. Goodwill is being amortized over seven years using the
straight-line method.
F-15
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes activity in goodwill, included in prepaid
expenses and other assets at December 31, 1998 (dollars in thousands):
<TABLE>
<S> <C>
Balance, beginning of year....................................... $ --
Additions........................................................ 3,642
Amortization..................................................... (503)
------
$3,139
======
</TABLE>
(6) OFFICE PROPERTY AND EQUIPMENT
Office property and equipment consist of the following at December 31
(dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Leasehold improvements................................. $ 589 $ 298
Furniture and office equipment......................... 1,937 1,355
Computer hardware and software......................... 4,150 3,921
------- -------
6,676 5,574
Less accumulated depreciation and amortization......... (3,032) (1,285)
------- -------
$ 3,644 $ 4,289
======= =======
</TABLE>
(7) SHORT-TERM FINANCING
Warehouse and aggregation lines of credit consist of the following at
December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
A $320 million line of credit expiring in May 1999 secured
by loans receivable held for sale, bearing interest based
on one month LIBOR (5.06% at December 31, 1998).......... $191,931 $182,280
A $4 million unsecured working capital line of credit
which expired in May 1998................................ -- 2,146
A $603 million master repurchase agreement bearing
interest based on one month LIBOR (5.06% at December 31,
1998). The agreement may be terminated by the lender
after giving 28 days written notice...................... 153,912 55,064
A $250 million master repurchase agreement which expired
in March 1998............................................ -- 15,873
-------- --------
$345,843 $255,363
======== ========
Residual financing payable:
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
$123 million in residual financing lines renewable
monthly, secured by residual interests in securitizations
bearing interest based on one month LIBOR (5.06% at
December 31, 1998)....................................... $122,298 $ 48,627
$5 million in residual financing lines renewable monthly,
which expired in March 1998.............................. -- 4,800
-------- --------
$122,298 $ 53,247
======== ========
</TABLE>
F-16
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The weighted-average interest rate on the warehouse and aggregation lines of
credit payable was 6.33% and 7.03% at December 31, 1998 and 1997,
respectively. The weighted-average interest rate on residual financing payable
was 6.46% and 7.21% at December 31, 1998 and 1997, respectively.
The warehouse line of credit agreements contain certain restrictive
financial and other covenants which require the Company to, among other
requirements, restrict dividends, maintain certain levels of net worth,
liquidity and available borrowing capacity of at least $10.0 million, debt to
net worth ratios and maintenance of compliance with regulatory and investor
requirements. At December 31, 1998, the Company was in compliance with these
financial and other covenants.
Advances under the residual financing lines are made at the sole discretion
of the lender and are based on a percentage of the amount of loans
securitized. These advances are repayable on demand by the lender and are
subject to renewal on a monthly basis.
(8) NOTES PAYABLE
Notes payable consists of a financing line of credit of $5.0 million,
collateralized by office property and equipment, bears interest at rates
varying from 7.99% to 9.58% and expires in May 1999. The borrowings are
payable in blended monthly payments of principal and interest and mature
commencing from May 1999 to December 2001.
The maturities of notes payable at December 31 for the years ended are as
follows (dollars in thousands):
<TABLE>
<S> <C>
Due in 1999....................................................... $1,961
Due in 2000....................................................... 1,410
Due in 2001....................................................... 614
------
$3,985
======
</TABLE>
(9) LOAN SERVICING
The Company's portfolio of mortgage loans serviced for others was comprised
of approximately $3.4 billion and $1.3 billion at December 31, 1998 and 1997,
respectively, the majority of which represents loans securitized by the
Company. The Company has a subservicing contract with a subservicer to service
the loans in its first five securitizations. The remaining portfolio is
serviced on the Company's in-house servicing platform. The Company commenced
full servicing operations on its in-house platform on July 1, 1998.
At December 31, 1998 and 1997, 33.6% and 38.4%, respectively, of the
servicing portfolio was related to real estate properties located in
California.
Fiduciary bank accounts are maintained on behalf of investors and for
impounded collections. These bank accounts are not assets of the Company and
are not reflected in the accompanying financial statements. These amounts are
as follows at December 31, 1998 (dollars in thousands):
<TABLE>
<S> <C>
Impounded collections, taxes and insurance...................... $ 4,296
Principal and interest collections.............................. 36,640
-------
$40,936
=======
</TABLE>
As master servicer, the Company is required to make advances for delinquent
payments and other servicing-related costs. At December 31, 1998, such
advances totaled $1.6 million and are included in prepaid expenses
F-17
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and other assets. Such advances are recovered from borrower payments and are
senior to any distribution to investors. These advances are reviewed
periodically for recoverability and amounts deemed to be unrecoverable are
included in general and administrative expenses.
(10) COMMITMENTS AND CONTINGENCIES
(a) Related Party
The Company has entered into employment agreements with four executive
officers (the Founding Managers). The original term of each agreement
continued in effect until December 31, 1998. In November 1998, the agreements
were amended to extend until December 31, 2002. Thereafter, the term of each
agreement is extended automatically for successive one-year periods unless
terminated by either the Company or the respective Founding Manager. Under the
terms of the agreements, the Founding Managers each received a signing bonus
of $15,000 and an annual base salary at the rate of $150,000 per year during
1996. For 1997, the Founding Managers initially received a salary of $180,000.
On May 30, 1997, the Board of Directors revised the Founding Managers' salary
to $256,000 for 1997, plus a $500 per month automobile allowance. Effective
January 1, 1998, the Board of Directors increased the Founding Manager's
salary to $281,600 for 1998, plus a $500 per month auto allowance.
In December 1996, the Company adopted the Founding Managers' Incentive
Compensation Plan and the Company has amended the terms thereof effective for
1997 and subsequent plan years (as amended, the Incentive Compensation Plan).
The Compensation Committee (the Committee) of the Board of Directors
administers the Incentive Compensation Plan. The Committee has full discretion
to construe and interpret the terms and provisions of the Incentive
Compensation Plan and related agreements. In addition, the Committee has the
authority to make all determinations under the Incentive Compensation Plan,
and to prescribe, amend and rescind rules relating to the administration of
the Incentive Compensation Plan.
Each of the four Founding Managers is entitled to one quarter of amounts
payable under the Incentive Compensation Plan. Subject to the limitations
described below, the amount available for incentive awards (the Incentive
Pool) for each fiscal year, commencing in 1997, is an amount equal to a
percentage of the Company's earnings (Earnings) before income taxes and
without deducting amounts payable under the Incentive Compensation Plan. The
specific percentage of Earnings which is used to determine the Incentive Pool
is based on the ratio (the Ratio) of Earnings to Total Stockholders' Equity.
If the Ratio is at least 25% but less than 50%, the Incentive Pool is an
amount equal to 5% of Earnings in excess of 25% of Total Stockholders' Equity.
If the Ratio is at least 50%, the Incentive Pool is an amount equal to the sum
of (i) 5% of Earnings in excess of 25% of Total Stockholders' Equity plus (ii)
2% of Earnings in excess of 50% of Total Stockholders' Equity. Total
Stockholders' Equity for purposes of this calculation is equal to the amount
of stockholders' equity as of January 1 of each fiscal year adjusted on a pro-
rata basis for any equity offerings completed during the fiscal year.
Awards under the Incentive Compensation Plan are payable in either cash or
restricted stock if agreed by the Committee and respective Founding Manager.
In the absence of such an agreement, incentive compensation to each Founding
Manager will be paid in cash up to 200% of such base salary. If the Incentive
Pool exceeds the cash portion of incentive compensation and there is no
agreement between the Committee and respective Founding Manager regarding the
distribution of excess, such excess shall be paid to respective Founding
Manager in the form of restricted stock. The restricted stock will vest in
equal annual installments over a three-year period. In the event that a
Founding Manager's employment terminates with the Company for any reason other
than death or total disability, shares of restricted stock which have not yet
become vested shall be forfeited. Notwithstanding the preceding, upon the
occurrence of certain Change of Control Events, unvested shares subject to a
restricted stock award will become fully vested. A Founding Manager who
receives shares of
F-18
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
restricted stock will be entitled to cash dividends and voting rights for each
share of restricted stock issued under the Incentive Compensation Plan.
Included in personnel expense for the years ended December 31, 1998, 1997 and
1996, respectively, are $2.4 million, $1.0 million and $318,000 related to the
plan.
(b) Operating Leases
The Company and its subsidiaries lease certain facilities under
noncancelable operating leases, which expire at various dates through 2004.
Total rental expenditures under these leases were approximately $6.1 million,
$2.6 million and $389,000 for the years ended December 31, 1998, 1997 and
1996, respectively. The Company and its subsidiaries lease office property and
equipment from various equipment leasing companies under operating lease
agreements, including $1.1 million in fixed assets that were sold and leased
back. The excess of the sales proceeds over the book value of the assets sold
and leased back of $327,000 was recognized as a deferred gain and is being
amortized over the lease term. Total lease commitments available under these
facilities are $14.1 million, all of which was utilized as of December 31,
1998. These operating leases expire from May 1999 to December 2002. Total
rental expenditures under these office property and equipment leases were
approximately $2.4 million, $1.1 million and $143,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Minimum rental commitments for these leases are as follows (dollars in
thousands):
<TABLE>
<S> <C>
Years ending December 31:
1999.......................................................... $ 9,051
2000.......................................................... 7,960
2001.......................................................... 5,632
2002.......................................................... 2,742
2003.......................................................... 529
-------
$25,914
=======
</TABLE>
(c) Loan Commitments
Commitments to fund loans are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination
clauses. Also, external market forces affect the probability of commitments
being exercised; therefore, total commitments outstanding do not necessarily
represent future cash requirements. The Company quotes interest rates to
borrowers which are subject to change by the Company. Although the Company
generally honors such interest rate quotes, the quotes do not constitute
interest rate locks, minimizing any potential interest rate risk exposure. The
Company had commitments to fund loans of approximately $1.2 billion at
December 31, 1998.
The Company had commitments to sell loans of $300 million at December 31,
1998 to an investment banker.
As of December 31, 1998, the Company was committed to provide an investment
banking firm with a first right of refusal to underwrite loans sold through
securitization by the Company in an aggregate amount of $1.0 billion, none of
which was fulfilled at December 31, 1998. The investment banking firm is
obligated to provide an aggregation facility for the duration of this
commitment.
(d) Contingencies
The Company has entered into loan sale agreements with investors in the
normal course of business which include representations and warranties
customary to the mortgage banking industry. Violations of these
F-19
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
representations and warranties may require the Company to repurchase loans
previously sold or to reimburse investors for losses incurred. In the opinion
of management, the potential exposure related to the Company's loan sale
agreements is adequately provided for in the allowance for losses.
The Company sold $221.2 million in loans in December 1997 and $96.2 million
in loans in December 1996 under agreements to repurchase those loans which
were delinquent at specific dates in March 1998 and January 1997,
respectively. In accordance with these loan sale agreements, the Company
repurchased loans with an outstanding principal balance of approximately $20.8
million, $3.5 million and $1.7 million, respectively, for the years ended
December 31, 1998, 1997 and 1996.
At December 31, 1998 and 1997, included in accounts payable and accrued
liabilities are approximately $2.4 million and $1.6 million, respectively, in
allowances for losses related to possible off-balance sheet recourse and
repurchase agreement provisions. The activity in the allowance related to
possible off-balance sheet recourse and repurchase agreement provisions for
the years ended December 31 is summarized as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Balance, beginning of year............................. $ 1,597 $ 100
Provision for losses................................... 6,400 3,986
Charge-offs, net....................................... (5,615) (2,489)
------- -------
Balance, end of year................................... $ 2,382 $ 1,597
======= =======
</TABLE>
(e) Residual Interests
The Company entered into an agreement to purchase a residual interest in
securitization totaling $52.4 million. This residual interest originated from
a securitization pool, including $250 million of loans sold in a whole loan
sale transaction by the Company in December 1998. The Company intends to sell
this residual interest in a NIMS transaction in the first quarter of 1999.
(f) Litigation
The Company is a party to legal actions arising in the normal course of
business. In the opinion of management, based in part on discussions with
outside legal counsel, resolution of such matters will not have a material
adverse effect on the Company.
(11) INCOME TAXES
Components of the Company's provision for income taxes for the years ended
December 31, 1998 and 1997 and 1996 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ----
<S> <C> <C> <C>
Current:
Federal........................................... $ 7,184 $ 3,739 $650
State............................................. 1,804 1,201 192
------- ------- ----
8,988 4,940 842
Deferred:
Federal........................................... 9,512 5,789 66
State............................................. 2,693 2,120 62
------- ------- ----
12,205 7,909 128
------- ------- ----
$21,193 $12,849 $970
======= ======= ====
</TABLE>
F-20
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Actual income taxes differ from the amount determined by applying the
statutory Federal rate of 35% for the years ended December 31, 1998 and 1997
and 34% for the year ended December 31, 1996 to earnings before income taxes
as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ----
<S> <C> <C> <C>
Computed "expected" income taxes................. $18,303 $10,707 $784
State tax, net of federal benefit................ 2,923 2,157 174
Valuation allowance.............................. -- -- (28)
Other............................................ (33) (15) 40
------- ------- ----
$21,193 $12,849 $970
======= ======= ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December
31 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997
------- ------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses.............................. $ 1,471 $1,111
State taxes............................................ 1,838 1,126
Office property and equipment.......................... 330 250
Other.................................................. 196 --
------- ------
3,835 2,487
Valuation allowance.................................. -- --
------- ------
3,835 2,487
------- ------
Deferred tax liabilities:
Non-cash gain from securitization...................... 22,144 9,401
Deferred loan fees..................................... 1,933 1,098
Other.................................................. -- 25
------- ------
24,077 10,524
------- ------
Net deferred income tax liability.................... $20,242 $8,037
======= ======
</TABLE>
There was no valuation allowance for deferred tax assets at December 31,
1998 and 1997, respectively.
Deferred tax assets are initially recognized for differences between the
financial statement carrying amount and the tax bases of assets and
liabilities which will result in future deductible amounts and operating loss
and tax credit carryforwards. A valuation allowance is then established to
reduce that deferred tax asset to the level at which it is "more likely than
not" that the tax benefits will be realized. Realization of tax benefits of
deductible temporary differences and operating loss or tax credit
carryforwards depends on having sufficient taxable income of an appropriate
character within the carryback and carryforward periods. Sources of taxable
income of an appropriate character that may allow for the realization of tax
benefits include: (1) taxable income in the current year or prior years that
is available through carryback, (2) future taxable income that will result
from the reversal of existing taxable temporary differences, (3) future
taxable income generated by future operations and (4) tax planning strategies
that, if necessary, would be implemented to accelerate taxable income into
years in which net operating losses might otherwise expire.
Based upon the level of historical taxable income and projections for future
taxable income over the periods in which the deferred tax assets are
deductible, management believes it is more likely than not that the Company
will realize deferred tax assets existing at December 31, 1998 and 1997.
F-21
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(12) EMPLOYEE BENEFIT PLANS
On July 1, 1996, the Company established the New Century Financial
Corporation 401(k) Profit Sharing Plan (the Plan) for the benefit of eligible
employees and their beneficiaries. The Plan is a defined contribution 401(k)
plan which allows eligible employees to save for retirement through pretax
contributions. Under the Plan, employees of the Company may contribute up to
the statutory limit. The Company will match 25% of the first 6% of
compensation contributed by the employee. An additional Company contribution
may be made at the discretion of the Company. Contributions to the Plan by the
Company for the years ended December 31, 1998, 1997 and 1996 were $407,000,
$194,000 and $47,000, respectively.
In October 1997, the Company established the New Century Financial
Corporation Employee Stock Purchase Plan (the Plan) for the benefit of
eligible employees. This plan is a compensatory plan as defined in accordance
with APB 25. The plan allows employees to contribute, through payroll
deductions, to the Plan. Plan periods are six months, with the exception of
the first plan period, which was October 13, 1997 to December 31, 1997. At the
end of each plan period, the employees purchase stock at a price equal to 90%
of the lesser of the market price at the beginning and end of the plan period.
Since its inception, the Company has issued 38,566 shares of common stock
under this plan.
In December 1998, the Company established the New Century Financial
Corporation Deferred Compensation Plan for the benefit of eligible employees.
The plan allows eligible employees to defer payment of a portion of their
salary to future years. The Company does not contribute to the plan.
(13) STOCKHOLDERS' EQUITY
(a) Convertible Preferred Stock
On November 22, 1995, the Company issued 5,000,000 shares of Series A
preferred stock. In December 1995, the Company issued an additional 500,000
shares of Series A preferred stock. The Company received $2.75 million from
the issuances. The holders of the Series A preferred stock are entitled to
convert each share of Series A preferred stock into one share of common stock.
Upon liquidation, the Series A preferred stock is entitled to receive, in
preference to any payment on Series B preferred stock and common stock, an
amount equal to $0.50 per share and a 12% annual return.
On November 22, 1995, the Company issued 320,000 shares of Series B
preferred stock. The Company received $160,000 from this issue. The holders of
the Series B preferred stock are entitled to convert each share of Series B
preferred stock into one share of common stock. Upon liquidation, after the
payments to Series A preferred stock as described above, Series B preferred
stock is entitled to receive, in preference to any payment on common stock, an
amount equal to $0.50 per share and a 6% annual return.
In May 1997, all shares of Series A and B preferred stock were converted to
common stock.
In June 1997, after the Company completed its Initial Public Offering, the
Company increased its authorized preferred stock to 7,500,000 shares.
In November 1998, the Company issued 20,000 shares of Series 1998-A
Convertible Preferred stock to US Bancorp. The Company received $20.0 million
from this issue. The holders of Series 1998-A preferred stock are entitled to
convert each share of Series 1998-A preferred stock into 136.24 shares of
common stock. The Series 1998-A preferred stock earns a dividend at a rate of
7.5% per annum, payable quarterly. At December 31, 1998, accrued dividends of
$158,000 are included in accounts payable and accrued liabilities. Upon
liquidation, the holders of Series 1998-A preferred stock are entitled to
receive, in preference to any payment on common stock, an amount equal to
$1,000 per share and any accumulated unpaid dividends.
F-22
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(b) Common Stock
On November 22, 1995, the Company issued 528,618 shares of common stock. The
Company received $240,000 from this issue.
In May 1997, the Company issued 304,501 shares of common stock upon the
exercise by such stockholders of certain warrants to purchase common stock of
the Company. The Company received approximately $1.1 million from this issue.
The Company also issued 3,424,255 shares of common stock under cashless
exercises of warrants at exercise prices of $1.00 to $3.50 per share.
In May 1997, the Company issued to Comerica Incorporated (Comerica) 545,000
shares of common stock for $4,087,500.
In May 1997, pursuant to certain Restricted Stock Award Agreements, the
Company issued 92,500 shares of restricted stock to each of the four Founding
Managers. The Company recorded $2.8 million in deferred compensation expense
and additional paid in capital at the grant date. The deferred compensation
expense is being amortized over the vesting period of the restricted stock,
which is in equal installments in May 1998, 1999 and 2000. Included in
personnel expenses for the year ended December 31, 1998 is $1,286,000 related
to the amortization of deferred compensation.
In June 1997, the Company completed its Initial Public Offering, issuing
3,132,500 new shares of common stock, and raising approximately $31.0 million
in proceeds, net of offering expenses of approximately $1 million. The Company
also increased its authorized shares of common stock to 45,000,000 shares.
In January 1998, the Company issued 188,150 shares of common stock in
connection with the acquisition of Primewest.
In April 1998, the Company issued 16,402 shares of restricted stock to two
of its Founding Managers in partial payment of its 1997 bonus obligation under
the Founding Managers' Incentive Compensation Plan.
In May 1998, the Company received 43,676 shares of common stock from its
Founding Managers as payment of the Company's withholding obligations upon
vesting of the first installment of the May 1997 Founding Managers' Restricted
Stock Awards. The fair market value of the stock at the time it was paid to
the Company was $422,000. These shares are held as Treasury stock as of
December 31, 1998.
(c) Stock Split
On September 19, 1996, the Company authorized a 2-for-1 stock split of all
classes of stock. All references in the consolidated financial statements to
number of shares, per share amounts and market prices of the Company's
preferred and common stock have been retroactively restated to reflect the
increased number of preferred and common shares outstanding.
(d) Warrants
Each share of common stock issued on November 22, 1995 had a warrant
attached which entitled the holder to purchase 2.78 shares of common stock of
the Company at $1.00, $2.00 and $3.00 per share. All of these warrants were
exercised in May 1997.
In December 1996, the Company issued warrants to purchase an aggregate of
512,384 shares of common stock, exercisable at $3.50 per share, to the
Company's existing stockholders at that time. Such warrants were granted to
stockholders on a pro rata basis in satisfaction of the stockholders'
respective preemptive rights. These warrants were exercised in May 1997.
F-23
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In May 1997, the Company issued to Comerica warrants to purchase 100,000
shares of common stock at $11.00 per share and in September 1997, the Company
issued an additional 50,000 warrants at $11.00 per share pursuant to the
completion of certain services by Comerica with respect to servicing the
Company's loans. During 1998, Comerica forfeited the right to receive an
additional 183,333 warrants due to non-completion of certain services. The
warrants granted are exercisable over five years, and vest in equal
installments on December 31, 1997, 1998 and 1999. The Company believes that
the warrant prices approximated fair market value of the Company's stock at
the date of grant. In accordance with FASB No. 123, $675,000 has been
determined to be the value of the stock warrants issued on the measurement
date. Included in other assets is prepaid commitment costs of $90,000 at
December 31, 1998 and included in general and administrative expense (note 15)
is a credit for reversal of $441,000 in amortization recorded in 1997 for
warrants forfeited, partially offset by $228,000 in amortization expense for
the year ended December 31, 1998.
(14) STOCK OPTIONS
In 1995, the Company adopted and received stockholders' approval of the
qualified 1995 Stock Option Plan (the Plan) pursuant to which the Company's
Board of Directors may grant stock options to officers and key employees. The
Plan authorizes grants of options to purchase up to 2.5 million shares of
authorized but unissued common stock. Stock options granted under the Plan
have terms of ten years and vest over a range from December 1996 to December
2003. The Company has also issued the following grants of nonqualified stock
options outside the Plan: (i) 120,000 granted to certain executive officers of
the Company in December 1996, vesting over a three-year period and expiring
ten years from the grant date, (ii) 7,500 granted to a former director of the
Company in May 1997, vesting over five years and expiring ten years from the
grant date, and (iii) 10,000 granted to a nonemployee director of the Company
in September 1998, vesting over three years and expiring ten years from the
grant date. All stock options are granted with an exercise price not less than
the stock's fair market value at the date of grant.
At December 31, 1998, there were 410,680 shares available for grant under
the Plan. Of the options outstanding at December 31, 1998 and 1997, 919,344
and 683,280, respectively, were exercisable with weighted-average exercise
prices of $7.52 and $6.41, respectively. The per share weighted-average fair
value of stock options granted during the year ended December 31, 1998 and
1997 was $5.07 and $5.20, respectively, at the date of grant using the Black-
Scholes option-pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Expected life (years)........................................ 4.5 4.5
Risk-free interest rate...................................... 6.0% 6.0%
Volatility................................................... 55.0% 60.0%
Expected dividend yield...................................... -- --
==== ====
</TABLE>
F-24
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company applies APB Opinion No. 25 in accounting for its plans and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," the Company's net earnings would have been reduced to the
pro forma amounts indicated below (dollars in thousands, except per share
amounts):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Net earnings (loss):
As reported..................................... $31,115 $17,743 $1,335
Pro forma....................................... 30,018 16,108 1,329
Basic earnings (loss) per share:
As reported..................................... 2.20 2.18 2.53
Pro forma....................................... 2.12 1.98 2.51
======= ======= ======
Diluted earnings (loss) per share:
As reported..................................... 2.03 1.40 .20
Pro forma....................................... 1.96 1.27 .20
======= ======= ======
</TABLE>
Stock options activity during the year ended December 31, 1998 and 1997 and
1996 is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance at December 31, 1995..................... 73,000 $0.50
Granted........................................ 595,600 1.92
Canceled....................................... (4,000) 0.50
--------- -----
Balance at December 31, 1996..................... 664,600 1.77
Granted........................................ 1,399,120 9.41
Exercised...................................... (41,100) 1.02
Canceled....................................... (84,550) 3.00
--------- -----
Balance at December 31, 1997..................... 1,938,070 7.25
Granted........................................ 510,900 9.88
Exercised...................................... (108,150) 1.18
Canceled....................................... (273,700) 7.49
--------- -----
Balance at December 31, 1998..................... 2,067,120 $8.19
========= =====
</TABLE>
F-25
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1998, the range of exercise prices, the number outstanding,
weighted-average remaining term and weighted-average exercise price of options
outstanding and the number exercisable and weighted-average price of options
currently exercisable are as follows:
<TABLE>
<CAPTION>
NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES OUTSTANDING REMAINING TERM EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------------ ------------ ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.50- 0.50
91,550 7.23 $ 0.50 25,550 $ 0.50
1.75- 1.75
110,750 7.75 1.75 26,600 1.75
3.50- 3.50
152,000 8.00 3.50 89,200 3.50
7.50- 7.50
708,370 8.40 7.50 605,370 7.50
8.38- 8.38
92,500 9.75 8.38 -- --
9.00- 9.00
13,000 9.88 9.00 -- --
9.50- 9.53
98,600 9.46 9.52 -- --
10.00-10.75
232,850 9.49 10.19 -- --
11.00-11.50
483,300 8.76 11.10 142,999 11.00
12.50-12.50
21,900 9.00 12.50 5,400 12.50
15.00-15.00
10,000 9.67 15.00 10,000 15.00
17.00-17.00
52,300 8.75 17.00 14,225 17.00
============= ======= ==== ====== ======= ======
</TABLE>
(15) GENERAL AND ADMINISTRATIVE EXPENSES
A summary of general and administrative expenses for the year ended December
31, 1998 and 1997 and 1996 follows (dollars in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Other administrative expenses........................ $ 3,888 $ 3,259 $ 568
Occupancy............................................ 7,576 2,555 389
Depreciation and amortization........................ 2,550 1,848 260
Telephone............................................ 3,467 1,577 336
Postage and courier.................................. 2,892 1,443 204
Travel and entertainment............................. 2,901 1,374 277
Equipment rental..................................... 4,207 1,371 184
Office supplies...................................... 1,673 1,074 238
------- ------- ------
$29,154 $14,501 $2,456
======= ======= ======
</TABLE>
(16) FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company estimates the fair value of financial instruments using
available market information and appropriate valuation methods. However,
considerable judgment is necessarily required to interpret market data to
develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that could be realized in
a current market exchange. The use of different market assumptions or
estimation methods may have a material impact on the estimated fair value
amounts.
F-26
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The estimated fair values of the Company's financial instruments as of
December 31, 1998 and 1997 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1998
-------------------
CARRYING
VALUE FAIR VALUE
-------- ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents.............................. $ 30,875 $ 30,875
Loans receivable held for sale, net.................... 356,975 367,836
Residual interests in securitizations.................. 205,395 205,395
Interest only securities............................... 5,027 5,027
Financial liabilities:
Warehouse and aggregation lines of credit.............. 345,843 345,843
Residual financing payable............................. 122,298 122,298
Notes payable.......................................... 3,985 3,985
Off-balance sheet items:
Commitment to purchase residual interests.............. -- --
======== ========
<CAPTION>
1997
-------------------
CARRYING
VALUE FAIR VALUE
-------- ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents.............................. $ 12,701 $ 12,701
Loans receivable held for sale, net.................... 276,506 280,310
Residual interests in securitizations.................. 97,260 97,260
Financial liabilities:
Warehouse and aggregation lines of credit.............. 255,363 255,363
Residual financing payable............................. 53,427 53,427
Notes payable.......................................... 3,222 3,222
======== ========
</TABLE>
The following methods and assumptions were used in estimating the Company's
fair value disclosures for financial instruments.
Cash and cash equivalents: The fair value of cash and cash equivalents
approximates the carrying value reported in the balance sheet.
Loans receivable held for sale: The fair value of loans receivable held for
sale is determined in the aggregate based on outstanding whole loan
commitments from investors or current investor yield requirements.
Residual interests in securitizations: The fair value of residual interests
in securitizations is determined by calculating the net present value of
estimated future cash flows using a discount rate commensurate with the risks
involved.
Interest only securities: The fair value of interest only securities is
determined by calculating the net present value of estimated future cash flows
using a discount rate commensurate with the risks involved.
Warehouse lines of credit and residual financing payable: The carrying value
reported in the balance sheet approximates fair value as the warehouse lines
of credit and residual financing payable are due upon demand and bear interest
at a rate that approximates current market interest rates for similar type
lines of credit.
F-27
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Notes payable: The fair value of notes payable is determined by discounting
expected cash payments at the current market interest rate over the term of
the notes payable.
Commitments to purchase residual interests: The fair value of commitments to
purchase residual interests is determined by calculating the net present value
of estimated future cash flows using a discount rate commensurate with the
risks involved.
(17) CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
The following is condensed information as to the financial condition,
results of operations and cash flows of New Century Financial Corporation:
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1998 1997
-------- -------
<S> <C> <C>
ASSETS
Cash and cash equivalents.................................. $ 567 $ --
Investment in and receivable from subsidiaries............. 112,312 59,161
Other assets............................................... 2,137 1,734
-------- -------
$115,016 $60,895
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities.......................................... $ 403 $ 59
Stockholders' equity....................................... 114,613 60,836
-------- -------
$115,016 $60,895
======== =======
</TABLE>
CONDENSED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
------------------------
1998 1997 1996
------- ------- ------
<S> <C> <C> <C>
Interest income....................................... $ 44 $ 230 $ 17
Equity in undistributed earnings of subsidiaries...... 32,940 18,991 1,419
------- ------- ------
32,984 19,221 1,436
------- ------- ------
Personnel............................................. 1,979 1,149 104
General and administrative............................ 236 1,106 46
Professional services................................. 289 126 10
------- ------- ------
2,504 2,381 160
------- ------- ------
Earnings before income tax benefit.................. 30,480 16,840 1,276
Income tax benefit.................................... (635) (903) (59)
------- ------- ------
Net earnings........................................ $31,115 $17,743 $1,335
======= ======= ======
</TABLE>
F-28
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
CONDENSED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
---------------------------
1998 1997 1996
-------- -------- -------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings.................................... $ 31,115 $ 17,743 $ 1,335
Adjustments to reconcile net earnings to net
cash used in operating activities:
Depreciation and amortization................. 1,035 1,797 11
Increase in other assets...................... (1,027) (908) (94)
Increase (decrease) in other liabilities...... 186 49 (39)
Equity in undistributed earnings of
subsidiaries................................. (32,940) (18,991) (1,419)
-------- -------- -------
Net cash used in operating activities....... (1,631) (310) (206)
-------- -------- -------
Cash flows from investing activity--increase in
investment in and receivables from subsidiary.... (18,211) (35,897) (941)
-------- -------- -------
Cash flows from financing activity--proceeds from
issuance of common stock......................... 20,409 36,203 --
-------- -------- -------
Net increase (decrease) in cash and cash
equivalents................................ 567 (4) (1,147)
Cash and cash equivalents, beginning of period.... -- 4 1,151
-------- -------- -------
Cash and cash equivalents, end of period.......... $ 567 $ -- $ 4
======== ======== =======
</TABLE>
(18) EARNINGS PER SHARE
The following table illustrates the computation of basic and diluted
earnings per share (dollars in thousands, except per share amounts):
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------------
1998 1997 1996
----------- ----------- ----------
<S> <C> <C> <C>
Numerator:
Income available to common stockholders... $ 31,115 $ 17,743 $ 1,335
=========== =========== ==========
Denominator:
Denominator for basic earnings per share--
weighted-average common shares
outstanding.............................. 14,165,307 8,139,052 528,618
Effect of dilutive securities:
Convertible preferred stock............... 283,678 2,375,834 5,820,000
Restricted stock award.................... 258,397 197,926 --
Warrants.................................. 22,879 1,226,463 244,987
Stock options............................. 591,332 766,459 139,491
----------- ----------- ----------
Denominator for diluted earnings per share.. 15,321,593 12,705,734 6,733,096
=========== =========== ==========
Basic earnings per share.................... $ 2.20 $ 2.18 $ 2.53
=========== =========== ==========
Diluted earnings per share.................. $ 2.03 $ 1.40 $ 0.20
=========== =========== ==========
</TABLE>
For 1998, 798,850 stock options and 50,000 warrants, for 1997, 138,500 stock
options, and for 1996, 3,452,224 warrants and 382,600 stock options whose
exercise price exceeds the average market price of the common shares are
excluded from dilutive shares.
F-29
<PAGE>
NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(19) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data are presented below by quarter for the
years ended December 31, 1998 and 1997 (dollars in thousands, except per share
amounts):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1998 1998 1998 1998
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Gain on sale of loans............. $22,403 $30,557 $27,781 $24,319
Interest income................... 13,124 11,152 13,186 10,193
Servicing income.................. 8,624 6,593 4,539 3,936
------- ------- ------- -------
Total revenues.................. 44,151 48,302 45,506 38,448
------- ------- ------- -------
Operating expenses................ 30,617 33,368 32,495 27,619
------- ------- ------- -------
Earnings before income taxes...... 13,534 14,934 13,011 10,829
Income taxes...................... 4,752 6,326 5,519 4,596
------- ------- ------- -------
Net earnings.................... $ 8,782 $ 8,608 $ 7,492 $ 6,233
======= ======= ======= =======
Basic earnings per share.......... $ 0.62 $ 0.61 $ 0.53 $ 0.45
======= ======= ======= =======
Diluted earnings per share........ $ 0.55 $ 0.57 $ 0.50 $ 0.42
======= ======= ======= =======
<CAPTION>
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1997 1997 1997 1997
------------ ------------- -------- ---------
<S> <C> <C> <C> <C>
Gain on sale of loans............. $16,435 $24,394 $17,098 $10,012
Interest income................... 11,414 6,313 5,073 2,271
Servicing income.................. 2,666 1,793 862 302
------- ------- ------- -------
Total revenues.................. 30,515 32,500 23,033 12,585
------- ------- ------- -------
Operating expenses................ 24,854 20,362 14,286 8,539
------- ------- ------- -------
Earnings before income taxes...... 5,661 12,138 8,747 4,046
Income taxes...................... 2,378 5,098 3,674 1,699
------- ------- ------- -------
Net earnings.................... $ 3,283 $ 7,040 $ 5,073 $ 2,347
======= ======= ======= =======
Basic earnings per share.......... $ 0.29 $ 0.50 $ 1.15 $ 4.44
======= ======= ======= =======
Diluted earnings per share........ $ 0.22 $ 0.46 $ 0.46 $ 0.25
======= ======= ======= =======
</TABLE>
(20) LIQUIDITY
The Company's business requires substantial cash to support its operating
activities and growth plans. As a result, the Company is dependent on its
warehouse and aggregation lines of credit and its residual financing facility
in order to finance its continued operations. If the Company's principal
lenders decided to terminate or not to renew any of these credit facilities
with the Company, the loss of borrowing capacity would have a material adverse
impact on the Company's results of operations unless the Company found a
suitable alternative source.
F-30
<PAGE>
EXHIBIT 4.2
INCORPORATED UNDER THE LAWS OF
DELAWARE ON NOVEMBER 17, 1995
___________ ____________
NUMBER SHARES
___________ ____________
NEW CENTURY FINANCIAL CORPORATION
Authorized Shares: 20,000 Series 1998A Convertible Preferred Stock
THIS CERTIFIES THAT ____________________________________________________ is the
registered holder of ______________________________________________ Shares of
Series 1998A Convertible Preferred Stock of the above named Corporation.
HEREINAFTER DESIGNATED "THE CORPORATION", TRANSFERABLE ON THE SHARE REGISTERED
OF THE CORPORATION UPON SURRENDER OF THIS CERTIFICATE PROPERLY ENDORSED OR
ASSIGNED.
This certificate and the shares represented thereby shall be held subject
to all of the provisions of the Certificate of Incorporation and the By-laws of
said Corporation, a copy of each of which is on file at the office of the
Corporation, and made a part hereof as fully as though the provisions of said
Certificate of Incorporation and By-laws were imprinted in full on this
certificate, to all of which the holder of this certificate, by acceptance
hereof, assents and agrees to be bound.
Any stockholder may obtain from the principal office of the Corporation,
upon request and without charge, a statement of the number of shares
constituting each class or series of stock and the designation thereof; and a
copy of the powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights and the By-laws.
WITNESS THE SEAL OF THE CORPORATION AND THE SIGNATURES OF ITS DULY
AUTHORIZED OFFICERS.
DATED:
_____________________________ ______________________________
Brad A. Morrice, Secretary Brad A. Morrice, President
<PAGE>
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED WITHOUT (I) AN
OPINION OF COUNSEL SATISFACTORY TO THIS CORPORATION THAT SUCH TRANSFER MAY
LAWFULLY BY MADE WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND ALL APPLICABLE STATE SECURITIES LAWS OR (II) SUCH REGISTRATION.
NO. .
CERTIFICATE
FOR
.
SHARES
OF
PREFERRED STOCK
ISSUED TO
.
____________
DATED
.
____________
For Value Received, _______________ hereby sell assign and transfer unto
________________________________________________________________________________
_______________________________________________________________ Shares of the
Preferred Stock represented by the within Certificate; and do hereby
irrevocably constitute and appoint ____________________________________________.
Attorney to transfer the said Stock on the books of the within named Corporation
with full power of substitution in the premises.
Dated ________________________19__________
In presence of _______________________________________________
_____________________________.
NOTICE. THE SIGNATURE OF THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS
WRITTEN UPON THE FACE OF THE CERTIFICATE, IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT, OR ANY CHANGE WHATEVER.
<PAGE>
EXHIBIT 10.36
THIRD AMENDMENT TO
-------------------
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
-------------------------------------------
THIS THIRD AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT (the
"Amendment") dated as of November 23, 1998 by and among NEW CENTURY MORTGAGE
CORPORATION, a California corporation (the"Company:), the lenders party to the
Credit Agreement referred to below (collectively, the "Lenders" and
individually, a "Lender"), and U.S. BANK NATIONAL ASSOCIATION, a national
banking association, in its capacity as agent for the Lenders (in such capacity,
together with any successor agents appointed thereunder, the "Agent").
WITNESSETH THAT:
WHEREAS, the Company, the Lenders and the Agent are parties to a Third
Amended and Restated Credit Agreement dated as of May 29, 1998, as amended by a
First Amendment to Third Amended and Restated Credit Agreement dated as of July
27, 1998 and a Second Amendment to Third Amended and Restated Credit Agreement
dated as of September 30, 1998 (as so amended, the "Credit Agreement"), pursuant
to which the Lenders provide the Company with a revolving mortgage warehousing
credit facility; and
WHEREAS, the Company and the Lenders have agreed to amend the Credit
Agreement upon the terms and conditions herein set forth;
NOW, THEREFORE, for value received, the receipt and sufficiency of which
are hereby acknowledged, the Company and the Lenders agree as follows:
1. Certain Defined Terms. Each capitalized term used herein without
---------------------
being defined herein that is defined in the Credit Agreement shall have the
meaning given to it therein.
2. Amendments to Credit Agreement. The Credit Agreement is hereby amended
------------------------------
as follows:
(a) Restricted Payments. Section 4.13 is hereby amended in its entirety to
--------------------
read as follows:
4.13 Restricted Payments. The Company and NCFC will not make any
-------------------
Restricted Payments, other than (a) dividends paid by NCFC on its Series
1998A Convertible Preferred Stock in an amount not to exceed $1,500,000 per
annum, and (b) dividends paid by the Company to NCFC to enable NCFC to pay
such dividends in an amount not to exceed $1,500,000 per annum, in each
case provided that, both before and after giving effect to such dividend
payments, the Borrowers and NCFC are in compliance with the covenants set
<PAGE>
forth in Section 4 of this Agreement and no Event of Default or Unmatured
Event of Default has occurred and is continuing.
3. Conditions to Effectiveness of this Amendment. This Amendment shall
---------------------------------------------
become effective when the Agent shall have received at least thirteen (13)
counterparts of this Amendment, duly executed by the Borrower and the Required
Lenders and acknowledged by NCFC, provided the following conditions are
satisfied:
(a) Before and after giving effect to this Amendment, the representations
and warranties of the Company in Section 3 of the Credit Agreement, Section 5 of
the Pledge and Security Agreement and Section 4 of the Servicing Security
Agreement, and of NCFC in Section 15 of the Guaranty, shall be true and correct
as though made on the date hereof, except for changes that are permitted by the
terms of the Credit Agreement.
(b) Before and after giving effect to this Amendment, no Event of Default
and no Unmatured Event of Default shall have occurred and be continuing.
(c) No material adverse change in the business, assets, financial
condition or prospects of the Company or NCFC shall have occurred since the
Effective Date.
(d) The following, each duly executed or certified, as the case may be,
and dated as of the date of delivery thereof:
(i) copy of resolutions of the Board of Directors of the Company,
certified by its Secretary or Assistant Secretary, authorizing or ratifying
the execution, delivery and performance of this Amendment;
(ii) a certified copy of any amendment or restatement of the
Articles of Incorporation or the By-laws of the Company made or entered
following the date of the most recent certified copies thereof furnished to
the Lenders;
(iii) certified copies of all documents evidencing any necessary
corporate action, consent or governmental or regulatory approval (if any)
with respect to this Amendment; and
(iv) such other documents, instruments, opinions and approvals as
the Agent may reasonably request.
6. Acknowledgments. The Company and each Lender acknowledge that, as
---------------
amended hereby, the Credit Agreement remains in full force and effect with
respect to the Company and the Lenders, and that each reference to the Credit
Agreement in the Loan Documents shall refer to the Credit Agreement as amended
-2-
<PAGE>
hereby. The Company confirms and acknowledges that it will continue to comply
with the covenants set out in the Credit Agreement and the other Loan Documents,
as amended hereby, and that its representations and warranties set out in the
Credit Agreement and the other Loan Documents, as amended hereby, are true and
correct as of the date of this Amendment. The Company further represents and
warrants that (i) the execution, delivery and performance of this Amendment is
within its corporate powers and has been duly authorized by all necessary
corporate action; (ii) this Amendment has been duly executed and delivered by
the Company and constitutes the legal, valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms (subject
to limitations as to enforceability which might result from bankruptcy,
insolvency, or other similar laws affecting creditors' rights generally and
general principles of equity) and (iii) no Events of Default or Unmatured Events
of Default exist.
7. General.
-------
(a) The Company agrees to reimburse the Agent upon demand for all
reasonable expenses (including reasonable attorneys fees and legal expenses)
incurred by the Agent in the preparation, negotiation and execution of this
Amendment and any other document required to be furnished herewith, and to pay
and save the Lenders harmless from all liability for any stamp or other taxes
which may be payable with respect to the execution or delivery of this
Amendment, which obligations of The Company shall survive any termination of the
Credit Agreement.
(b) This Amendment may be executed in as many counterparts as may be
deemed necessary or convenient, and by the different parties hereto on separate
counterparts, each of which, when so executed, shall be deemed an original but
all such counterparts shall constitute but one and the same instrument.
(c) Any provision of this Amendment which is prohibited or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent
of such prohibition or unenforceability without invalidating the remaining
portions hereof or affecting the validity or enforceability of such provisions
in any other jurisdiction.
(d) This Amendment shall be governed by, and construed in accordance with,
the internal law, and not the law of conflicts, of the State of Minnesota, but
giving effect to federal laws applicable to national banks.
(e) This Amendment shall be binding upon the Company, the Lenders, the
Agent and their respective successors and assigns, and shall inure to the
benefit of the Company, the Lenders, the Agent and the successors and assigns of
the Lenders and the Agent.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed as of the day and year first above written.
NEW CENTURY MORTGAGE
CORPORATION
By /s/ Pat Flanagan
---------------------------
Its Executive Vice President
------------------------
U.S. BANK NATIONAL ASSOCIATION,
By /s/ David T. Piet
----------------------------
Its Senior Vice President
------------------------
GUARANTY FEDERAL BANK, FSB
By /s/ W. James Meintjes
----------------------------
Its Vice President
------------------------
[Signature Page for Fourth Amendment to
Third Amended and Restated Credit Agreement]
-4-
<PAGE>
COMERICA BANK
By /s/ David R. Chirchill
-----------------------------------
Its Assistant Vice President
-------------------------------
FIRST UNION NATIONAL BANK
By /s/ C. L. Simms
------------------------------------
Its VP
-------------------------------
RESIDENTIAL FUNDING CORPORATION
By /s/ illegible
------------------------------------
Its Director
--------------------------------
BANK ONE, TEXAS, N.A.
By /s/ Mark L. Freeman
------------------------------------
Its Vice President
--------------------------------
[Signature Page for Third Amendment to
Third Amended and Restated Credit Agreement]
<PAGE>
THE BANK OF NEW YORK
By /s/ Robert W. Pierson
-----------------------------------
Its Vice President
--------------------------------
THE FIRST NATIONAL BANK OF CHICAGO
By /s/ Scott Mellin
-----------------------------------
Its Assistant Vice President
--------------------------------
NATIONSBANK OF TEXAS, N.A.
By /s/ Bob L. Caston
-----------------------------------
Its Senior Vice President
--------------------------------
FLEET BANK, N.A.
By____________________________________
Its_______________________________
[Signature Page for Third Amendment to
Third Amended and Restated Credit Agreement]
<PAGE>
THE UNDERSIGNED, NEW CENTURY FINANCIAL CORPORATION, HEREBY (1) AGREES
THAT EACH REFERENCE TO THE CREDIT AGREEMENT, OR WORDS OF SIMILAR IMPORT,
CONTAINED IN THE THIRD AMENDED AND RESTATED GUARANTY DATED AS OF MAY 29, 1998
(THE "GUARANTY") BY THE UNDERSIGNED TO THE LENDERS AND THE AGENT, SHALL BE A
REFERENCE TO THE CREDIT AGREEMENT AS AMENDED BY THE FOREGOING AMENDMENT, (2)
CONFIRMS THAT THE GUARANTY SHALL REMAIN IN FULL FORCE AND EFFECT AFTER GIVING
EFFECT TO THE FOREGOING AMENDMENT, AND (3) CONFIRMS AND ACKNOWLEDGES THAT ITS
REPRESENTATIONS AND WARRANTIES SET FORTH IN SECTION 15 OF THE GUARANTY ARE TRUE
AND CORRECT AS OF THE DATE OF THE FOREGOING AMENDMENT.
NEW CENTURY FINANCIAL CORPORATION
By /s/ Robert K. Cole
----------------------------------
Its CEO
-------------------------------
<PAGE>
EXHIBIT 10.37
FOURTH AMENDMENT TO
-------------------
THIRD AMENDED AND RESTATED CREDIT AGREEMENT
-------------------------------------------
THIS FOURTH AMENDMENT TO THIRD AMENDED AND RESTATED CREDIT AGREEMENT (the
"Amendment") dated as of December 11, 1998 by and among NEW CENTURY MORTGAGE
CORPORATION, a California corporation (the "Company"), the lenders party to the
Credit Agreement referred to below (collectively, the "Lenders" and
individually, a "Lender") and U.S. BANK NATIONAL ASSOCIATION, a national banking
association, in its capacity as agent for the Lenders (in such capacity,
together with any successor agents appointed thereunder, the "Agent").
WITNESSETH THAT:
WHEREAS, the Company, the Lenders and the Agent are parties to a Third
Amended and Restated Credit Agreement dated as of May 29, 1998, as amended by a
First Amendment to Third Amended and Restated Credit Agreement dated as of July
27, 1998, a Second Amendment to Third Amended and Restated Credit Agreement
dated as of September 30, 1998 and a Third Amendment to Third Amended and
Restated Credit Agreement dated as of November 24, 1998 (as so amended, the
"Credit Agreement"), pursuant to which the Lenders provide the Company with a
revolving mortgage warehousing credit facility; and
WHEREAS, the Company and the Lenders have agreed to amend the Credit
Agreement upon the terms and conditions herein set forth;
NOW, THEREFORE, for value received, the receipt and sufficiency of which
are hereby acknowledged, the Company and the Lenders agree as follows:
1. Certain Defined Terms. Each capitalized term used herein without
---------------------
being defined herein that is defined in the Credit Agreement shall have the
meaning given to it therein.
2. Amendments to Credit Agreement. The Credit Agreement is hereby
------------------------------
amended as follows:
(a) New Definitions. Section 1.01 is hereby amended by adding the
---------------
following definitions in the correct alphabetical order:
"NCCC": means NC Capital Corporation, a California corporation.
----
<PAGE>
"NCCC Guaranty": means the guaranty in the form of Exhibit C-1, as
-------------
the same may be amended, supplemented or restated from time to time.
"Residual Finance Subsidiaries": means (a) NC Residual Corporation, a
-----------------------------
Delaware corporation, as long as it is a wholly-owned Subsidiary of
the Company and does not amend its Certificate of Incorporation as in
effect on December __, 1998, and (b) any other wholly-owned Subsidiary
of the Company or NCCC that, pursuant to its Articles or Certificate
of Incorporation, has a purpose limited to the ownership of Junior
Securitization Interests, the establishment of one or more
securitization trusts, issuing securities backed by such Junior
Securitization Interests, otherwise financing such Junior
Securitization Interests, and lawful activities incidental to and
necessary and convenient to the foregoing.
(b) Change of Control. The definition of "Change of Control" in Section
-----------------
1.01 is hereby amended by deleting clause (a) thereof and inserting the
following:
(a) NCFC not owning, directly or indirectly, all of the issued and
outstanding capital stock of the Company, or the Company not owning,
directly, all of the issued and outstanding capital stock of NCCC;
(c) Formation; Powers; Good Standing. Sections 3.01(a) and (b) are hereby
--------------------------------
amended in their entirety to read as follows:
(a) Formation and Powers. NCFC is a corporation duly organized,
--------------------
validly existing and in good standing under the laws of the State of
Delaware, the Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of
California, NCCC is a corporation duly organized, validly existing and
in good standing under the laws of the State of California, and each
of NCFC, the Company and NCCC has all requisite corporate power and
authority to own and operate its properties, to carry on its business
as now conducted and proposed to be conducted, to enter into and
perform each Loan Document to which it is or will be a party and to
carry out the transactions contemplated thereby.
(b) Good Standing. Each of NCFC, the Company and NCCC is in
-------------
good standing wherever necessary to carry on its business and
operations, except in jurisdictions in which the failure to be in good
standing would not preclude it from enforcing its rights with respect
to any material asset or expose it to any material liability.
-2-
<PAGE>
(d) Authorization; No Conflict; Governmental Consents; Binding Effect.
-----------------------------------------------------------------
Section 3.02 is hereby amended by deleting all references therein to "NCFC and
the Company" and inserting therefor "NCFC, the Company and NCCC."
(e) Litigation; Adverse Facts. Section 3.05 is hereby amended in its
-------------------------
entirety to read as follows:
3.05 Litigation; Adverse Facts. Except as set forth in Schedule
-------------------------
3.05, there is no action, suit, proceeding or arbitration at law or in
equity or before or by any federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality, domestic
or foreign, pending or, to the knowledge of NCFC, the Company or any of
their Subsidiaries, threatened against or affecting NCFC, the Company or
NCCC or any of their respective properties that would, if decided in a
manner adverse to it, result in any material adverse change in its
business, operations, properties, assets or condition (financial or
otherwise) or would materially adversely affect its ability to perform its
obligations under each Loan Document to which it is or will be a party, and
there is no basis known to it for any action, suit or proceeding which
would have such an effect. None of NCFC, the Company or NCCC is (i) in
violation of any applicable law if such violation materially adversely
affects or may materially adversely affect its business, operations,
properties, assets or condition (financial or otherwise) or (ii) subject to
or in violation of any final judgment, writ, injunction, decree, rule or
regulation of any court or federal, state, municipal or other governmental
department, commission, board, bureau, agency or instrumentality, domestic
or foreign, which could have a material adverse effect on its business,
operations, properties, assets or condition (financial or otherwise).
There is no action, suit, proceeding or investigation pending or, to the
knowledge of NCFC, the Company or NCCC, threatened against or affecting
NCFC, the Company or NCCC, which questions the validity or the
enforceability of any Loan Document.
(f) Other Agreements; Performance. Section 3.06 is hereby amended in its
-----------------------------
entirety to read as follows:
3.06 Other Agreements; Performance.
-----------------------------
(a) Agreements. None of NCFC, the Company or NCCC is a party
----------
to or subject to any contractual obligation or charter or other
internal restriction materially adversely affecting its business,
properties, assets, operations or condition (financial or otherwise).
(b) Performance. None of NCFC, the Company or NCCC is in
-----------
default in the performance, observance or fulfillment of any of the
obligations, covenants or conditions contained in any of its material
contractual obligations, and no condition exists which, with the
giving
-3-
<PAGE>
of notice or the lapse of time or both, would constitute such a
default, except where the consequences, direct or indirect, of such
default or defaults, if any, would not have a material adverse effect
on its business, properties, assets, operations or condition
(financial or otherwise). To the best knowledge of NCFC, the Company
and NCCC, the other parties to any of the contractual obligations of
NCFC, the Company or NCCC are not in default thereunder, except where
the consequences, direct or indirect, of such default or defaults, if
any, would not have a material adverse effect on its business,
properties, assets, operations or condition (financial or otherwise).
(g) Licenses and Permits. Section 3.13 is hereby amended in its entirety
--------------------
to read as follows:
3.13 Licenses and Permits. Each of NCFC, the Company and NCCC has
--------------------
all federal, state and local licenses and permits required to be maintained
in connection with and material to the current operation of its businesses,
and all such licenses and permits are valid and fully effective.
(h) Indebtedness. Section 4.08 is hereby amended in its entirety to read
------------
as follows:
4.08 Indebtedness. The Company and NCFC will not, and will not
------------
permit NCCC to, directly or indirectly, create, incur, assume, guarantee,
or otherwise become or remain directly or indirectly liable with respect
to, any Indebtedness, except:
(a) the Obligations;
(b) current liabilities not more than 90 days overdue, unless
contested in good faith by appropriate proceedings and any reserves
required by GAAP have been established, incurred by NCFC, the Company
or NCCC in the ordinary course of business otherwise than for money
borrowed;
(c) Indebtedness incurred to finance the purchase of equipment
and secured solely by Liens on such equipment, in an aggregate amount
not to exceed $7,500,000;
(d) Indebtedness incurred to finance Junior Securitization
Interests which Indebtedness is secured only by such Junior
Securitization Interests, provided, such Indebtedness does not exceed
--------
75% of the value of such Junior Securitization Interests determined in
accordance with GAAP;
-4-
<PAGE>
(e) intercompany Indebtedness of NCFC to the Company or NCCC in
an aggregate amount not to exceed $1,000,000;
(f) intercompany indebtedness of the Company or NCCC to NCFC
incurred in the ordinary course of business;
(g) obligations under gestation repurchase agreements or similar
arrangements of the type described in Section 4.09(f);
(h) obligations in respect of letters of credit issued by USBNA
for the account of the Company or NCFC with an aggregate face amount
not to exceed $1,250,000;
(i) Indebtedness incurred by the Company in connection with the
Salomon REO Agreement in an aggregate amount not to exceed $3,000,000;
and
(j) intercompany Indebtedness between the Company and NCCC
incurred in the ordinary course of business.
(i) Liens. Section 4.09 is hereby amended in its entirety to read as
-----
follows:
4.09 Liens. The Company and NCFC will not, and will not permit NCCC
-----
to, directly or indirectly, create, incur, assume or permit to exist any
Lien with respect to any property now owned or hereafter acquired by NCFC,
the Company or NCCC, or any income or profits therefrom, except:
(a) the security interests granted to the Agent for the benefit
of the Lenders, FBS Business Finance Corp. (with respect to
obligations described in Section 4.08(c)) and USBNA (with respect to
obligations described in Section 4.08(g)) under the Loan Documents;
(b) Liens in connection with deposits or pledges to secure
payment of workers' compensation, unemployment insurance, old age
pensions or other social security obligations, in the ordinary course
of business of NCFC or the Company;
(c) Liens for taxes, fees, assessments and governmental charges
not delinquent or which are being contested in good faith by
appropriate proceedings and for which appropriate reserves have been
established in accordance with GAAP;
(d) encumbrances consisting of zoning regulations, easements,
rights of way, survey exceptions and other similar restrictions on the
use of real property and minor irregularities in title thereto which
do not materially impair their use in the operation of its business;
-5-
<PAGE>
(e) Liens on equipment arising under any capitalized lease
obligation or other purchase money Liens on equipment acquired after
the Signing Date to secure Indebtedness permitted pursuant to Section
4.08(c);
(f) Liens incurred in connection with gestation repurchase
agreements or similar arrangements under which NCFC or its
Subsidiaries are required to repurchase Mortgage-backed Securities or
Mortgage Loans from any Lender or other counterparty reasonably
satisfactory to the Agent; provided, that such gestation repurchase
agreements are entered into in the ordinary course of business in
contemplation of the subsequent non-recourse sale of such Mortgage-
backed Securities or Mortgage Loans;
(g) Liens on Junior Securitization Interests which secure
Indebtedness permitted by Section 4.08(d);
(h) Liens arising under Hedging Arrangements; and
(i) a pledge of the stock of REO Sub to SBRC pursuant to the
Salomon REO Agreement.
(j) Investments. Section 4.10 is hereby amended in its entirety to read as
-----------
follows:
4.10 Investments. The Company and NCFC will not, and will not permit
-----------
NCCC to, directly or indirectly, make or own any Investment, except
Investments in:
(a) Marketable direct obligations issued or unconditionally
guaranteed by the United States Government or issued by any agency
thereof and backed by the full faith and credit of the United States,
in each case maturing within one year from the date of acquisition
thereof.
(b) Marketable direct obligations issued by any state of the
United States of America or any political subdivision of any such
state or any public instrumentality thereof maturing within one year
from the date of acquisition thereof and, at the time of acquisition,
having the highest rating obtainable from either Standard & Poor's
Ratings
-6-
<PAGE>
Group, a division of McGraw Hill, Inc., or Moody's Investors Service,
Inc.
(c) Commercial paper maturing no more than one year from the
date of creation thereof and, at the time of acquisition, having the
highest rating obtainable from either Standard & Poor's Ratings Group,
a division of McGraw Hill, Inc., or Moody's Investors Service, Inc.
(d) In the case of the Company, Mortgage Loans originated or
acquired by the Company in the ordinary course of the Company's
business, in the case of NCCC, Mortgage Loans acquired from the
Company in the ordinary course of business, and in the case of NCFC,
other consumer debt obligations originated or acquired by NCFC in the
ordinary course of NCFC's business.
(e) Certificates of deposits or bankers acceptances issued by
any of the Lenders or any other commercial bank organized under the
laws of the United States or any State thereof and having a combined
capital and surplus of at least $500,000,000, or by United States
offices of foreign banks having the highest rating obtainable from a
nationally recognized rating agency, in each case maturing within one
year from the date of acquisition thereof.
(f) Investments in mutual funds that invest substantially all of
their assets in Investments of the types described in subsections (a),
(b), (c) and (e) of this Section 4.10.
(g) The capital stock of any Subsidiary (subject to the
limitations set forth in Sections 4.12 and 4.17).
(h) In the case of the Company and NCCC, loans to NCFC in an
aggregate amount not to exceed $1,000,000.
(i) Direct equity investments made by the Company, to the extent
no Event of Default or Unmatured Event of Default has occurred and is
continuing, or would occur as a result therof, in or loans to Persons
in the mortgage origination business, in an aggregate amount not to
exceed $2,500,000.
(j) Investments made or to be made by the Company, in an amount
not to exceed $1,250,000 in the aggregate, and a guaranty made by
NCFC, pursuant to a Strategic Alliance Agreement by and among the
Company, Qualified Financial Services, Inc., a Colorado
-7-
<PAGE>
corporation, Qualified Financial Services, Inc., a California
corporation, Simon Mundy, an individual, and David V.V. Thais, an
individual.
(k) Investments arising under Hedging Arrangements.
(l) In the case of NCFC, loans to the Company and NCCC.
(m) Intercompany Indebtedness between the Company and NCCC
incurred in the ordinary course of business.
(k) Guarantees. Section 4.11 is hereby amended in its entirety to read as
----------
follows:
4.11 Guarantees. The Company and NCFC will not, directly or
----------
indirectly, create or become or be liable with respect to any Guarantee,
other than:
(a) the Guaranty and the NCCC Guaranty;
(b) Guarantees by NCFC of Indebtedness of the Company secured
by liens described in Section 4.09(e), in an amount not to exceed
$7,500,000;
(c) Guarantees by NCFC of the Company's obligations under (i)
gestation repurchase agreements or similar arrangements of the type
described in Section 4.09(f), or (ii) the Strategic Alliance Agreement
described in Section 4.10(j); and
(d) Guarantees by the Company of the obligations of NCCC or
Residual Finance Subsidiaries in respect of Indebtedness permitted by
Sections 4.08 (d) and (g).
(l) Restriction on Fundamental Changes. Section 4.12 is hereby amended by
----------------------------------
deleting the word "and" at the end of subsection (b) thereof, by deleting the
period at the end of subsection (c) thereof and inserting a semicolon therefor
followed by the word "and" and inserting the following new subsection (d) at the
end thereof:
(d) The Company may transfer to NCCC (i) Mortgage Loans,
provided that such Mortgage Loans are subject to the security interest
created under the Pledge and Security Agreement prior to such
transfer, but will be released from such security interest, and the
Warehousing Loans will be repaid with the proceeds of Indebtedness
incurred by NCCC of the type described in Section 4.08(g),
-8-
<PAGE>
simultaneously with such transfer, (ii) Junior Securitization
Interests, and (iii) fixed assets used in the operation of NCCC.
(m) Subsidiaries. Section 4.17 is hereby amended in its entirety to read
------------
as follows:
4.17 Subsidiaries. (a) The Company will not create or acquire any
------------
Subsidiaries other than REO Sub, NCCC and Residual Finance Subsidiaries,
and (b) NCFC will not create or acquire any Subsidiaries other than (i) the
Company, (ii) REO Sub, (iii) NCCC, (iv) Residual Finance Subsidiaries, and
(v) Subsidiaries engaged solely in any business involving the origination,
acquisition, servicing and sale of consumer obligations.
(n) Affiliate Transactions. Section 4.18 is hereby amended in its entirety
----------------------
to read as follows:
4.18 Affiliate Transactions. The Company and NCFC will not enter
----------------------
into any transaction with an Affiliate of the Company or NCFC, except:
(a) transactions in the ordinary course of business on terms no
less favorable to the Company or NCFC than those that would be
obtained in an arm's-length transaction;
(b) Indebtedness described in Sections 4.08(e) and 4.08(j);
(c) guaranties of Indebtedness described in Section 4.11;
(d) transfers of assets by the Company to NCCC and REO Sub as
described in Sections 4.12(c) and 4.12(d); and
(e) transfers by the Company and NCCC of Junior Securitization
Interests to Residual Finance Subsidiaries.
(o) Events of Default. Section 6.01 is hereby amended in its entirety to
-----------------
read as follows:
6.01 Events of Default. The occurrence of any one or more of the
-----------------
following events shall constitute an Event of Default:
(a) The Company shall fail to make when due, whether by
acceleration of maturity or otherwise, any payment of principal of any
Note, or shall fail to pay within five days after the same becomes
due, whether by acceleration of maturity or otherwise, any payment of
interest on any Note or any fee or other amount required to be paid to
-9-
<PAGE>
the Agent or any Lender pursuant to this Agreement or any other Loan
Document; or
(b) Any representation or warranty made or deemed made by the
Company in this Agreement or by the Company, NCFC or NCCC in any other
Loan Documents or in any certificate, statement, report or document
furnished to the Agent or the Lenders pursuant to or in connection
with any Loan Document shall be untrue or misleading in any material
respect on the date as of which the facts set forth are stated or
certified or deemed stated or certified; or
(c) The Company shall fail to comply with any agreement,
covenant, condition, provision or term contained in the Pledge and
Security Agreement, in the Servicing Security Agreement or in Section
4.02(a), 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.14, 4.15, 4.16, 4.17,
4.20, 4.21 or 4.22, or shall fail to comply with any agreement,
covenant, condition, provision or term contained in Section 4.02(b) or
4.04 and such failure shall not be remedied within 10 calendar days
after an executive officer of the Company shall have become aware of
such failure to comply; or
(d) The Company, NCFC or NCCC shall fail to comply with any
other agreement, covenant, condition, provision or term contained in
this Agreement or any other Loan Document then in effect (other than
those hereinabove set forth in this Section 6.01) and such failure to
comply is not remedied within 30 calendar days after the earliest of
(i) the date the Agent has given the Company written notice of the
occurrence thereof, (ii) the date the Company gives notice of such
failure to the Agent or (iii) the date the Company should have given
such notice of such failure to the Agent pursuant to Section
4.01(e)(ii); or
(e) Any creditor or representative of any creditor of the
Company, NCFC or NCCC shall become entitled to declare any
Indebtedness in the amount of $250,000 or more owing on any bond,
debenture, note or other evidence of Indebtedness for borrowed money
to be due and payable prior to its expressed maturity, whether or not
such Indebtedness is actually declared to be immediately due and
payable, or any such Indebtedness becomes due and payable prior to its
expressed maturity by reason of any default by the Company, NCFC or
NCCC in the performance or observance of any obligation or condition
and such default shall not have been effectively waived or shall not
have been cured within any grace period allowed therefor or any such
Indebtedness shall have become due by its terms and shall not have
been promptly paid or extended; or
-10-
<PAGE>
(f) The Company, NCFC or NCCC shall become insolvent or shall
generally not or admit in writing its inability to pay its debts as
they mature or shall apply for, shall consent to, or shall acquiesce
in the appointment of a custodian, trustee or receiver of the Company,
NCFC or NCCC or for a substantial part of the property thereof or, in
the absence of such application, consent or acquiescence, a custodian,
trustee or receiver shall be appointed for the Company, NCFC or NCCC
or for a substantial part of the property thereof and shall not be
discharged within 60 days, or the Company, NCFC or NCCC shall make an
assignment for the benefit of creditors; or
(g) Any bankruptcy, reorganization, debt arrangement or other
proceeding under any bankruptcy or insolvency law shall be instituted
by or against the Company, NCFC or NCCC, and, if instituted against
the Company, NCFC or NCCC, shall have been consented to or acquiesced
in by the Company, NCFC or NCCC, or shall remain undismissed for 60
days, or an order for relief shall have been entered against the
Company, NCFC or NCCC; or
(h) Any dissolution or liquidation proceeding shall be
instituted by or against the Company, NCFC or NCCC and, if instituted
against the Company, NCFC or NCCC, shall be consented to or acquiesced
in by the Company, NCFC or NCCC or such Subsidiary or shall remain for
60 days undismissed; or
(i) A judgment or judgments for the payment of money in excess
of the sum of $250,000 in the aggregate shall be rendered against the
Company, NCFC or NCCC and either (i) the judgment creditor executes on
such judgment or (ii) such judgment remains unpaid or undischarged for
more than 60 days from the date of entry thereof or such longer period
during which execution of such judgment shall be stayed during an
appeal from such judgment.
(j) Any execution or attachment shall be issued whereby any
substantial part of the property of the Company, NCFC or NCCC shall be
taken or attempted to be taken and the same shall not have been
vacated or stayed within 30 days after the issuance thereof; or
(k) The Pledge and Security Agreement, the Servicing Security
Agreement, the Guaranty or the NCCC Guaranty shall, at any time, cease
to be in full force and effect or shall be judicially declared null
and void, or the validity or enforceability thereof shall be contested
by the Company, NCFC or NCCC, or the Agent for the benefit of the
Lenders shall cease to have a valid and perfected security interest
having the
-11-
<PAGE>
priority contemplated under the Pledge and Security Agreement or the
Servicing Security Agreement in any part of the Collateral described
therein, other than by action or inaction of the Agent, unless the
Company shall, within two Business Days after the earlier of the date
it receives notice thereof from the Agent or the date an officer of
the Company has knowledge thereof, repay the outstanding Loans in an
amount sufficient to reduce the aggregate outstanding principal
balance of the Loans to the aggregate Warehousing Collateral Value of
the Collateral; or
(l) A Change of Control shall occur.
(p) Amendments, Waivers and Modification Fees. Article VIII is hereby
-----------------------------------------
amended by adding a new Section 8.16 thereto to read as follows:
8.16 Amendments, Waivers and Modification Fees. The Company agrees
-----------------------------------------
to pay to the Agent for the account of each Lender which provides its
written consent to an amendment, waiver or other modification of the Loan
Documents on or before the date such amendment, waiver or other
modification becomes effective as a result of the written approval thereof
by the requisite number of Lenders required by the Loan Documents, a
processing fee of $1,500, said fee to be payable promptly following such
effective date; provided, however, that such fee shall not apply to the
first two such amendments, waivers or other modifications hereunder during
any continuous one year period (calculated from the date of this
Agreement).
(q) Exhibit C-1. The Credit Agreement is amended by adding Exhibit C-1
-----------
hereto as Exhibit C-1 to the Credit Agreement.
3. Conditions to Effectiveness of this Amendment. This Amendment shall
---------------------------------------------
become effective when the Agent shall have received at least thirteen (13)
counterparts of this Amendment, duly executed by the Company and the Required
Lenders and acknowledged by NCFC, provided the following conditions are
satisfied:
(a) Before and after giving effect to this Amendment, the representations
and warranties of the Company in Section 3 of the Credit Agreement, Section 5 of
the Pledge and Security Agreement and Section 4 of the Servicing Security
Agreement, of NCFC in Section 15 of the Guaranty, and of NCCC in Section 15 of
the NCCC Guaranty shall be true and correct as though made on the date hereof,
except for changes that are permitted by the terms of the Credit Agreement.
(b) Before and after giving effect to this Amendment, no Event of Default
and no Unmatured Event of Default shall have occurred and be continuing.
-12-
<PAGE>
(c) No material adverse change in the business, assets, financial
condition or prospects of the Company or NCFC shall have occurred since the
December 31, 1997.
(d) The Agent shall have received the following, each duly executed or
certified, as the case may be, and dated as of the date of delivery thereof:
(i) copy of resolutions of the Board of Directors of the Company,
certified by its respective Secretary or Assistant Secretary, authorizing
or ratifying the execution, delivery and performance of this Amendment;
(ii) a certified copy of any amendment or restatement of the
Articles of Incorporation or the By-laws of the Company made or entered
following the date of the most recent certified copies thereof furnished to
the Lenders;
(iii) certified copies of all documents evidencing any necessary
corporate action, consent or governmental or regulatory approval (if any)
with respect to this Amendment;
(iv) the NCCC Guaranty, executed by the parties thereto;
(v) a certificate signed by the Secretary or an Assistant Secretary
of NCCC certifying (A) as to the names, incumbency and true signatures of
the respective persons authorized to execute and deliver this Amendment and
each Loan Document to which it is or will be a party and (B) that the
Agent and the Lenders may conclusively rely on such certificate until the
Agent shall have received a further certification of its Secretary or an
Assistant Secretary canceling or amending such certificate and submitting
the names, incumbency and signatures of the officers named in such further
certificate;
(vi) a copy of the Articles of Incorporation of NCCC with all
amendments thereto, certified by the appropriate governmental official of
the jurisdiction of its respective incorporation;
(vii) certificates of good standing for NCCC in the jurisdiction of
its incorporation and in each of the jurisdictions in which it is required
to be qualified to do business, certified by the appropriate governmental
officials;
(viii) a certificate of the Secretary or an Assistant Secretary of
NCCC certifying to a true and correct copy of its respective bylaws, as
amended as of the date of this Amendment; and
(ix) such other documents, instruments, opinions and approvals as
the Agent may reasonably request.
-13-
<PAGE>
(e) The Agent shall have received the amendment fee required by Section
8.16 of the Credit Agreement as amended by this Amendment.
4. Acknowledgments. The Company and each Lender acknowledge that, as
---------------
amended hereby, the Credit Agreement remains in full force and effect with
respect to the Company and the Lenders, and that each reference to the Credit
Agreement in the Loan Documents shall refer to the Credit Agreement as amended
hereby. The Company confirms and acknowledges that it will continue to comply
with the covenants set out in the Credit Agreement and the other Loan Documents,
as amended hereby, and that its representations and warranties set out in the
Credit Agreement and the other Loan Documents, as amended hereby, are true and
correct as of the date of this Amendment. The Company represents and warrants
that (i) the execution, delivery and performance of this Amendment is within its
corporate powers and has been duly authorized by all necessary corporate action;
(ii) this Amendment has been duly executed and delivered by the Company and
constitutes the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms (subject to limitations as to
enforceability which might result from bankruptcy, insolvency, or other similar
laws affecting creditors' rights generally and general principles of equity) and
(iii) no Events of Default or Unmatured Events of Default exist.
5. General.
-------
(a) The Company agrees to reimburse the Agent upon demand for all
reasonable expenses (including reasonable attorneys fees and legal expenses)
incurred by the Agent in the preparation, negotiation and execution of this
Amendment and any other document required to be furnished herewith, and to pay
and save the Lenders harmless from all liability for any stamp or other taxes
which may be payable with respect to the execution or delivery of this
Amendment, which obligations of the Company shall survive any termination of the
Credit Agreement.
(b) This Amendment may be executed in as many counterparts as may be
deemed necessary or convenient, and by the different parties hereto on separate
counterparts, each of which, when so executed, shall be deemed an original but
all such counterparts shall constitute but one and the same instrument.
(c) Any provision of this Amendment which is prohibited or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent
of such prohibition or unenforceability without invalidating the remaining
portions hereof or affecting the validity or enforceability of such provisions
in any other jurisdiction.
-14-
<PAGE>
(d) This Amendment shall be governed by, and construed in accordance with,
the internal law, and not the law of conflicts, of the State of Minnesota, but
giving effect to federal laws applicable to national banks.
(e) This Amendment shall be binding upon the Company, the Lenders, the
Agent and their respective successors and assigns, and shall inure to the
benefit of the Company, the Lenders, the Agent and the successors and assigns of
the Lenders and the Agent.
-15-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to
be executed as of the day and year first above written.
NEW CENTURY MORTGAGE
CORPORATION
By /s/ Pat Flanagan
-----------------------------
Its Executive Vice President
-------------------------
U.S. BANK NATIONAL ASSOCIATION,
By /s/ Edwin S. Jenkins
-----------------------------
Its Vice President
-------------------------
GUARANTY FEDERAL BANK, FSB
By /s/ W. James Meintjes
-----------------------------
Its Vice President
-------------------------
[Signature Page for Fourth Amendment to
Third Amended and Restated Credit Agreement]
-16-
<PAGE>
COMERICA BANK
By /s/ David R. Chirchill
----------------------------------------
Its Assistant Vice President
-------------------------------------
FIRST UNION NATIONAL BANK
By /s/ C. L. Simms
----------------------------------------
Its VP
-------------------------------------
RESIDENTIAL FUNDING CORPORATION
By /s/ illegible
----------------------------------------
Its Director
-------------------------------------
BANK ONE, TEXAS, N.A.
By /s/ Mark L. Freeman
----------------------------------------
Its Vice President
-------------------------------------
[Signature Page for Fourth Amendment to
Third Amended and Restated Credit Agreement]
<PAGE>
THE BANK OF NEW YORK
By /s/ Robert W. Pierson
-----------------------------------
Its Vice President
------------------------------
THE FIRST NATIONAL BANK OF CHICAGO
By /s/ Scott Mellin
-----------------------------------
Its Assistant Vice President
--------------------------------
NATIONSBANK OF TEXAS, N.A.
By /s/ Carolyn Warren
------------------------------------
Its Senior Vice President
---------------------------------
FLEET BANK, N.A.
By ___________________________________
Its________________________________
[Signature Page for Fourth Amendment to
Third Amended and Restated Credit Agreement]
<PAGE>
THE UNDERSIGNED, NEW CENTURY FINANCIAL CORPORATION, HEREBY (1) AGREES
THAT EACH REFERENCE TO THE CREDIT AGREEMENT, OR WORDS OF SIMILAR IMPORT,
CONTAINED IN THE THIRD AMENDED AND RESTATED GUARANTY DATED AS OF MAY 29, 1998
(THE "GUARANTY") BY THE UNDERSIGNED TO THE LENDERS AND THE AGENT, SHALL BE A
REFERENCE TO THE CREDIT AGREEMENT AS AMENDED BY THE FOREGOING AMENDMENT, (2)
CONFIRMS THAT THE GUARANTY SHALL REMAIN IN FULL FORCE AND EFFECT AFTER GIVING
EFFECT TO THE FOREGOING AMENDMENT, AND (3) CONFIRMS AND ACKNOWLEDGES THAT ITS
REPRESENTATIONS AND WARRANTIES SET FORTH IN SECTION 15 OF THE GUARANTY ARE TRUE
AND CORRECT AS OF THE DATE OF THE FOREGOING AMENDMENT.
NEW CENTURY FINANCIAL CORPORATION
By /s/ Pat Flanagan
-----------------------------------
Its Executive Vice President
--------------------------------
<PAGE>
EXHIBIT 10.40
Schedule of Securitization Pools
Being Serviced by New Century Mortgage Corporation
as of January 31, 1999
<TABLE>
<CAPTION>
Date of
Securitization Name of Trust Underwriter Balance at 1/31/99 Sub-Servicer
- --------------- ------------- ----------- ------------------ ------------
<C> <S> <C> <C> <C>
2/27/97 1997-NC1 Salomon $ 37,738,703 Advanta
5/25/97 1997-NC2 Salomon $ 61,112,161 Advanta
6/28/97 1997-NC3 Salomon $ 52,677,964 Advanta
8/28/97 1997-NC4 Salomon $159,560,939 Advanta
9/24/97 1997-NC5 Greenwich $130,503,291 Advanta
12/25/97 1997-NC5 Salomon $128,058,209 None
12/25/97 1997-NC6 Greenwich $128,058,209 None
12/25/97 1998-NC1 Salomon $270,710,535 None
3/25/98 1998-NC3 Salomon $446,830,937 None
6/25/98 1998-NC4 Salomon $281,669,973 None
12/24/98 1998-NC5 Salomon $894,533,752 None
9/26/98 1998-NC6 Salomon $248,817,747 None
12/24/98 1998-NC7 Salomon $697,027,405 None
</TABLE>
<PAGE>
EXHIBIT 10.45
SHAREHOLDER AGREEMENT
SHAREHOLDER AGREEMENT, dated as of November 24, 1998, between U.S.
Bancorp, a Delaware corporation ("Purchaser"), and _________________
("Shareholder").
WHEREAS, Purchaser and New Century Financial Corporation, a Delaware
corporation (the "Company"), are entering into a Preferred Stock Purchase
Agreement, dated the date hereof (the "Purchase Agreement"), which provides for
the purchase of shares of the Company's Series 1998A Convertible Preferred Stock
by the Purchaser;
WHEREAS, Shareholder is the beneficial owner of certain shares of the
outstanding common stock, par value $.01 per share, of the Company (the "Common
Stock") as described herein; and
WHEREAS, as a condition to the willingness of Purchaser and the
Company to enter into the Purchase Agreement, Shareholder has agreed to certain
restrictions on his ability to sell the shares of Common Stock owned by him as
of the date hereof and any shares acquired by Shareholder after the date hereof
(including any shares acquired pursuant to the exercise of any rights to
purchase or otherwise acquire shares) (the "Shares") as provided in this
Agreement.
NOW THEREFORE, the parties hereby agree as follows:
1. Right of First Refusal.
----------------------
(a) If, after the date hereof, Shareholder should decide to sell,
transfer or otherwise dispose of any or all of the Shares (other than any
Permitted Transfers as defined in Section 3), Shareholder shall first offer to
sell such Shares to the Purchaser upon substantially the same terms and
conditions as Shareholder is proposing to sell such Shares to others.
(b) In the event that Shareholder is required to make an offer of
Shares to the Purchaser pursuant to this Agreement, Shareholder shall give the
Purchaser written notice of such offer, indicating the estimated price and the
general terms upon which Shareholder proposes to sell the Shares (the "Sale
Notice"). The Purchaser shall have ten business days from the date of receipt
of any Sale Notice to subscribe for the purchase of such Shares for the price
and upon the general terms specified in the Sale Notice by giving written notice
to Shareholder. The closing of the sale of the Shares to the Purchaser shall
take place within the later of (i) ten business days after the delivery of such
notice to Shareholder, or (ii) three business days after all necessary
regulatory or governmental filings, authorizations or approvals, if any,
required to consummate such purchase shall have been duly made or obtained and
all statutory waiting periods in respect thereof shall have expired; provided
--------
that, if such closing has not occurred within 90 days after the date of delivery
- ----
of Purchaser's notice to the Shareholder, the Shareholder shall have the right
to sell such Shares without regard to the limitations of paragraph (c) below.
-1-
<PAGE>
The Purchaser agrees that it will use all reasonable efforts to make any such
filing and obtain any such authorization or approval as promptly as practicable.
In the event that making such filing or obtaining such authorization or approval
takes more than 60 days after the delivery of such notice to Shareholder, the
Purchaser will use reasonable efforts to arrange for a six-month line of credit
for the Shareholder.
(c) In the event that the Purchaser fails to subscribe for the
purchase of all of the Shares offered to it pursuant to this Agreement within
ten business days after the date of receipt of a Sale Notice, Shareholder shall
have 120 days thereafter to sell the Shares at a price which is not less than
95% of the price specified in the Sale Notice and upon terms otherwise no more
favorable to the purchasers thereof than the terms specified in the Sale Notice.
In the event Shareholder has not sold the Shares within such 120 day period,
Shareholder shall not thereafter sell any Shares without first offering such
Shares to the Purchaser as required by this Agreement.
2. No Preclusive Agreements. The Shareholder shall not enter into
------------------------
any agreement or understanding with any Person (as defined in Section 5),
including any voting, lock-up or option agreement, the effect of which would be
inconsistent with or violate the provisions and agreements contained in Section
5 or would preclude the Purchaser from exercising its rights pursuant to Section
5.
3. Permitted Transfers. "Permitted Transfers" mean (a) any transfer
-------------------
of Shares by gift or otherwise not for value if, at or before the transfer,
the transferee executes an instrument (i) acknowledging that the Shares being
acquired are subject to the provisions of this Agreement, and (ii) agreeing to
be bound by the terms and conditions of this Agreement with respect to the
Shares, (b) any sale of Shares by a pledgee or by Shareholder after a default in
an obligation secured by a bona fide pledge of the Shares by Shareholder as
security for a loan (including a margin loan), (c) any transfer by Shareholder
to Shareholder's spouse in conjunction with any consent decree or other
settlement order relating to Shareholder's pending divorce proceeding and (d)
sales of Shares in accordance with Rule 144 promulgated under the Securities Act
of 1933, or any successor rule ("Rule 144 Sales"), not to exceed in the
aggregate during any 365-day period 0.50% of the shares of Common Stock
outstanding at the beginning of the calendar year of such sale, provided that no
Trigger Date (as defined in Section 5) has occurred within the nine-month period
prior to any such Rule 144 Sale and provided further that prior to each such
Rule 144 Sale (x) Shareholder shall have given Purchaser notice (the "144 Sale
Notice") in accordance with the special notice provisions of Section 14 hereof
of his intention to sell Shares in accordance with this Section 3(d) (which 144
Sale Notice shall include the number of Shares (the "144 Shares") that
Shareholder intends to sell and Shareholder's offer to sell such 144 Shares to
Purchaser at the price determined pursuant to this Section 3(d)) and (y) prior
to the expiration of the Acceptance Window (as defined in the next sentence),
Purchaser has not communicated (by phone or by facsimile) its agreement to
purchase the 144 Shares from Shareholder. For purposes of this Section 3(d),
the Acceptance Window shall end at 3:30 p.m. Central Time on the day of receipt
by Purchaser of the 144 Sale Notice unless such 144 Sale Notice was received
after 2:00 p.m. Central Time on a business day or was received on a non-business
day, in which case the Acceptance Window would end at 8:30 a.m. Central Time on
the next business day following receipt by Purchaser of the 144 Sale Notice. If
Purchaser timely
<PAGE>
agrees to purchase the 144 Shares, the purchase shall close by wire transfer of
same day funds within three business days of such agreement to purchase, and the
purchase price per share shall be the most recent sale price on the Nasdaq
market prior to time at which Purchaser communicated its acceptance to
Shareholder.
4. Representations and Warranties of Shareholder. Shareholder
---------------------------------------------
represents and warrants to Purchaser that:
(a) this Agreement has been duly executed and delivered by
Shareholder and constitutes a valid and legally binding obligation of
Shareholder enforceable in accordance with its terms;
(b) Shareholder is not subject to or obligated under any provision of
(i) any contract, (ii) any license, franchise or permit or (iii) any law,
regulation, order, judgment or decree which would be breached or violated by his
execution, delivery and performance of this Agreement and the consummation of
the transactions contemplated hereby;
(c) no authorization, consent or approval of, or any filing with, any
public body or authority is necessary for consummation by him of the
transactions contemplated by this Agreement;
(d) as of the date of this Agreement, the Shares consist of
_____________ shares of Common Stock (including ____________ shares of Common
Stock which represent shares that would be acquired by Shareholder if all of the
rights to purchase or otherwise acquire shares of Common Stock held by
Shareholder on the date hereof were exercised); and
(e) except as set forth on Schedule 1 hereto on the date hereof
Shareholder has, and he will have at the time of any purchase by Purchaser of
the Shares, good and marketable title to the Shares free and clear of all
claims, liens, charges, encumbrances and security interests.
5. Voting Agreement. The Shareholder hereby agrees that, if a
----------------
Trigger Date (as defined herein) occurs on or before December 31, 2002, in
connection with the Acquisition Transaction relating to the Trigger Date, he
shall vote (or cause to be voted) at any meeting of the holders of the Common
Stock, however called, or in connection with any written consent of the holders
of the Common Stock, the Shares held of record by him or with respect to which
he has or shares the power to vote, whether now owned or hereafter acquired, (i)
in favor of approval of a Purchaser Transaction (as defined herein) and any
actions required in furtherance thereof and hereof; and (ii) except as otherwise
agreed to in writing in advance by Purchaser, against (A) any action or
agreement that is intended, or could reasonably be expected, to impede,
interfere with, delay, postpone, or materially adversely affect a Purchaser
Transaction; (B) any Competing Transaction; (C) any change in a majority of the
persons who constitute the board of directors of the Company; or (D) any change
in the capitalization of the Company or any amendment of the Company's
Certificate of Incorporation or Bylaws. Such Shareholder shall not enter into
any agreement or understanding with any Person (as defined herein) the effect of
which would be inconsistent with or violate the provisions and agreements
contained in this Section 5.
<PAGE>
Notwithstanding the foregoing, the Shareholder shall have the right to vote at
any meeting of the Board of Directors of the Company (or by written consent of
the directors) in his capacity as a director of the Company in his sole
discretion and to comply with his fiduciary duties as a director of the Company
under applicable law.
For purposes of this Agreement, the following terms shall have the
following respective meanings:
"Acquisition Transaction" shall mean any of the following actions: (A) any
-----------------------
extraordinary corporate transaction, such as a merger, consolidation or other
business combination involving the Company; or (B) a sale, lease or transfer of
a material amount of assets of the Company, or a reorganization,
recapitalization, dissolution or liquidation of the Company.
"Competing Transaction" shall mean an Acquisition Transaction involving any
---------------------
Person other than Purchaser or an affiliate of Purchaser.
"Person" shall mean an individual, corporation, partnership, joint venture,
------
association, trust, unincorporated organization or other entity.
"Purchaser Transaction" shall mean an Acquisition Transaction by Purchaser
---------------------
or an affiliate of Purchaser.
"Trigger Date" shall mean the date the Company receives a bona fide
------------
proposal regarding an Acquisition Transaction (a "Proposal"), unless, within 15
days of the date Purchaser is notified in writing of all material terms of such
Proposal, the Purchaser has failed to make an offer that is similar to, and on
terms no less favorable to the Company and its shareholders than, such Proposal.
Notwithstanding the foregoing, a Trigger Event shall not be deemed to have
occurred if: (i) prior to the date of a definitive agreement with respect to a
Purchaser Transaction, the terms of the Proposal are improved or a new proposal
regarding an Acquisition Transaction that is financially superior to such
original proposal (a "Superior Proposal") is received by the Company and the
Purchaser fails to match such improved terms or such Superior Proposal within
five business days of Purchaser's receipt of written notice of all material
terms thereof; or (ii) the Purchaser withdraws its offer.
6. Irrevocable Proxy. The Shareholder agrees that he will, promptly
-----------------
following any Trigger Date, execute and deliver, or cause to be executed and
delivered, an irrevocable proxy, in form and substance reasonably satisfactory
to Purchaser, appointing Purchaser or any designee of Purchaser as such
Shareholder's agent, attorney and proxy, to vote (or cause to be voted) the
Shares held of record by him or with respect to which he has the power to vote,
whether now owned or hereafter acquired, in the manner provided in Section 5,
and to execute and deliver, or cause to be executed and delivered such
additional or further transfers, assignments, endorsements, consents and other
instruments as the Purchaser may reasonably request for the purpose of
effectively carrying out the transactions contemplated by Section 5 and to vest
the power to vote the Shares as contemplated by Section 5.
<PAGE>
7. Term. This Agreement shall terminate on the earlier of December
----
31, 2002 or the date on which all of Purchaser's rights under Section 8.4 of the
Purchase Agreement have terminated; provided that if a Trigger Date has occurred
prior to December 31, 2002, the Shareholder's agreement in Section 5 shall
survive with respect to such Trigger Date.
8. Capacity. The parties hereby agree that Shareholder is executing
--------
this Agreement solely in his individual capacity. Nothing contained in this
Agreement shall limit or otherwise affect Shareholder's conduct or exercise of
his fiduciary duties as a director of the Company.
9. Counterparts. This Agreement may be executed in separate
------------
counterparts, each of which will be an original and all of which taken together
shall constitute one and the same agreement, and any party hereto may execute
this Agreement by signing any such counterpart.
10. Severability. Whenever possible, each provision of this
------------
Agreement shall be interpreted in such a manner as to be effective and valid
under applicable law but if any provision of this Agreement is held to be
invalid, illegal or unenforceable under any applicable law or rule, the
validity, legality and enforceability of the other provisions of this Agreement
will not be affected or impaired thereby.
11. Successors and Assigns. This Agreement shall be binding upon and
----------------------
inure to the benefit of the parties hereto and their respective heirs, personal
representatives and, to the extent permitted by paragraph 12, successors and
assigns.
12. Assignment. This Agreement and the rights and obligations of the
----------
parties hereunder shall not be assignable, in whole or in part, by either party
without the prior written consent of the other party.
13. Modification, Amendment, Waiver or Termination. No provision of
----------------------------------------------
this Agreement may be modified, amended, waived or terminated except by an
instrument in writing signed by the parties to this Agreement. No course of
dealing between the parties will modify, amend, waive or terminate any provision
of this Agreement or any rights or obligations of any party under or by reason
of this Agreement.
14. Notices. Except for notices to be given in connection with a
-------
Rule 144 Sale in accordance with Section 3(d) herein, all notices, consents,
requests, instructions, approvals or other communications provided for herein
shall be in writing and delivered by personal delivery, overnight courier, mail,
or electronic facsimile addressed to the receiving party at the address set
forth herein. All such communications shall be effective when received.
Notices to the Purchaser: with a copy to:
- ------------------------ --------------
U.S. Bancorp Dorsey & Whitney LLP
601 Second Avenue South 220 South Sixth Street
<PAGE>
Minneapolis, Minnesota 55402 Minneapolis, Minnesota 55402
Attention: Lee R. Mitau, Esq. Attention: Elizabeth C. Hinck, Esq.
Telecopy: (612) 973-4333 Telecopy: (612) 340-8738
Notices to Shareholder: with a copy to:
- ---------------------- --------------
______________________
O'Melveny & Myers LLP
c/o New Century Financial Corporation 610 Newport Center Drive, 17th Floor
18400 Von Karman, Suite 1000 Newport Beach, California 92660
Irvine, California 92612 Attention: Karen K. Dreyfus, Esq.
Telecopy: 949-440-7033 Telecopy: 949-823-6994
Any party may change the address set forth above by notice to each other party
given as provided herein.
Any Rule 144 Sale Notice required to be given to Purchaser must be given by
a live telephone communication (i.e., not by voice-mail) directly to one of the
following persons or to such other persons as may be designated in writing from
time to time by Purchaser:
Ken Nelson, Telephone (612) 205-2190
Brett Boushele, Telephone (612) 205-2208
15. Governing Law. All matters relating to the interpretation,
-------------
construction, validity and enforcement of this Agreement shall be governed by
the internal laws of the state of Delaware, without giving effect to any choice
of law provisions thereof.
16. Third-Party Benefit. Nothing in this Agreement, express or
-------------------
implied, is intended to confer upon any other person any rights, remedies,
obligations or liabilities of any nature whatsoever.
17. Survival of Representations and Warranties. Notwithstanding any
------------------------------------------
investigation made by either of the parties hereto and notwithstanding the
Closing or any actions taken after the execution hereof, the representations and
warranties made in this Agreement shall survive for the term of this Agreement.
18. Remedies. The parties agree that money damages may not be an
--------
adequate remedy for any breach of the provisions of this Agreement and that any
party may, in its discretion, apply to any court of law or equity of competent
jurisdiction for specific performance and injunctive relief in order to enforce
or prevent any violations this Agreement, and any party against whom such
proceeding is brought hereby waives the claim or defense that such party has an
adequate remedy at law and agrees not to raise the defense that the other party
has an adequate remedy at law.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed as of the day and year first above written.
U.S. BANCORP
By ________________________
Its ____________________
SHAREHOLDER
________________________
<PAGE>
EXHIBIT 10.46
FIRST AMENDMENT
TO
EMPLOYMENT AGREEMENT
THIS FIRST AMENDMENT TO EMPLOYMENT AGREEMENT (the "First Amendment"),
dated as of November ___, 1998, is made and entered into by and among New
Century Financial Corporation, a Delaware corporation (the "Company"), and
________ (the "Executive").
R E C I T A L S
WHEREAS, the Company and the Executive are parties to that certain
Employment Agreement, effective as of June 1, 1997 (the "Agreement"); and
WHEREAS, the Company and the Executive desire to amend the Agreement
to extend the term of employment of the Executive under the Agreement;
NOW, THEREFORE, the parties agree as follows:
1. Term. Section 1.2 (a) of the Agreement shall be amended to read
----
in its entirety as follows:
"(a) December 31, 2002,".
2. No Waiver. No provision of this First Amendment may be modified,
---------
waived or discharged unless such waiver, modification or discharge is agreed to
in writing signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto of, or compliance
with, any condition or provision of this First Amendment to be performed by such
other party shall be deemed a waiver of similar or dissimilar provisions or
conditions at the same or at any prior or subsequent time.
3. Governing Law. This First Amendment shall be governed by and
-------------
construed in accordance with the laws of the State of California.
4. Counterparts. This First Amendment may be executed in one or more
------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
5. Legal Fees and Expenses. Should any party institute any action or
-----------------------
proceeding to enforce this First Amendment or any provision hereof, or for
damages by reason of any alleged breach of this First Amendment or any provision
hereof, or for a declaration of rights hereunder, the prevailing party in any
such action or proceeding shall be entitled to receive from the other party all
costs and expenses, including reasonable attorneys' fees, incurred by the
prevailing party in connection with such action or proceeding.
6. Assignment. This First Amendment and the rights, duties and
----------
obligations hereunder may not be assigned or delegated by any party without the
prior written consent of the
<PAGE>
other party and any such attempted assignment and delegation shall be void and
be of no effect. Notwithstanding the foregoing provisions of this Section 6, the
Company may assign or delegate its rights, duties and obligations hereunder to
any person or entity which succeeds to all or substantially all of the business
of the Company through merger, consolidation, reorganization or other business
combination or by acquisition of all or substantially all of the assets of the
Company; provided that such person assumes the Company's obligations under this
First Amendment and the Agreement in accordance with Section 5.1 of the
Agreement.
7. Arbitration. Any controversy, dispute, claim or other matter in
-----------
question arising out of or relating to this First Amendment shall be settled
pursuant to the arbitration provision in Section 6.9 of the Agreement.
8. Future Amendments. The Company and the Executive acknowledge and
-----------------
agree that they intend to amend and/or restate the Agreement after the date
hereof; provided that any amendment to or restatement of the Agreement after the
date hereof shall be subject to the approval of the Compensation Committee of
the Board of Directors of the Company; provided, further that the nonsolicit and
noncompete provisions of the Agreement shall not be amended or restated without
the consent of U.S. Bancorp, a Delaware corporation ("USB"), but only if such
consent is required pursuant to Section 7.1(i) of that certain Preferred Stock
Purchase Agreement, dated as of October 18, 1998, between the Company and USB.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this First
Amendment as of the date first above written.
NEW CENTURY FINANCIAL CORPORATION [NAME OF EXECUTIVE]
By:_______________________ ____________________________
Name:_____________________
Title:____________________
S-1
<PAGE>
EXHIBIT 10.47
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement ("Agreement') is effective as of January 1, 1999
between New Century Financial Corporation, a Delaware corporation (the
"Company"), and _______________ (the "Executive"). In consideration of the
mutual covenants and agreements set forth herein, the parties hereto agree as
follows:
ARTICLE I
EMPLOYMENT
----------
The Company hereby employs Executive and Executive accepts employment with
the Company upon the terms and conditions herein set forth.
1.1 Employment. The Company hereby employs Executive, and Executive agrees
----------
to serve, as the Company's ____________________ during the term of this
Agreement. Executive agrees to perform such duties as may be assigned to
Executive from time to time by the Board of Directors. Executive agrees to
devote substantially his full business time and attention and best efforts to
the affairs of the Company during the term of this Agreement.
1.2 Term. The term of employment of Executive hereunder will be for the
----
period commencing on the date of this Agreement and ending on the earliest of:
(a) December 31, 2002,
(b) The date of termination of Executive's employment in accordance
with Article IV of this Agreement,
(c) The date of Executive's voluntary retirement in accordance with
the Company's plans and policies; or
(d) The date of Executive's death.
The date set forth in Paragraph (a) above shall automatically be extended
by one (1) year (resulting in a three (3)-year term) on January 1, 2001 and on
each January 1 thereafter (an "Anniversary Date"), unless prior to any such
Anniversary Date either party gives written notice to the other party requesting
non-renewal or renegotiation of this Agreement.
ARTICLE II
COMPENSATION
------------
2.1 Base Salary. Effective January 1, 1999 and during the employment of
------------
Executive, the Company shall pay to the Executive a base salary at the rate of
$333,333 per year during 1999, and thereafter at a rate determined by the
Company's Board of Directors (the "Base Salary"); provided, however, that
Executive's Base Salary shall be increased by a minimum of 5.0% per year
commencing January 1, 2000. The Base Salary shall be payable in substantially
equal semi-monthly installments.
<PAGE>
2.2 Profit Sharing and Bonuses. Executive shall be eligible to
---------------------------
participate in the Founding Managers' Incentive Compensation Plan, or any
successor plan established by the Board of Directors. The parties agree that
the performance goals and potential incentive awards for Performance Periods
during 1999 and 2000 under the Founding Managers' Incentive Compensation Plan
shall be as set forth in Exhibit A hereto. The performance goals for
Performance Periods in 2001 and thereafter shall be the same as the goals and
award formulas for 2000, except that the Compensation Committee has the
discretion to reduce the applicable ratio of Before-Tax Net Income to Total
Stockholders' Equity.
2.3 Reimbursement of Expenses. The Executive shall be entitled to receive
--------------------------
prompt reimbursement of all reasonable expenses incurred by the Executive in
performing services hereunder, including all expenses of travel, car phone,
entertainment and living expenses while away from home on business at the
request of, or in the service of, the Company, provided that such expenses are
incurred and accounted for in accordance with the policies and procedures
established by the Company.
2.4 Automobile Expenses. The Company shall provide Executive with an
--------------------
automobile allowance of $500 per month. In addition, the Company shall at
Executive's request enter into a lease agreement to provide an automobile for
Executive's use subject to a reduction in Executive's Base Salary equal to the
amount of all lease and insurance payments. If Executive elects to utilize a
lease agreement, Executive will be responsible for all operating costs of the
vehicle and will provide the Company with records to substantiate the business
use of the vehicle. In such event, the Company will calculate and report an
amount of taxable income to Executive based on Executive's personal use of the
vehicle, such calculation and reporting to be in accordance with applicable IRS
guidelines.
2.5 Benefits. The Executive shall be entitled to participate in and be
---------
covered by all health, insurance, pension, disability insurance, physical exam
and other employee plans and benefits established by the Company (collectively
referred to herein as the "Company Benefit Plans") on the same terms as are
generally applicable to other senior executives of the Company, subject to
meeting applicable eligibility requirements.
2.6 Vacations and Holidays. During Executive's employment with the
-----------------------
Company, Executive shall be entitled to an annual vacation leave at full pay,
such vacation to be four weeks in each year of the term hereof or such greater
vacation benefits as may be provided for by the Company's vacation policies
applicable to senior executives. Executive shall be entitled to such holidays
as are established by the Company for all employees.
ARTICLE III
NON-COMPETITION, CONFIDENTIALITY AND NONDISCLOSURE
--------------------------------------------------
3.1 Confidentiality. Executive will not during Executive's employment by
----------------
the Company or thereafter at any time disclose, directly or indirectly, to any
person or entity or use for Executive's own benefit any trade secrets or
confidential information relating to the Company's business operations,
marketing data, business plans, strategies, employees, negotiations and
contracts with other companies, or any other subject matter pertaining to the
business of the Company or any of its clients, customers, consultants,
licensees, or affiliates,
2
<PAGE>
known, learned, or acquired by Executive during the period of Executive's
employment by the Company (collectively "Confidential Information"), except as
may be necessary in the ordinary course of performing Executive's particular
duties as an employee of the Company.
3.2 Return of Confidential Material. Executive shall promptly deliver to
--------------------------------
the Company on termination of Executive's employment with the Company, whether
or not for cause and whatever the reason, or at any time the Company may so
request, all memoranda, notes, records, reports, manuals, drawings, blueprints,
and any other documents of a confidential nature belonging to the Company,
including all copies of such materials which Executive may then possess or have
under Executive's control. Upon termination of Executive's employment by the
Company, Executive shall not take any document, data, or other material of any
nature containing or pertaining to the proprietary information of the Company.
3.3 No Competing Employment. During the term of this Agreement and, if
------------------------
Executive terminates this Agreement, for a period ending one year thereafter,
or, if longer, for any period during which Executive receives any compensation
from the Company hereunder (subject to the right of Executive to waive any right
to receive further compensation from the Company) (the "Restricted Period"), the
Executive shall not, unless he receives the prior written consent of the
Company, directly or indirectly own an interest in, manage, operate, join,
control, lend money or render financial assistance to, as an officer, employee,
partner, stockholder, consultant or otherwise, any individual, partnership,
firm, corporation or other business organization or entity that, at such time
directly competes with, or intends to compete with, the Company or its
affiliates in the business of, underwriting, purchasing, securitizing, selling
or servicing subprime credit grade secured loans or any other principal line of
business engaged in by the Company at the time of such termination (a "Competing
Company"). Notwithstanding the foregoing, Executive shall be entitled to own
securities of any entity if such securities are registered under Section 12(b)
or (g) of the Securities Exchange Act of 1934, as amended, and, upon approval of
the Company's Board of Directors, Executive shall be entitled to purchase
securities of a Competing Company entity if such securities are offered to
investors irrespective of any employment or other participation in the entity by
the investor.
3.4 Prohibition on Solicitation of Customers. During the term of
-----------------------------------------
Executive's employment with the Company and for a period of one year thereafter
or, if longer, for any period during which Executive receives any compensation
from the Company hereunder, Executive shall not, directly or indirectly, either
for Executive or for any other person or entity, solicit any person or entity to
terminate such person's or entity's contractual and/or business relationship
with the Company, nor shall Executive interfere with or disrupt or attempt to
interfere with or disrupt any such relationship.
3.5 Prohibition on Solicitation of the Company's Employees or Independent
---------------------------------------------------------------------
Contractors After Termination. For a period of one year following the
- ------------------------------
termination of Executive's employment with the Company or, if longer, for any
period during which Executive receives any compensation from the Company
hereunder, Executive will not directly or indirectly solicit any of the
Company's employees, agents, or independent contractors to leave the employ of
the Company for a competitive company or business.
3
<PAGE>
3.6 Right to Injunctive and Equitable Relief. Executive's obligations not
-----------------------------------------
to disclose or use Confidential Information and to refrain from the
solicitations described in this Article III are of a special and unique
character which gives them a peculiar value. The Company cannot be reasonably
or adequately compensated in damages in an action at law in the event Executive
breaches such obligations. Therefore, Executive expressly agrees that the
Company shall be entitled to injunctive and other equitable relief without bond
or other security in the event of such breach in addition to any other rights or
remedies which the Company may possess. Furthermore, the obligations of
Executive and the rights and remedies of the Company under this Article III are
cumulative and in addition to, and not in lieu of, any obligations, rights, or
remedies created by applicable law relating to misappropriation or theft of
trade secrets or confidential information.
3.7 No Violation of Other Agreements. Executive represents that his
---------------------------------
performance of all the terms of this Agreement and as an employee of the Company
does not and will not breach any agreement to (i) not compete or interfere with
the business of a former employer (which term for purposes of this Section 3.7
shall also include persons, firms, corporations and other entities for which
Executive has acted as an independent contractor or consultant), (ii) not
solicit employees, customers or vendors of any former employer or (iii) keep in
confidence proprietary information acquired by Executive in confidence or in
trust prior to Executive's employment with the Company. Executive represents
and warrants to and covenants with the Company that Executive will not bring to
the Company any materials or documents of a former employer containing
confidential or proprietary information that is not generally available to the
public, unless Executive shall have obtained express written authorization from
any such former employer for their possession and use.
ARTICLE IV
TERMINATION
-----------
4.1 Definitions. For purposes of this Article IV, the following
------------
definitions shall apply to the terms set forth below:
(a) Cause. "Cause" shall be defined as follows:
(i) Executive's conviction of any felony (whether or not
involving the Company) which constitutes a crime of moral
turpitude or which is punishable by imprisonment in a
state or federal correction facility;
(ii) Actions by Executive during the term of this Agreement
involving willful malfeasance or gross negligence;
(iii) Executive's commission of an act of fraud or dishonesty,
whether prior or subsequent to the date hereof, upon the
Company,
(iv) Executive's repeated, willful failure or refusal to
perform his duties as required by this Agreement on an
exclusive and full-time basis; provided that termination
of Executive's employment pursuant to this subparagraph
(iv) shall not constitute valid termination for cause
4
<PAGE>
unless Executive shall have first received written notice
from the Board of Directors of the Company stating the
nature of such failure or refusal and affording Executive
at least ten (10) days to correct the act or omission
complained of to the satisfaction of the Board of
Directors;
(v) Executive's willful violation of any reasonable rule or
regulation of the Board of Directors applicable to all
senior executives if such violation is not cured to the
satisfaction of the Board of Directors promptly following
notice to Executive; and
(vi) Any knowing or intentional material misrepresentation made
in connection with the transactions contemplated by that
certain Investment Agreement dated November 21, 1995 to
which the Company is a party.
(b) Disability. "Disability" shall mean a physical or mental
----------
incapacity as a result of which the Executive becomes unable to continue the
proper performance of his duties hereunder in substantially a full time capacity
(reasonable absences because of sickness for up to six (6) consecutive months
excepted, provided, however, that any new period of incapacity or absences shall
be deemed to be part of a prior period of incapacity or absences if the prior
period terminated within ninety (90) days of the beginning of the new period of
incapacity or absence and the new capacity or absence is determined by the
Company's Board of Directors, in good faith, to be related to the prior
incapacity or absence.) A determination of Disability shall be subject to the
certification of a qualified medical doctor agreed to by the Company and the
Executive or, in the event of the Executive's incapacity to designate a doctor,
the Executive's legal representative. In the absence of agreement between the
Company and the Executive, each party shall nominate a qualified medical doctor
and the two doctors so nominated shall select a third doctor, who shall make the
determination as to Disability.
(c) Good Reason. "Good Reason" shall mean any of the following:
-----------
(i) the assignment to Executive by the Company's Board of
Directors of duties substantially inconsistent with
Executive's position, duties, responsibilities or status
with the Company as of the date of this Agreement;
(ii) any substantial change in Executive's titles or offices
with the Company, except in connection with a termination
of Executive's employment for Cause, Disability,
retirement or Executive's death;
(iii) any assignment to Executive of duties that would require
him to relocate or transfer his current principal place of
residence in Southern California, or would make the
continuance of such current principal place of residence
unreasonably difficult; or
5
<PAGE>
(iv) any failure by the Company to comply with any material
provision of this Agreement which has not been cured
within 30 days after notice of such noncompliance has been
given by Executive to the Company.
(d) Change in Control. "Change in Control" shall mean any of the
-----------------
following:
(i) 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 of the Company (a "Business Combination"),
unless (A) 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
(B) no "person" (as such term is defined for purposes of
clause (ii) 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;
(ii) any "person" (as such term is used in Section 13(d) and
14(d) of the Securities Exchange Act of 1934, as amended
(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
(iii) during any period not longer than two consecutive years,
individuals who at the beginning of such period
constituted the Board of Directors of the Company 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.
4.2 Termination by Company. The Company may terminate the Executive's
-----------------------
employment hereunder immediately for Cause. Subject to the other provisions
contained in this
6
<PAGE>
Agreement, the Company may terminate this Agreement for any reason other than
Cause upon 30 days' written notice to Executive.
4.3 Termination by Executive. The Executive may terminate this Agreement
-------------------------
upon 30 days' written notice to the Company.
4.4 Benefits Received Upon Termination.
----------------------------------
(a) If the Executive's employment is terminated by the Company for
Cause, or if this Agreement is terminated by Executive without Good Reason, then
the Company shall pay the Executive his Base Salary through the effective date
of such termination plus credit for any vacation earned but not taken and the
Company shall thereafter have no further obligations to Executive under this
Agreement; provided, however, that the Company will continue to honor any
obligations that may have vested or accrued under the existing Company Benefit
Plans or any other Agreements or arrangements applicable to the Executive.
(b) If the Executive's employment is terminated by the Company
without Cause, or if this Agreement is terminated by Executive for Good Reason,
then the Company shall:
(i) pay to the Executive within two business days following
the date of termination his Base Salary through the end of
the month during which such termination occurs plus credit
for any vacation earned but not taken;
(ii) pay to the Executive as severance pay (a) the Executive's
Base Salary in effect as of the date of termination, such
payments to be made in accordance with the Company's usual
payroll periods for a minimum of six (6) months or, if
longer, through the expiration of the term of employment
then in effect under this Agreement, without additional
renewals as otherwise provided hereunder, plus (b) an
amount equal to the cash portion of the most recent annual
profit sharing and/or incentive bonus received by the
Executive from the Company or, if more, the cash amount
which would be due under the profit sharing and/or
incentive bonus plans applicable to Executive for the then
current year calculated as of the effective date of
termination; such payment to be made in substantially
equal installments in accordance with the Company's usual
payroll periods over such time period as Executive
receives Base Salary payments hereunder;
(iii) maintain, at the Company's expense, in full force and
effect, for the Executive's continued benefit until the
earlier of (i) the expiration of the term of employment
then in effect, or (ii) the Executive's commencement of
full time employment with a new employer, all Company
medical insurance and reimbursement plans and other
programs or arrangements in which the Executive was
entitled to participate immediately prior to the date of
termination, provided
7
<PAGE>
that the Executive's continued participation is possible
under the general terms and provisions of such plans and
programs. In the event that the Executive's participation
in any such plan or program is barred, the Company shall
arrange to provide the Executive with medical benefits
substantially similar to those which the Executive was
entitled to receive under such plans or programs; and
(iv) pay, for the benefit of Executive, all costs, up to a
maximum of $20,000, related to Executive's participation
in a senior executive outplacement program at Lee Hecht
Harrison or a similar outplacement firm.
Notwithstanding the foregoing, if, within twelve (12) months of a Change
in Control, Executive's employment with the Company is terminated without Cause,
Executive terminates this Agreement for Good Reason, or the Company provides
Executive notice of non-renewal or renegotiation of this Agreement pursuant to
Section 1.2 above, then the six (6)-month period referred to in subsection
(b)(ii) above shall be extended to eighteen (18) months for purposes of this
Section 4.4(b).
(c) Termination Because of Employee Disability. Should Executive
-------------------------------------------
become disabled from performing his duties hereunder as defined above, Executive
acknowledges that his employment may be terminated anytime thereafter if such
disability continues; provided that, during the period of the disability prior
to such termination of employment, Executive shall continue to receive all
compensation and benefits as if he were actively employed less any sums received
directly by the Executive, if any, under any policy or policies of disability
income insurance purchased by the Company. In the event of such termination,
Executive's rights to receive any salary or payments under this Agreement shall
terminate but Executive shall have the right to continue to receive any and all
payments made by an insurance company under any and all policies of disability
insurance purchased by the Company. Executive's rights under any Company
Benefit Plans will be those rights accorded to any terminated employee under the
plan provisions and applicable law. Executive will remain entitled to receive
any benefits under state disability or worker's compensation laws.
(d). Any termination for cause hereunder will only be effective if
approved by at least a majority vote of the entire Board of Directors, pursuant
to votes casts in person at a meeting at which Executive shall be entitled to be
present to answer any charges which might be asserted as cause for his
termination.
4.5 Effect of Termination. Upon any termination of this Agreement, for
----------------------
any reason, Executive shall be deemed to have immediately resigned as a director
of the Company and all subsidiaries, if applicable, without the giving of any
notice or the taking of any other action.
ARTICLE V
ASSUMPTION OF OBLIGATIONS BY SUCCESSOR TO COMPANY
-------------------------------------------------
5.1 Assumption of Obligations. The Company will require any successor or
--------------------------
assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or
8
<PAGE>
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to the Executive, expressly, absolutely and
unconditionally to assume and agree to perform this Agreement in the same manner
and to the same extent that the Company would be required to perform it if no
such succession or assignment had taken place. Any failure of the Company to
obtain such agreement prior to the effectiveness of any such succession or
assignment shall be a material breach of this Agreement. As used in this
Agreement, "Company" shall mean the Company as herein before defined and any
successor or assign to its business and/or assets as aforesaid which executes
and delivers the agreement provided for in this Article V or which otherwise
becomes bound by all the terms and provisions of this Agreement by operation of
law. If at any time during the term of this Agreement the Executive is employed
by any corporation a majority of the voting securities of which is then owned by
the Company, "Company" as used in this Agreement shall in addition include such
employer.
5.2 Beneficial Interests. This Agreement shall inure to the benefit of
---------------------
and be enforceable by the Executive's personal and legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If the Executive should die while any amounts are still payable to
him or her hereunder, all such amounts, unless otherwise provided herein, shall
be paid in accordance with the terms of this Agreement to the Executive's
devisee, legatee, or other designee or, if there be no such designee, to the
Executive's estate.
ARTICLE VI
GENERAL PROVISIONS
------------------
6.1 Notice. For purposes of this Agreement, notices and all other
-------
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
If to the Company: New Century Financial Corporation
18400 Von Karman, Suite 1000
Irvine, CA 92612
Attn: President
If to the Executive: ______________
New Century Financial Corporation
18400 Von Karman, Suite 1000
Irvine, CA 92612
or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
6.2 No Waivers. No provision of this Agreement may be modified, waived or
-----------
discharged unless such waiver, modification or discharge is agreed to in writing
signed by the Executive and the Company. No waiver by either party hereto at
any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be
9
<PAGE>
performed by such other party shall be deemed a waiver of similar or dissimilar
provisions or conditions at the same or at any prior or subsequent time.
6.3 Governing Law. This agreement shall be governed by and construed in
--------------
accordance with the laws of the State of California.
6.4 Severability or Partial Invalidity. The invalidity or
-----------------------------------
unenforceability of any provisions of this Agreement shall not affect the
validity or enforceability of any other provision of this Agreement, which shall
remain in full force and effect.
6.5 Counterparts. This Agreement may be executed in one or more
-------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
6.6 Legal Fees and Expenses. Should any party institute any action or
------------------------
proceeding to enforce this Agreement or any provision hereof, or for damages by
reason of any alleged breach of this Agreement or of any provision hereof, or
for a declaration of rights hereunder, the prevailing party in any such action
or proceeding shall be entitled to receive from the other party all costs and
expenses, including reasonable attorneys' fees, incurred by the prevailing party
in connection with such action or proceeding.
6.7 Entire Agreement. This Agreement constitutes the entire agreement of
-----------------
the parties and supersedes all prior written or oral and all contemporaneous
oral agreements, understandings, and negotiations between the parties with
respect to the subject matter hereof. This Agreement is intended by the parties
as the final expression of their agreement with respect to such terms as are
included in this Agreement and may not be contradicted by evidence of any prior
or contemporaneous agreement. The parties further intend that this Agreement
constitutes the complete and exclusive statement of its terms and that no
extrinsic evidence may be introduced in any judicial proceeding involving this
Agreement.
6.8 Assignment. This Agreement and the rights, duties, and obligations
-----------
hereunder may not be assigned or delegated by any party without the prior
written consent of the other party and any such attempted assignment and
delegation shall be void and be of no effect. Notwithstanding the foregoing
provisions of this Section 6.8, the Company may assign or delegate its rights,
duties, and obligations hereunder to any person or entity which succeeds to all
or substantially all of the business of the Company through merger,
consolidation, reorganization, or other business combination or by acquisition
of all or substantially all of the assets of the Company; provided that such
person assumes the Company's obligations under this Agreement in accordance with
Section 5. 1.
6.9 Arbitration. Any controversy, dispute, claim or other matter in
------------
question arising out of or relating to this Agreement shall be settled, at the
request of either party, by binding arbitration in accordance with the National
Rules for the Resolution of Employment Disputes of the American Arbitration
Association ("AAA"), and judgment upon the award rendered by the arbitrators may
be entered in any court having jurisdiction thereof, subject to the following
terms, conditions and exceptions:
10
<PAGE>
EXHIBIT A
(a) Notice of the demand for arbitration shall be filed in writing
with the other party and with the AAA. There shall be a panel of three (3)
arbitrators whose selection shall be made in accordance with the procedures then
existing for the selection of such arbitrators by the AAA.
(b) Reasonable discovery shall be allowed in arbitration.
(c) The costs and fees of the arbitration shall be allocated by the
arbitrators.
6.10 Indemnification. To the extent permitted by law, applicable statutes
----------------
and the Articles of Incorporation, Bylaws or resolutions of the Company in
effect from time to time, the Company shall indemnify Executive against
liability or loss arising out of Executive's actual or asserted misfeasance or
nonfeasance in the performance of Executive's duties or out of any actual or
asserted wrongful act against, or by, the Company including but not limited to
judgments, fines, settlements and expenses incurred in the defense of actions,
proceedings and appeals therefrom. The Company shall endeavor to obtain
Directors and Officers Liability Insurance to indemnify and insure the Company
and Executive from and against the aforesaid liabilities. The provisions of
this paragraph shall apply to the estate, executor, administrator, heirs,
legatees or devisees of Executive.
6.11 Termination of Prior Agreement. The Employment Agreement dated June
------------------------------
1, 1997 and amended November 24, 1998 between Executive and Company is hereby
terminated.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
NEW CENTURY FINANCIAL CORPORATION _____________________________
By:_______________________________ _____________________________
("Executive")
11
<PAGE>
EXHIBIT A
PERFORMANCE GOALS
FOR
FOUNDING MANAGERS OF NEW CENTURY FINANCIAL CORPORATION
ESTABLISHED FEBRUARY 10, 1999
SIX-MONTH PERFORMANCE PERIOD - JANUARY 1, 1999 THROUGH JUNE 30, 1999
- --------------------------------------------------------------------
Each Founding Manager shall be entitled to receive an Incentive Award for
the 6-Month Performance Period based on the following ratio, and calculated
according to the table set forth below:
Before-Tax Net Income for the 6-Month Performance Period
----------------------------------------------------------------------
Total Stockholders' Equity
<TABLE>
<CAPTION>
Amount of
Ratio Incentive Award
- ------------------------------------------ --------------------------------------------
<S> <C>
If ratio is less than 10% 0
If ratio is at least 10% but less than 20% 1.25% of Before-Tax Net Income for the
6-Month Performance Period in excess of 10%
of Total Stockholders' Equity
If ratio is at least 20% 1.25% of Before-Tax Net Income for the
6-Month Performance Period in excess of 10%
of Total Stockholders' Equity, plus 0.50%
of Before-Tax Net Income for the 6-Month
Performance Period in excess of 20% of
Total Stockholders' Equity
</TABLE>
However, in no event shall the Incentive Award paid to any Founding Manager for
the 6-Month Performance Period exceed 80% of his base salary for the calendar
year in which the 6-Month Performance Period falls.
TWELVE-MONTH PERFORMANCE PERIOD - JANUARY 1, 1999 THROUGH DECEMBER 31, 1999
- ---------------------------------------------------------------------------
Each Founding Manager shall be entitled to receive an Incentive Award for
the 12-Month Performance Period based on the following ratio, and calculated
according to the table set forth below:
12
<PAGE>
Before-Tax Net Income for the 12-Month Performance Period
- ------------------------------------------------------------------------------
Total Stockholders' Equity
<TABLE>
<CAPTION>
Amount of
Ratio Incentive Award
- ------------------------------------------ --------------------------------------------
<S> <C>
If ratio is less than 20% 0
If ratio is at least 20% but less than 40% 1.25% of Before-Tax Net Income for the
12-Month Performance Period in excess of
20% of Total Stockholders' Equity
If Ratio is at least 40% 1.25% of Before-Tax Net Income for the
12-Month Performance Period in excess of
20% of Total Stockholders' Equity, plus
0.50% of Before-Tax Net Income for the
12-Month Performance Period in excess of
40% of Total Stockholders' Equity
</TABLE>
The amount of any Incentive Award paid for the 12-Month Performance Period
shall be reduced by amounts previously paid to the Founding Manager for the 6-
Month Performance Period.
Any Incentive Award amount up to 200% of a Founding Manager's base salary
for the applicable year will be paid in cash. Any Incentive Award amount
exceeding 200% of a Founding Manager's base salary will be paid in the form of
restricted stock. However, the Compensation Committee has the discretion to
allow Founding Managers to elect what portion of any Incentive Award to receive
in cash and what portion in restricted stock.
SIX-MONTH PERFORMANCE PERIOD - JANUARY 1, 2000 THROUGH JUNE 30, 2000
- --------------------------------------------------------------------
Each Founding Manager shall be entitled to receive an Incentive Award for
the 6-Month Performance Period based on the following ratio, and calculated
according to the table set forth below:
13
<PAGE>
Before-Tax Net Income for the 6-Month Performance Period
----------------------------------------------------------------------
Total Stockholders' Equity
<TABLE>
<CAPTION>
Amount of
Ratio Incentive Award
- ------------------------------------------ --------------------------------------------
<S> <C>
If ratio is less than 9% 0
If ratio is at least 9% but less than 18% 1.25% of Before-Tax Net Income for the
6-Month Performance Period in excess of 9%
of Total Stockholders' Equity
If ratio is at least 18% 1.25% of Before-Tax Net Income for the
6-Month Performance Period in excess of 9%
of Total Stockholders' Equity, plus 0.50%
of Before-Tax Net Income for the 6-Month
Performance Period in excess of 18% of
Total Stockholders' Equity
</TABLE>
However, in no event shall the Incentive Award paid to any Founding Manager for
the 6-Month Performance Period exceed 80% of his base salary for the calendar
year in which the 6-Month Performance Period falls.
TWELVE-MONTH PERFORMANCE PERIOD - JANUARY 1, 2000 THROUGH DECEMBER 31, 2000
- ---------------------------------------------------------------------------
Each Founding Manager shall be entitled to receive an Incentive Award for
the 12-Month Performance Period based on the following ratio, and calculated
according to the table set forth below:
Before-Tax Net Income for the 12-Month Performance Period
----------------------------------------------------------------------
Total Stockholders' Equity
<TABLE>
<CAPTION>
Amount of
Ratio Incentive Award
- ------------------------------------------ --------------------------------------------
<S> <C>
If ratio is less than 18% 0
If ratio is at least 18% but less than 35% 1.25% of Before-Tax Net Income for the
12-Month Performance Period in excess of
18% of Total Stockholders' Equity
If Ratio is at least 35% 1.25% of Before-Tax Net Income for the
</TABLE>
14
<PAGE>
12-Month Performance Period in excess of
18% of Total Stockholders' Equity, plus
0.50% of Before-Tax Net Income for the
12-Month Performance Period in excess of
35% of Total Stockholders' Equity
The amount of any Incentive Award paid for the 12-Month Performance Period
shall be reduced by amounts previously paid to the Founding Manager for the 6-
Month Performance Period.
Any Incentive Award amount up to 200% of a Founding Manager's base salary
for the applicable year will be paid in cash. Any Incentive Award amount
exceeding 200% of a Founding Manager's base salary will be paid in the form of
restricted stock. However, the Compensation Committee has the discretion to
allow Founding Managers to elect what portion of any Incentive Award to receive
in cash and what portion in restricted stock.
DEFINITIONS:
- -----------
"BEFORE-TAX NET INCOME" shall mean the Company's net income for operations
before reduction for income taxes as shown on the Company's financial statements
with the following adjustments: (i) benefits payable under the Company's
employee incentive compensation plans for the Performance Period for employees
other than the Founding Managers shall be deducted, but amounts payable to the
Founding Managers for the Performance Periods described above shall not be
deducted, and (ii) the inclusion or exclusion of any income or loss from
discontinued operations or extraordinary items shall be determined by the
Compensation Committee in its discretion. The amount of Before-Tax Net Income
for the 6-Month Performance Period shall be based on the Company's unaudited
financial statements for the six-months ended June 30 of the applicable year.
The amount of Before-Tax Net Income for the 12-Month Performance Period shall be
determined by the Company's independent certified public accountants based on
the audited financial statements for the 12-months ended December 31 of the
applicable year.
"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 issued 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.
15
<PAGE>
EXHIBIT 10.48
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement ("Agreement") is effective as of January 1, 1999 (the
"Effective Date") between New Century Mortgage Corporation, a California
corporation (the "Company"), and Patrick Flanagan (the "Executive"). In
consideration of the mutual covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE I
EMPLOYMENT
----------
The Company hereby employs Executive and Executive accepts employment with
the Company upon the terms and conditions herein set forth.
1.1 Employment. The Company hereby employs Executive, and Executive
----------
agrees to serve, as the Company's Executive Vice President and Chief Operating
Officer during the term of this Agreement. Executive agrees to perform such
duties as may be assigned to Executive from time to time by the Company.
Executive agrees to devote substantially his full business time and attention
and best efforts to the affairs of the Company during the term of this
Agreement.
1.2 Term. The term of employment of Executive hereunder will be for the
-----
period commencing on the Effective Date and ending on the earliest of:
(a) December 31, 1999;
(b) The date of termination of Executive's employment in accordance
with Article IV of this Agreement;
(c) The date of Executive's voluntary retirement in accordance with
the Company's plans and policies; or
(d) The date of Executive's death.
Unless this Agreement is terminated pursuant to Paragraphs (b), (c) or (d)
above, the term of this Agreement shall be extended automatically for successive
one year periods, unless and until at least three months written notice is given
by either party requesting termination or renegotiation of this Agreement prior
to the expiration of its term or any one year extension thereof.
ARTICLE II
COMPENSATION
------------
2.1 Base Salary. During the employment of Executive, the Company shall
------------
pay to the Executive a base salary at the rate of $230,000 per year during 1999,
and thereafter at a rate determined by the Company's Board of Directors (the
"Base Salary"), but no less than the rate
<PAGE>
paid during 1999. The Base Salary shall be payable in substantially equal semi-
monthly installments.
2.2 Profit Sharing and Bonuses. Executive shall be eligible to
---------------------------
participate in a Bonus Plan (the "Plan") as established and modified by the
Board of Directors from time to time, the initial terms of which are described
in Exhibit A hereto.
2.3 Reimbursement of Expenses. The Executive shall be entitled to receive
--------------------------
prompt reimbursement of all reasonable expenses incurred by the Executive in
performing services hereunder, including all expenses of travel, living expenses
while away from home on business at the request of, or in the service of, the
Company, provided that such expenses are incurred and accounted for in
accordance with the policies and procedures established by the Company.
2.4 Automobile Expenses. The Company shall provide Executive with an
--------------------
automobile allowance of $1,000.00 per month.
2.5 Benefits. The Executive shall be entitled to participate in and be
---------
covered by all health, insurance, pension, disability insurance, physical exam
and other employee plans and benefits established by the Company (collectively
referred to herein as the "Company Benefit Plans") on the same terms as are
generally applicable to other senior executives of the Company, subject to
meeting applicable eligibility requirements.
2.6 Vacations and Holidays. During Executive's employment with the
-----------------------
Company, Executive shall be entitled to an annual vacation leave at full pay,
such vacation to be 3 weeks in each year of the term hereof or such greater
vacation benefits as may be provided for by the Company's vacation policies
applicable to senior executives. Executive shall be entitled to such holidays
as are established by the Company for all employees.
ARTICLE III
NON-COMPETITION, CONFIDENTIALITY AND NONDISCLOSURE
--------------------------------------------------
3.1 Proprietary Information. Concurrently with the execution and delivery
------------------------
of this Agreement, Executive shall execute and deliver the Confidentiality
Agreement attached as Exhibit B hereto.
3.2 Confidentiality. Executive agrees to keep the terms of this Agreement
----------------
and the other terms of Executive's employment strictly confidential.
ARTICLE IV
TERMINATION
-----------
4.1 Definitions. For purposes of this Article IV, the following
------------
definitions shall apply to the terms set forth below:
(a) Cause. "Cause" shall be defined as follows:
2
<PAGE>
(i) Executive's conviction of, or guilty plea relating to, any
felony (whether or not involving the Company) which
constitutes a crime of moral turpitude or which is
punishable by imprisonment in a state or federal
correction facility;
(ii) Failure by Executive to achieve the performance standards
or objectives agreed to in writing by the Board of
Directors and Executive;
(iii) Actions by Executive involving willful malfeasance or
gross negligence in the performance of Executive's duties;
(iv) Executive's commission of an act of fraud or dishonesty,
whether prior or subsequent to the date hereof, upon the
Company;
(v) Executive's failure or refusal to perform his duties as
required by this Agreement on an exclusive and full-time
basis;
(vi) Executive's insubordination or failure to follow the Board
of Directors' instructions; and
(vii) Executive's violation of any reasonable rule or regulation
of the Board of Directors applicable to all senior
executives if such violation is not cured to the
satisfaction of the Board of Directors promptly following
notice to Executive.
(b) Disability. "Disability" shall mean a physical or mental
-----------
incapacity as a result of which the Executive becomes unable to continue the
proper performance of his duties hereunder in substantially a full time capacity
(reasonable absences because of sickness for up to three (3) consecutive months
excepted, provided, however, that any new period of incapacity or absences shall
be deemed to be part of a prior period of incapacity or absences if the prior
period terminated within ninety (90) days of the beginning of the new period of
incapacity or absence and the new capacity or absence is determined by the
Company's Board of Directors, in good faith, to be related to the prior
incapacity or absence.) A determination of Disability shall be subject to the
certification of a qualified medical doctor agreed to by the Company and the
Executive or, in the event of the Executive's incapacity to designate a doctor,
the Executive's legal representative. In the absence of agreement between the
Company and the Executive, each party shall nominate a qualified medical doctor
and the two doctors so nominated shall select a third doctor, who shall make the
determination as to Disability.
4.2 Termination by Company. The Company may terminate the Executive's
-----------------------
employment hereunder immediately for Cause. Any termination for Cause hereunder
will only be effective if approved by at least a majority vote of the entire
Board of Directors. Subject to the other provisions contained in this
Agreement, the President or Chief Executive Officer of the
3
<PAGE>
Company may terminate this Agreement on behalf of the Company for any reason
other than Cause upon 30 days' written notice to Executive.
4.3 Termination by Executive. The Executive may terminate this Agreement
-------------------------
upon 30 days' written notice to the Company.
4.4 Benefits Received Upon Termination.
-------------------------------------
(a) If the Executive's employment is terminated by the Company for
Cause, or if this Agreement is terminated by Executive, then the Company shall
pay the Executive his Base Salary through the effective date of such termination
plus credit for any vacation earned but not taken and the Company shall
thereafter have no further obligations to Executive under this Agreement.
(b) If the Executive's employment is terminated by the Company
without Cause, then the Company shall:
(i) pay to the Executive within two business days following
the date of termination his Base Salary through the end of the
month during which such termination occurs plus credit for any
vacation earned but not taken;
(ii) pay to the Executive as severance pay (a) the Executive's
Base Salary in effect as of the date of termination, such
payments to be made in accordance with the Company's usual
payroll periods for a minimum of six (6) months or, if longer,
through the expiration of the term of employment then in effect
under this Agreement, without additional renewals as otherwise
provided hereunder, plus (b) within two business days after
termination a lump sum amount equal to any incentive bonus earned
by Executive as of the termination date but not yet paid by the
Company, plus (c) within two business days after termination an
amount equal to any incentive bonus to which Executive would be
entitled for his performance during the calendar quarter in which
the termination occurs, prorated according to the portion of the
quarter elapsed at the time of termination;
(iii) maintain, at the Company's expense, in full force and
effect, for the Executive's continued benefit during period of
salary continuation under the preceding subsection, all Company
medical insurance and reimbursement plans and other programs or
arrangements in which the Executive was entitled to participate
immediately prior to the date of termination, provided that the
Executive's continued participation is possible under the general
terms and provisions of such plans and programs; and
4
<PAGE>
(iv) pay the reasonable costs, consistent with what the Company
pays for its other executives, related to Executive's
participation in a senior executive outplacement program.
Notwithstanding the foregoing, if prior to expiration of the
period of salary continuation referred to in subsections (ii) and
(iii) above Executive commences employment that the Board of Directors
deems to be in competition with the Company's business, the payments
and benefits described in subsections (ii) and (iii) shall cease
immediately upon Executive's commencement of such competing
employment.
(c) Termination Because of Employee Disability. Should Executive
-------------------------------------------
become disabled from performing his duties hereunder as defined above, Executive
acknowledges that his employment may be terminated anytime thereafter if such
disability continues; provided that, during the period of the disability prior
to such termination of employment, Executive shall continue to receive all
compensation and benefits as if he were actively employed less any sums received
directly by the Executive, if any, under any policy or policies of disability
income insurance purchased by the Company. In the event of such termination,
Executive's rights to receive any salary or payments under this Agreement shall
terminate but Executive shall have the right to continue to receive any and all
payments made by an insurance company under any and all policies of disability
insurance purchased by the Company. Executive's rights under any Company
Benefit Plans will be those rights accorded to any terminated employee under the
plan provisions and applicable law. Executive will remain entitled to receive
any benefits under state disability or worker's compensation laws.
4.5 Effect of Termination. Upon any termination of this Agreement, for
----------------------
any reason, Executive shall be deemed to have immediately resigned as a director
of New Century Mortgage Corporation and all subsidiaries, if applicable, without
the giving of any notice or the taking of any other action.
ARTICLE V
ASSUMPTION OF OBLIGATIONS BY SUCCESSOR TO COMPANY
-------------------------------------------------
5.1 Assumption of Obligations. The Company will require any successor or
--------------------------
assign (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company, by agreement in form and substance satisfactory to the Executive,
expressly, absolutely and unconditionally to assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession or assignment had taken place. Any
failure of the Company to obtain such agreement prior to the effectiveness of
any such succession or assignment shall be a material breach of this Agreement.
As used in this Agreement, "Company" shall mean the Company as herein before
defined and any successor or assign to its business and/or assets as aforesaid
which executes and delivers the agreement provided for in this Article V or
which otherwise becomes bound by all the terms and provisions of this Agreement
by
5
<PAGE>
operation of law. If at any time during the term of this Agreement the Executive
is employed by any corporation a majority of the voting securities of which is
then owned by the Company, "Company" as used in this Agreement shall in addition
include such employer.
5.2 Beneficial Interests. This Agreement shall inure to the benefit of
---------------------
and be enforceable by the Executive's personal and legal representatives,
executors, administrators, successors, heirs, distributees, devisees and
legatees. If the Executive should die while any amounts are still payable to
him or her hereunder, all such amounts, unless otherwise provided herein, shall
be paid in accordance with the terms of this Agreement to the Executive's
devisee, legatee, or other designee or, if there be no such designee, to the
Executive's estate.
ARTICLE VI
GENERAL PROVISIONS
------------------
6.1 Notice. For purposes of this Agreement, notices and all other
-------
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, as follows:
If to the Company: New Century Mortgage Corporation
18400 Von Karman, Suite 1000
Irvine, California 92612
Attn: Chief Executive Officer
If to the Executive: Patrick Flanagan
33 Cala de'Or
Laguna Niguel, California 92677
or such other address as either party may have furnished to the other in writing
in accordance herewith, except that notices of change of address shall be
effective only upon receipt.
6.2 No Waivers. No provision of this Agreement may be modified, waived or
-----------
discharged unless such waiver, modification or discharge is agreed to in writing
signed by the Executive and the Company. No waiver by either party hereto at
any time of any breach by the other party hereto of, or compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time.
6.3 Governing Law. This agreement shall be governed by and construed in
--------------
accordance with the laws of the State of California.
6.4 Severability or Partial Invalidity. The invalidity or
-----------------------------------
unenforceability of any provisions of this Agreement shall not affect the
validity or enforceability of any other provision of this Agreement, which shall
remain in full force and effect.
6
<PAGE>
6.5 Counterparts. This Agreement may be executed in one or more
-------------
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.
6.6 Legal Fees and Expenses. Should any party institute any action or
------------------------
proceeding to enforce this Agreement or any provision hereof, or for damages by
reason of any alleged breach of this Agreement or of any provision hereof, or
for a declaration of rights hereunder, the prevailing party in any such action
or proceeding shall be entitled to receive from the other party all costs and
expenses, including reasonable attorneys' fees, incurred by the prevailing party
in connection with such action or proceeding.
6.7 Entire Agreement. This Agreement constitutes the entire agreement of
-----------------
the parties and supersedes all prior written or oral and all contemporaneous
oral agreements, understandings, and negotiations between the parties with
respect to the subject matter hereof. This Agreement is intended by the parties
as the final expression of their agreement with respect to such terms as are
included in this Agreement and may not be contradicted by evidence of any prior
or contemporaneous agreement. The parties further intend that this Agreement
constitutes the complete and exclusive statement of its terms and that no
extrinsic evidence may be introduced in any judicial proceeding involving this
Agreement.
6.8 Assignment. This Agreement and the rights, duties, and obligations
-----------
hereunder may not be assigned or delegated by any party without the prior
written consent of the other party and any such attempted assignment and
delegation shall be void and be of no effect. Notwithstanding the foregoing
provisions of this Section 6.8, the Company may assign or delegate its rights,
duties, and obligations hereunder (i) to any affiliate, or (ii) to any person or
entity which succeeds to all or substantially all of the business of the Company
through merger, consolidation, reorganization, or other business combination or
by acquisition of all or substantially all of the assets of the Company;
provided that such person assumes the Company's obligations under this Agreement
in accordance with Section 5.1.
6.9 Arbitration. Any controversy, dispute, claim or other matter in
------------
question arising out of or relating to this Agreement shall be settled, at the
request of either party, by binding arbitration in accordance with the National
Rules for the Resolution of Employment Disputes of the American Arbitration
Association ("AAA"), and judgment upon the award rendered by the arbitrators may
be entered in any court having jurisdiction thereof, subject to the following
terms, conditions and exceptions:
(a) Notice of the demand for arbitration shall be filed in writing
with the other party and with the AAA. There shall be one arbitrator selected
in accordance with the procedures then existing for the selection of arbitrators
by the AAA.
(b) Reasonable discovery shall be allowed in arbitration.
(c) The costs and fees of the arbitration shall be allocated by the
arbitrator.
7
<PAGE>
6.10 Indemnification. To the extent permitted by law, applicable
----------------
statutes and the Articles of Incorporation, Bylaws or resolutions of the Company
in effect from time to time, the Company shall indemnify Executive against
liability or loss arising out of Executive's actual or asserted misfeasance or
nonfeasance in the performance of Executive's duties or out of any actual or
asserted wrongful act against, or by, the Company including but not limited to
judgments, fines, settlements and expenses incurred in the defense of actions,
proceedings and appeals therefrom. The Company shall endeavor to obtain
Directors and Officers Liability Insurance to indemnify and insure the Company
and Executive from and against the aforesaid liabilities. The provisions of
this paragraph shall apply to the estate, executor, administrator, heirs,
legatees or devisees of Executive.
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.
NEW CENTURY MORTGAGE CORPORATION EXECUTIVE
By: /s/ Patrick Flanagan
----------------------------- ----------------------
Patrick Flanagan
9
<PAGE>
EXHIBIT A
BONUS PLAN
Intentionally Omitted
<PAGE>
EXHIBIT B
CONFIDENTIALITY AGREEMENT
<PAGE>
NEW CENTURY MORTGAGE CORPORATION
--------------------------------
CONFIDENTIALITY AGREEMENT
-------------------------
1. Introduction.
------------
I recognize that New Century Mortgage Corporation and its affiliated
companies (collectively, "New Century") is a consumer finance company
engaged in a continuous program of product and customer development
regarding its business, present and future, as a mortgage lending and
consumer finance company.
I understand that, during the course of my employment with New
Century, I may acquire and have access to confidential information and trade
secrets of New Century (collectively, "Confidential Information").
Specifically, I will have access to Confidential Information about New Century's
products, techniques, processes, services, clients, employee relationships,
marketing strategy and/or business plans, including, without limitation,
information relative to client lists, business development plans, business
studies, projections, business practices and finances. Additionally, I may have
access to highly confidential personal and financial information of New
Century's customers.
This Confidential Information is disclosed to me on a business need-
to-know basis only, and is considered confidential and secret by New Century.
Furthermore, this information is made known to me in confidence solely by virtue
of my employment, and is not generally known in the industry. My employment
with New Century creates a duty of trust and confidentiality to New Century with
respect to such Confidential Information.
2. Agreement to Maintain Confidentiality.
-------------------------------------
At all times, both during my employment and after the cessation of my
employment, whether the cessation is voluntary or involuntary, for any reason or
no reason, or by disability, I will keep in strictest confidence and trust all
Confidential Information, and I will not disclose, use, or induce or assist in
the use or disclosure of any Confidential Information, or anything related
thereto, without the prior express written consent of New Century, except as may
be necessary in the ordinary course of performing my duties as an employee of
New Century.
I recognize that New Century has received and in the future will
receive from third parties their Confidential Information subject to a duty on
New Century's part to maintain the confidentiality of such information and to
use it only for certain limited purposes. I agree that I owe New Century and
such third parties, during my employment and thereafter, a duty to hold all such
Confidential Information in the strictest confidence, and I will not disclose,
use, or induce or assist in the use or disclosure of any such Confidential
Information without the prior express written consent of New Century, except as
may be necessary in the ordinary course of performing my duties as an employee
of New Century consistent with New Century's agreement with such third party.
I understand that the unauthorized use or dissemination of any
Confidential Information is considered a serious breach of confidence, and any
employee engaging in such activity is in violation of a number of laws,
including the California Uniform Trade Secrets Act. Such employee will be
subject to termination and/or legal action.
3. Agreement to Return Confidential Material.
-----------------------------------------
<PAGE>
I agree that, upon termination of my employment, all documents,
records, notebooks, computer programs and records and similar repositories of or
containing Confidential Information, including all copies thereof, as well as
all other New Century property then in my possession or control, must be left
with or returned to New Century.
4. Agreement Regarding Inventions.
------------------------------
I agree to disclose in writing and to assign on behalf of me or my
heirs, executors, or administrators, to New Century or its successors, any
inventions, processes, diagrams, methods, computer software, or any improvements
whatsoever that I may discover, conceive, or develop, either individually or in
collaboration with others, during the course of my employment with New Century,
or with the use of New Century's time, data, equipment, facilities, or
materials. I agree to execute all documents necessary or appropriate for use by
New Century in applying for, obtaining and enforcing any rights regarding
Confidential Information or inventions as New Century may desire, together with
any assignments thereof to New Century. This paragraph does not apply to any
invention which qualifies under the provisions of California Labor Code Section
2870 regarding inventions developed solely by an employee on his/her own time.
5. Use of Confidential Information to Compete with New Century.
-----------------------------------------------------------
I agree that during my employment with New Century I will not, without
New Century's express written consent, engage in any employment or business
which is competitive with New Century, or any employment or business which is
otherwise in conflict with my employment relationship with New Century.
I further agree that during the term of my employment with New Century
and thereafter, I will not, either directly or indirectly, for me or for any
other person or entity, utilize or rely upon any Confidential Information to
call on, solicit, or take away, or attempt to call on, solicit, or take away any
past or present customers of New Century with respect to the same or similar
business services now or in the future provided by New Century.
I further agree that during my employment and for a period of the
longer of (i) six (6) months after cessation of my employment, or (ii) the
expiration of any post-cessation severance payments pursuant to any employment
agreement in effect between me and New Century at the time of cessation of my
employment, I will not, either directly or indirectly, either alone or in
concert with others, solicit or entice any employee of or consultant to New
Century to leave New Century to work for anyone in competition with New Century.
6. Representations Regarding Former Employment.
-------------------------------------------
I represent that my performance of all the terms of this Agreement and
as an employee of New Century does not and will not breach any agreement to keep
in confidence Confidential Information acquired by me in confidence or in trust
prior to my employment with New Century. I have not entered into, and I agree
that I will not enter into, any agreement, either written or oral, in conflict
herewith. I promise that I have not and will not bring to New Century any
materials or documents of a former employer that are not generally available to
the public, unless I have obtained express written authorization from any such
former employer for their possession and use. I also understand that, in my
service to New Century, I am not to breach any obligation of confidentiality
that I have to former employers, and I have fulfilled all such obligations
during my employment.
<PAGE>
7. Injunctive Relief.
-----------------
I recognize that New Century is relying upon the existence and
validity of these provisions and that monetary damages would not be an adequate
remedy if I violated any of these provisions. Therefore, I expressly agree that
in addition to any rights or remedies New Century may have, New Century may
apply to any court of law or equity having jurisdiction for injunctive relief
(without posting a bond or other security) against any act which would violate
this Agreement.
8. General Provisions.
------------------
The terms of this Confidentiality Agreement shall apply during and
after any period during which I perform any services for New Century. Nothing
in this Confidentiality Agreement shall obligate New Century to continue to
retain me as an employee. Upon cessation of my relationship with New Century, I
agree to execute an Affirmation of Confidentiality Agreement.
This Confidentiality Agreement shall be governed by and construed
under and according to the internal substantive laws, and not the laws of
conflicts, of the State of California. If any provision of this Confidentiality
Agreement shall be determined by any court of competent jurisdiction to be
unenforceable or otherwise invalid as written, the same shall be enforced and
validated to the extent permitted by law. In any litigation, arbitration, or
other proceeding by which one party either seeks to enforce its rights under
this Confidentiality Agreement or seeks a declaration of any rights or
obligations hereunder, the prevailing party shall be awarded reasonable attorney
fees, together with costs and expenses, to resolve the dispute and enforce the
final judgment.
This Confidentiality Agreement contains the sole and entire agreement
between New Century and myself with respect to the subject matter hereof, and
supersedes and replaces any prior agreements to the extent they are inconsistent
herewith. This Confidentiality Agreement can be amended or modified only by a
written agreement between New Century and myself.
My signature below confirms that I have read, understand and agree to
comply with the terms of this Confidentiality Agreement.
NEW CENTURY MORTGAGE EMPLOYEE
CORPORATION
- ----------------------------------- ---------------------------------
Signature of Employee
By:
-------------------------------- ---------------------------------
Its: Print Name
-------------------------------
- ----------------------------------- ---------------------------------
Date Date
<PAGE>
Exhibit 10.49
SALOMON BROTHERS REALTY CORP.
SEVEN WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
December 11, 1998
NC Capital Corporation
18400 Von Karman, Suite 1000
Irvine, California 92612
Attention: Mr. Patrick Flanagan
President
New Century Mortgage Corporation
18400 Von Karman, Suite 1000
Irvine, California 92612
Attention: Mr. Brad Morrice
Chief Executive Officer
Ladies and Gentlemen:
This letter agreement (the "Letter Agreement") confirms the understanding
and agreements among NC Capital Corporation ("NCCC"), New Century Mortgage
Corporation ("New Century"), Salomon Brothers Realty Corp. ("SBRC") and Salomon
Smith Barney Inc. ("Salomon Smith Barney"), under the terms set forth herein,
regarding (i) NCCC's agreement to securitize certain fixed and adjustable rate,
one-to-four family, first and second lien mortgages (the "Mortgage Loans")
either (a) using Salomon Brothers Mortgage Securities VII Inc. ("SBMSVII") or
(b) pursuant to a shelf registration filing of NCCC or its affiliate in
connection with pass-through transfers with respect to which Salomon Smith
Barney or one of its affiliates is the sole underwriter and (ii) SBRC's
agreement to provide an aggregation line to NCCC in connection with certain
mortgage loans that are originated by New Century.
1. Mortgage Loans.
--------------
(a) In General. NCCC hereby agrees to securitize Mortgage Loans with an
----------
unpaid principal balance, as of the date of securitization, of not less than
$1,000,000,000 between December 1, 1998 and November 30, 1999 securitized
through a program of securitizations (the "Securitizations") of AAA and Aaa-
rated mortgage-backed securities (the "Securities") either (i) using SBMSVII or
(ii) pursuant to a shelf registration filing of NCCC or its affiliate in
connection with pass-through transfers with respect to which Salomon Smith
Barney or one of its affiliates is the sole underwriter.
<PAGE>
NC Capital Corporation
New Century Mortgage Corporation
December 11, 1998 Page 2.
(b) Servicing of the Mortgage Loans. The purchase by SBRC of a Mortgage
-------------------------------
Loan pursuant to the Aggregation Line (as defined in Section 3(a)) shall include
the purchase of the related servicing rights for such Mortgage Loan. Unless
otherwise agreed to between SBRC and NCCC, SBRC hereby covenants and agrees to
hire New Century to service; and New Century hereby covenants and agrees to
service the Mortgage Loans for a term beginning on the related Settlement Date
and ending on the related repurchase date as provided for in the Purchase and
Sale Agreement (as defined in Section 3(a)); provided that if a Termination
Event (as defined in Section 5(b)) has occurred, New Century shall immediately
be terminated as servicer. In connection with its servicing duties, New Century
can service the Mortgage Loans itself or through such other sub-servicer which
SBRC has accepted in writing, as the sub-servicer (the "Sub-Servicer") provided
that, SBRC shall have the right to perform due diligence on any entity appointed
as servicer or sub-servicer of the Mortgage Loans and may require New Century to
select another servicer or sub-servicer to the extent that SBRC is not satisfied
with the results of such due diligence. The Mortgage Loans shall be serviced in
accordance with the servicing provisions specified in the Pooling and Servicing
Agreement, Series 1998-NC6 dated as of September 1, 1998 among U.S. Bank
National Association, SBMSVII and New Century. New Century or the Sub-Servicer
shall remit payments of principal and interest to SBRC on a date prior to the
25th day of each month beginning with the month after the Settlement Date (as
defined in Section 3(a)) to permit remittances to certificateholders on the
25/th/ day of each month in connection with a securitization, shall enforce
"due-on-sale" provisions to the extent permitted by law, shall administer all
escrow/impound deposits, shall pay compensating interest on principal
prepayments in any month up to the amount of its servicing compensation in such
month and shall make all servicing advances on any Mortgage Loan (including
advances of delinquent principal and interest payments). New Century or the Sub-
Servicer shall be required to make advances in respect of delinquent payments of
principal and interest on the Mortgage Loans through foreclosure and in
connection with any properties acquired by the related trustee in any
securitization transaction through liquidation of such properties, subject to
New Century's or the Sub-Servicer's determination regarding recoverability. The
Mortgage Loans shall be serviced for a servicing fee equal to 0.50% per annum
payable monthly on the then-outstanding principal balance of each Mortgage Loan
(the "Servicing Fee"). Any fee payable to the Sub-Servicer shall be paid by New
Century without any right of reimbursement by SBRC. Any Sub-Servicer shall
execute a letter agreement recognizing SBRC's interest in the Mortgage Loans in
the form of Exhibit A. Notwithstanding the foregoing, in the event NCCC fails to
repurchase a Mortgage Loan on the related repurchase date or if a Termination
Event occurs, New Century and any related Sub-Servicer will no longer be
servicer with respect to such Mortgage Loan or Mortgage Loans, unless the term
of servicing is extended by SBRC in its sole discretion. In such event, SBRC
shall have the right to transfer such servicing to another servicer without
payment of any fee to New Century. New Century will cooperate in good faith to
effect such servicing transfer and shall pay all costs associated with such
servicing transfer.
(c) Conditions Precedent to Mortgage Loan Purchases. SBRC's obligation to
-----------------------------------------------
purchase any Mortgage Loans and related servicing rights which it accepts for
its Aggregation Line shall be subject to each of the following conditions:
<PAGE>
NC Capital Corporation
New Century Mortgage Corporation
December 11, 1998 Page 3.
(i) there shall have been delivered to SBRC a Trust Receipt
issued by U.S. Bank National Association ("U.S. Bank")
with a mortgage loan schedule attached thereto and an
exception report which is acceptable to SBRC in its sole
discretion;
(ii) SBRC shall have had an opportunity to perform a due
diligence review of each Mortgage Loan and shall have
arranged for reappraisals of value with respect to each
Mortgage Loan if desired by SBRC;
(iii) NCCC shall have provided to SBRC such other documents
which are then required to have been delivered under the
Purchase and Sale Agreement or which are reasonably
requested by SBRC, which other documents may include UCC
financing statements, a favorable opinion or opinions of
counsel with respect to matters which are reasonably
requested by SBRC, and/or an officer's or secretary's
certificate; and
(iv) there shall have been delivered to SBRC a limited guaranty
of New Century, in the form of Exhibit B hereto, by which
New Century guarantees the obligations of NCCC under this
Letter Agreement and the Purchase and Sale Agreement.
2. Securitizations.
---------------
(a) In General. As noted above, NCCC shall meet its commitment to
SBRC with respect to not less than $1,000,000,000 in Mortgage Loans between
December 1, 1998 and November 30, 1999 by using a shelf registration statement
of SBMSVII or NCCC (or its affiliate) pursuant to transactions in which Salomon
Smith Barney or an affiliate of Salomon Smith Barney shall act as the sole
underwriter. NCCC and SBRC agree, however, that any securitizations scheduled to
close in December 1998 shall not be counted toward the $1,000,000,000
commitment. Additionally, sales of whole Mortgage Loans by New Century and/or
NCCC to SBRC shall not be counted toward the $1,000,000,000 commitment. NCCC
will pay to Salomon Smith Barney promptly upon the closing of each
Securitization an underwriting discount equal to the product of (i) the
applicable Underwriting Fee Percentage (as defined herein) multiplied by (ii)
the aggregate unpaid principal balance of the Mortgage Loans subject to such
Securitization (the "Underwriting Fee"). The "Underwriting Fee Percentage" with
respect to each Securitization shall be one-half of one percent (0.50%). If in
any six-month period commencing with the period from December 1, 1998 through
May 30, 1999, and thereafter on a semiannual basis, NCCC fails to pay Salomon
Smith Barney a cumulative Underwriting Fee of at least $2,500,000, NCCC shall
pay to Salomon Smith Barney on the last business day of such period an amount
equal to (i) $2,500,000 less (ii) the cumulative Underwriting Fee for such
period; provided, however, that any Underwriting Fees paid by NCCC in such
period in excess of $2,500,000 shall be carried forward and applied toward
<PAGE>
NC Capital Corporation
New Century Mortgage Corporation
December 11, 1998 Page 4.
NCCC's Underwriting Fee commitment hereunder; provided, further, that the
minimum semiannual Underwriting Fee commitment shall not apply in any such
period in which NCCC utilizes Salomon Smith Barney as the exclusive underwriter
for all securitizations completed by NCCC during such period. In addition, if on
November 30, 1999, NCCC has not paid to Salomon Smith Barney a cumulative
Underwriting Fee of at least $5,000,000, NCCC shall pay to Salomon Smith Barney
on the last business day of such period an amount equal to (i) $5,000,000 less
(ii) the cumulative Underwriting Fee.
In addition to those fees described above, in the event Salomon Smith
Barney sells on behalf of NCCC a CE Bond (as defined below), Salomon Smith
Barney shall receive a fee equal to 1.0% of the proceeds of the CE Bond, and, if
Salomon Smith Barney sells on behalf of NCCC an Excess Cash Flow Class D Bond,
Salomon Smith Barney shall receive a fee equal to 1.0% of the stated principal
balance of such bond; provided however, that in the event that the CE Bond is
liquidated by Salomon Smith Barney as the result of an event of default, Salomon
Smith Barney shall not receive such fee. In connection with the creation of the
Excess Cash Flow D Bond, the related equity certificates (the "Equity
Certificates") created by such securitization (the "ECF Securitization") will be
delivered to NCCC on the related closing date.
(b) Expenses. NCCC shall pay all reasonable costs and expenses
--------
arising from the preparation for and execution of the Securitizations, including
but not limited to, the fees and disbursements of legal counsel (including
investor's counsel in any private placement, if retained), rating agency fees
(including those fees associated with the annual monitoring of previously closed
Securitizations), credit enhancement fees, SEC registration fees (or equivalent
ratable fees of a SBRC affiliate in lieu thereof if such affiliate's shelf
registration is utilized), auditors' fees, due diligence expenses (other than
Salomon Smith Barney's), costs of preparing and printing any offering documents
and trustee fees, etc. Salomon Smith Barney shall be responsible for the fees
and disbursements of its own legal counsel and any due diligence expenses
incurred by Salomon Smith Barney. It is understood and agreed that NCCC may
require that the parties incurring or charging such costs and expenses agree in
advance that they are payable or reimbursable by NCCC only to a specified
reasonable extent or cap.
(c) Information. NCCC and New Century will furnish Salomon Smith
-----------
Barney with all financial and other information concerning NCCC and New Century
as Salomon Smith Barney deems reasonably appropriate in connection with the
performance of the services contemplated by this letter, including (without
limitation) "Monthly Cash Flow Projections and Sensitivity Analyses", and will
provide Salomon Smith Barney with reasonable access during normal business hours
to NCCC's and New Century's officers, directors, employees, accountants, and
other representatives. NCCC and New Century acknowledge and confirm that Salomon
Smith Barney (i) will rely on such information in the performance of the
services contemplated by this letter without independently investigating or
verifying any of it, (ii) assumes no responsibility for the accuracy or
completeness of such information and (iii) will not disclose such information to
any third party without the prior written consent of NCCC or New Century, as
applicable.
<PAGE>
NC Capital Corporation
New Century Mortgage Corporation
December 11, 1998 Page 5.
(d) Offering Documents. In connection with each Securitization, NCCC will
------------------
be solely responsible (and New Century will be responsible to the extent of any
servicer information) for the contents of any private placement memorandum,
prospectus supplement or other offering document used in connection with the
placement of the Securities (as such documents may be amended or supplemented
and including any information incorporated therein by reference, the "Offering
Document") and any and all other written communications provided by, or
authorized to be provided on behalf of, NCCC to any actual or prospective
purchaser of the Securities except to the extent such contents of the Offering
Document are provided by Salomon Smith Barney in writing expressly for use in
the Offering Document and provided that any statistical, tabular or similar
information, including computer runs, initially prepared by or on behalf of
Salomon Smith Barney (but as to which Salomon Smith Barney is not taking
responsibility in the Offering Document) shall have been verified by NCCC's
independent public accountants. NCCC shall represent and warrant (and New
Century shall represent and warrant to the extent of any servicer information)
that the Offering Document and such other written communications will not, as of
the date of the offer or sale of the Securities or the closing date of any such
sale, contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading. Such representation and warranty will not cover information
provided in writing by Salomon Smith Barney for use specifically in such
Offering Document. NCCC shall authorize Salomon Smith Barney to provide the
Offering Document to prospective purchasers of the Securities. If at any time
prior to the completion of the offer and sale of the Securities an event occurs
as a result of which the Offering Document (as then supplemented or amended)
would include any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, NCCC or New Century,
as applicable, will promptly notify Salomon Smith Barney of such event and
Salomon Smith Barney will suspend solicitations of prospective purchasers of the
Securities until such time as NCCC or New Century, as applicable, shall prepare
(and NCCC or New Century, as applicable, agrees that, if it shall have notified
Salomon Smith Barney to suspend solicitations after orders have been accepted
from prospective purchasers, it will promptly prepare) a supplement or amendment
to the Offering Document which corrects such statement or omission.
(e) Indemnification. New Century and NCCC agree, jointly and severally, to
---------------
indemnify and hold harmless (i) Salomon Smith Barney, (ii) SBMSVII and (iii)
each person who controls either Salomon Smith Barney or SBMSVII within the
meaning of either the Securities Act of 1933, as amended (the "Act") or the
Securities Exchange Act of 1934, as amended (the "Exchange Act") ((i) through
(iii) collectively, the "Indemnified Party") against any and all losses, claims,
damages or liabilities, joint or several, suffered or incurred which arise out
of or are based upon any untrue statement or alleged untrue statement of a
material fact contained in the Offering Document or in any revision or amendment
thereof or supplement thereof or arise out of or are based upon the omission or
alleged omission to state in the Offering Document or in any revision or
amendment thereof or supplement thereto a material fact required to be stated
therein or the omission or alleged omission to state a material fact in any
Offering Document or in any revision or amendment thereof or supplement thereto
necessary to make the statements therein, in light of the circumstances under
<PAGE>
NC Capital Corporation
New Century Mortgage Corporation
December 11, 1998 Page 6.
which they were made, not misleading, and agrees to reimburse each such
Indemnified Party for any legal or other expenses reasonably incurred by it or
him in connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however that NCCC and New Century shall not be
liable to any Indemnified Party to the extent that any misstatement or alleged
misstatement or omission or alleged omission was made in reliance upon and in
conformity with the information provided in writing to NCCC or New Century by
Salomon Smith Barney specifically for inclusion in the Offering Document. This
indemnity agreement will be in addition to any liability which NCCC and New
Century may otherwise have.
In order to provide for just and equitable contribution in circumstances in
which the indemnification provided for in this Section 2(e) is due in accordance
with its terms but is for any reason held by a court to be unavailable on
grounds of policy or otherwise, the parties entitled to indemnification
thereunder shall be entitled to contribution for the aggregate losses, claims,
damages and liabilities (including legal and other expenses reasonably incurred
in connection with investigating or defending same) to which it or they may be
subject, except that no person guilty of fraudulent misrepresentation shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. In determining the amount of contribution to which the
respective parties are entitled, consideration shall be given to the relative
benefits and also the relative fault of the party in connection with the
statements or omissions that resulted in losses, the parties' relative knowledge
and access to information concerning the matter with respect to which the claim
was asserted, the opportunity to correct and/or prevent the breach, and any
other equitable considerations appropriate under the circumstances. For purposes
of this Section 2(e), each person who controls either Salomon Smith Barney or
SBMSVII within the meaning of either the Act or the Exchange Act shall have the
same rights to contribution as Salomon Smith Barney or SBMSVII, respectively.
Any party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect of
which a claim for contribution may be made against NCCC and/or New Century under
this Section 2(e), notify NCCC and/or New Century, but the omission to so notify
NCCC and/or New Century shall not relieve NCCC and/or New Century from any other
obligation it may have hereunder or otherwise than under this Section 2(e).
(f) All financial data and other documentation prepared by Salomon Smith
Barney in connection with the transactions contemplated hereby (including,
without limitation, any computer models, cash flow analyses, and any
documentation prepared by counsel for Salomon Smith Barney) shall be proprietary
to Salomon Smith Barney. Except as otherwise required by law, none of NCCC, New
Century, any of their affiliates, nor any person acting on behalf of any of them
(including, without limitation, counsel and the independent accountants to NCCC
and New Century) shall disseminate, distribute, or otherwise make available such
data or documentation without Salomon Smith Barney's prior written consent
(other than NCCC or New Century making such data available to any NCCC or New
Century affiliate, its counsel or its independent accountants, in each case on a
need-to-know basis).
This Section 2 shall survive the termination of this Letter Agreement.
<PAGE>
NC Capital Corporation
New Century Mortgage Corporation
December 11, 1998 Page 7.
3. Aggregation Line.
----------------
(a) In General. In addition to the rights provided to Salomon Smith Barney
----------
and SBRC pursuant to Sections 1 and 2 of this Letter Agreement, SBRC shall make
available to NCCC an aggregation line (the "Aggregation Line") pursuant to which
SBRC shall simultaneously purchase from, and sign a forward commitment to resell
to, NCCC Mortgage Loans and the related servicing rights that are deemed
acceptable for such Aggregation Line as set forth below. The Aggregation Line
shall be more fully documented pursuant to the Mortgage Loan Purchase and Sale
Agreement (the "Purchase and Sale Agreement") to be entered into among NCCC, New
Century and SBRC, which shall be substantially similar in form to the Mortgage
Loan Purchase and Sale Agreement dated April 1, 1998 between New Century and
SBRC but shall provide for servicing provisions similar to those set forth in
Section 1(b) of this Letter Agreement. Under the Purchase and Sale Agreement,
NCCC will make standard secondary market corporate representations and
warranties as of the date such Purchase and Sale Agreement is executed and as of
any settlement date for the purchase and sale of any Mortgage Loans pursuant to
such Purchase and Sale Agreement (each such date, a "Settlement Date") and NCCC
shall make standard secondary market representations and warranties with respect
to each Mortgage Loan as of the Settlement Date on which such Mortgage Loan is
sold to SBRC. In the event that NCCC satisfies its obligations under the terms
of this Letter Agreement, the Aggregation Line shall terminate on the last day
of the calendar quarter in which NCCC satisfies its obligations to SBRC pursuant
to Section 1(a) of this Letter Agreement.
The "Purchase Price" with respect to each Mortgage Loan and related
servicing rights which conforms to the Underwriting Standards of New Century
which were most recently reviewed and approved by SBRC and which is not a
Problem Mortgage Loan (as defined in Section 3(b)) or a Non-Standard Mortgage
Loan (as defined in Section 3(c)) (a "Standard Mortgage Loan") shall be equal to
the market value of such Mortgage Loan, as determined by SBRC acting in good
faith. The "Purchase Price" for each Non-Standard Mortgage Loan and related
servicing rights shall be equal to the lesser of (i) the market value of such
Mortgage Loan as determined by SBRC acting in good faith or (ii) the amount
determined in accordance with the provisions of Section 3(c)(iii) of this Letter
Agreement. The "Purchase Price" for each Problem Mortgage Loan and related
servicing rights shall be equal to the lesser of (i) the market value of such
Mortgage Loan as determined by SBRC acting in good faith or (ii) the amount
determined in accordance with the provisions of Section 3(b) of this Letter
Agreement. Unless SBRC provides notice to NCCC and U.S. Bank pursuant to this
section, the Purchase Price for each Standard Mortgage Loan shall be equal to at
least 103% of the unpaid principal balance of such Standard Mortgage Loan, and
the Purchase Price for each Non-Standard Mortgage Loan shall be equal to at
least the market value of such Non-Standard Mortgage Loan as determined by SBRC
acting in good faith less 1%. In order for SBRC to determine when notice is
required to be delivered to U.S. Bank pursuant to this section, NCCC shall
forward to SBRC copies of the financing agreements between NCCC and U.S. Bank.
The repurchase price shall reflect the agreed upon return to SBRC for
providing the Aggregation Line (the "Aggregation Cost"). With respect to any
Standard Mortgage Loan, the Aggregation Cost shall equal One Month LIBOR (as
defined herein) plus 1.25%. With respect to
<PAGE>
NC Capital Corporation
New Century Mortgage Corporation
December 11, 1998 Page 8.
any Problem Mortgage Loan or Non-Standard Mortgage Loan, or in the event that
NCCC sells any Mortgage Loan which is subject to the Aggregation Line to a party
other than SBRC, the Aggregation Cost shall equal One Month LIBOR plus 2.00%;
provided, however, with respect to any second lien Mortgage Loans with a
combined loan-to-value ratio greater than 95% (to a maximum of 100%) the
Aggregation Cost shall equal One Month LIBOR plus 2.50%. In the event that a
Mortgage Loan is sold to a party other than SBRC, the Mortgage Loan shall be
subject to the foregoing increased rate from the day such Mortgage Loan became
subject to the Aggregation Line until the date of the sale to such third party.
A copy of the letter with the terms to the sale to such third party shall be
delivered to SBRC. NCCC shall retain principal and interest on any Mortgage
Loans subject to the Aggregation Line.
"One Month LIBOR" means as of the related Settlement Date, the 30 day
London Interbank Offered Rate as of 11:00 a.m. (London time) on such date, as
indicated on page number 3750 of the Telerate Service. If One Month LIBOR cannot
be so determined, then One Month LIBOR shall mean the rate determined by SBRC in
its sole discretion.
The Aggregation Line, inclusive of any Problem Mortgage Loans, Non-
Standard Mortgage Loans and Mortgage Loans described in Sections 3(c)(ii) and
4(b), at any one time shall be limited to $600 million in amount of Mortgage
Loans and shall have a term of one month. The maximum amount of Problem Mortgage
Loans and Non-Standard Mortgage Loans in the Aggregation Line shall not exceed
$120 million at any one time.
NCCC shall have the right to add Mortgage Loans to the Aggregation
Line up to four times each month. Standard Loans may be removed from the
Aggregation Line twice a month (one of which shall be on the roll date). Problem
Mortgage Loans and Non-Standard Mortgage Loans may be removed from the
Aggregation Line with one week prior written notice by NCCC to SBRC.
SBRC shall provide not less than twenty eight days' prior notice to
NCCC and U.S. Bank (or such other warehouse lender as directed by NCCC) in the
event that SBRC elects to not renew the Aggregation Line for any month.
(b) Problem Mortgage Loans. A "Problem Mortgage Loan" is defined as
----------------------
any Mortgage Loan (w) which is in SBRC's sole discretion of insufficient quality
to be financed as a Standard Mortgage Loan or a Non-Standard Mortgage Loan or
purchased, provided, however, that if SBRC agrees, it can finance any Mortgage
Loan rejected from a securitization or whole loan purchase as a Non-Standard
Mortgage Loan, (x) which is missing documentation or other information and such
problem is not cured by NCCC in sixty days, (y) which is delinquent at the time
of financing by SBRC, which becomes delinquent during such financing by SBRC or
(z) was more than thirty days but less than sixty days delinquent on more than
one occasion in the prior twelve months and is now current. Problem Mortgage
Loans shall be subject to the following qualifications with respect to the
Aggregation Line:
<PAGE>
NC Capital Corporation
New Century Mortgage Corporation
December 11, 1998 Page 9.
(i) the maximum Aggregation Line with respect to Problem
Mortgage Loans shall equal $42 million as of any trade
date on which there was formal notification of a trade by
a confirmation letter or trade ticket;
(ii) if a Mortgage Loan is a Problem Mortgage Loan based on
clause (w) or clause (x) above, then the "Purchase Price"
shall be equal to (A) for the first ninety-day period
after purchase, 90% of the unpaid principal balance of the
Problem Mortgage Loan as of the date of purchase and (B)
thereafter, 90% of the unpaid principal balance of the
Problem Mortgage Loan, minus an additional 10% of the
unpaid principal balance of such Problem Mortgage Loan for
each additional month after the initial ninety-day period;
(iii) if a Mortgage Loan is a Problem Mortgage Loan based on
clause (y) above, then the "Purchase Price" shall be equal
to (A) 90% of the unpaid principal balance of the Problem
Mortgage Loan as of the date of purchase if such Mortgage
Loan is delinquent one, two or three payments, (B) 90% of
the unpaid principal balance of the Problem Mortgage Loan,
minus an additional 10% of the unpaid principal balance of
such Problem Mortgage Loan for each of the fourth, fifth
and sixth delinquent payments and (C) 65% of the Broker
Price Opinion obtained by SBRC, at the expense of NCCC,
regarding the real property subject to the Mortgage Loan
if such Mortgage Loan is delinquent more than six
payments; and
(iv) if a Mortgage Loan is a Problem Loan based on clause (z)
above, then the "Purchase Price" shall be equal to (A) 95%
of the unpaid principal balance of the Problem Mortgage
Loan as of the date of purchase if such Mortgage Loan has
been more than thirty days delinquent but less than sixty
days delinquent on two occasions in the prior twelve
months; (B) 90% of the unpaid principal balance of the
Problem Mortgage Loan as of the date of purchase if such
Mortgage Loan has been sixty days delinquent on one
occasion in the prior twelve months and (C) 85% of the
unpaid principal balance of the Problem Mortgage Loan, if
such Mortgage Loan does not meet the requirements set
forth in (A) or (B) above.
With respect to any Mortgage Loan that is a Problem Mortgage Loan based on
clause (x) or clause (y) above, in the event that SBRC determines in its sole
discretion that such Problem Mortgage Loan has ceased to be a Problem Mortgage
Loan, such Mortgage Loan shall be treated as a Standard Mortgage Loan or a Non-
Standard Mortgage Loan, as the case may be, as of the first day of the month
following such determination.
<PAGE>
NC Capital Corporation
New Century Mortgage Corporation
December 11, 1998 Page 10.
(c) Non-Standard Mortgage Loans. A "Non-Standard Mortgage Loan" is defined
---------------------------
as any Mortgage Loan (x) with an unpaid principal balance in excess of
$1,000,000; or (y) that has a loan-to-value ratio in excess of 85.00% (up to a
maximum of 95.00%); provided, however, at its option, SBRC may deem a Mortgage
Loan with an unpaid principal balance of no more than $1,500,000 to be a
Standard Mortgage Loan. In addition, if (i) Mortgage Loans with a loan-to-value
ratios greater than 80% (but not more than 85%) have an aggregate unpaid
principal balance in excess of $120 million and (ii) Mortgage Loans with unpaid
principal balances greater than $500,000 and less than or equal to $1,500,000
have an aggregate unpaid principal balance in excess of $42 million, such excess
amounts shall be deemed "Non-Standard Mortgage Loans". No Mortgage Loan shall be
subject to the terms of the Aggregation Line if: (i) the unpaid principal
balance of such Mortgage Loan exceeds $1,500,000 or (ii) such Mortgage Loan has
a loan-to-value ratio greater than 95%, if it is a first lien, or a combined
loan-to-value ratio greater than 100%, if it is a second lien. Non-Standard
Mortgage Loans shall be subject to the following qualifications with respect to
the Aggregation Line:
(i) the maximum Aggregation Line with respect to Non-Standard
Mortgage Loans shall equal $78 million (of which no more than
$30 million shall have unpaid principal balances greater than
$1,000,000 (including any Problem Loans with unpaid principal
balances greater than $500,000) and no more than $42 million
shall be Mortgage Loans with a loan-to-value ratio in excess of
85.00% (up to a maximum of 95.00%)), as of any trade date on
which there was formal notification of a trade by a
confirmation letter or trade ticket;
(ii) the maximum Aggregation Line with respect to second lien
Mortgage Loans shall equal $25 million for second lien Mortgage
Loans with a combined loan-to-value ratio in excess of 95.00%
(up to a maximum of 100.00%), as of any trade date on which
there was formal notification of a trade by a confirmation
letter or trade ticket, and Mortgage Loans provided for in this
clause (ii) shall not be applied to the $42 million limit in
the preceding clause (i); and
(iii) with respect to the Mortgage Loans, the Purchase Price for the
first sixty days shall be the market value of such Mortgage
Loans as determined by SBRC acting in good faith, and
thereafter, the Purchase Price shall decrease by 10% of such
market value and by an additional 10% thereof for each
succeeding month.
(d) Mortgage Loan Schedule. No Mortgage Loan shall be included in the
----------------------
Aggregation Line unless NCCC shall have delivered to SBRC at least 72 hours
prior to such inclusion, a magnetic tape, in a format acceptable to SBRC,
consisting of the loan characteristics agreed upon by SBRC and NCCC with respect
to each Mortgage Loan.
<PAGE>
NC Capital Corporation
New Century Mortgage Corporation
December 11, 1998 Page 11.
(e) Marketing of Mortgage Loans. SBRC may (subject to NCCC's consent
---------------------------
unless a Termination Event has occurred) market the Problem Mortgage Loans and
Non-Standard Mortgage Loans on NCCC's behalf for a purchase price acceptable to
NCCC and shall provide NCCC with a copy of a trade ticket or letter of intent
with respect to any commitment to sell such Mortgage Loans. NCCC must advise
SBRC within sixty days after inclusion of each Mortgage Loan in the Aggregation
Line of the course of action it intends to take with respect to such Mortgage
Loan (i.e., securitization, whole loan sale, etc.).
(f) Hedging. NCCC will have the option to establish one or more securities
-------
or commodities accounts at Salomon Smith Barney and to enter into transactions
in such accounts (and only in such accounts) that are intended to hedge the
interest rate risk on Mortgage Loans included in the Aggregation Line.
4. (a) Financing of CE Bonds and Equity Certificates. SBRC or an
---------------------------------------------
affiliate shall provide a financing facility for the CE bonds (the "CE Bonds")
created by any NCCC securitizations on which Salomon Smith Barney has acted as
the sole underwriter pursuant to this Letter Agreement. Such facility shall
provide for financing at a rate equal to 75% of the present value of the CE
Bonds, as determined by SBRC. The CE Bonds shall be financed by SBRC or an
affiliate at a financing fee equal to One Month LIBOR plus 1.50% and will be
subject to standard provisions of the PSA global master repurchase agreement.
SBRC or an affiliate shall provide a financing facility for the Equity
Certificates created by any ECF Securitization on which Salomon Smith Barney has
acted as the sole underwriter. Such facility shall provide for financing by SBRC
or its affiliate at a financing fee equal to One Month LIBOR plus 2.50% and will
be subject to standard provisions of the PSA global master repurchase agreement.
In addition, SBRC hereby acknowledges that New Century has terminated its
relationship with Greenwich Capital Financial Products, Inc. ("Greenwich"). In
connection with such termination, SBRC agrees to refund the remaining $290,000
of the "termination fee" New Century has paid to Greenwich by reducing by one-
eighth (0.125%) of one percent the interest rate on the fixed rate loans
included in the Aggregation Line over the term of this Aggregation Line to the
extent necessary to refund such "termination fee" (and to the extent any amounts
remain after the termination of the line, SBRC shall pay such shortfall).
(b) Financing of Trigger Buybacks. SBRC shall purchase under the
-----------------------------
Aggregation Line mortgage loans which are repurchased by New Century and sold or
contributed to NCCC based upon trigger buybacks in effect pursuant to the
pooling and servicing agreements for SBMSVII 1997-NC1, 1997-NC2, 1997-NC3 and
New Century Home Equity Loan Trust Series 1997-NC5. The maximum aggregate
outstanding Purchase Price will be $10,000,000. Such mortgage loans will be
deemed Problem Mortgage Loans in the Aggregation Line and will be financed by
SBRC in the same manner as Problem Mortgage Loans financed pursuant to Section
3(b)(iii) above based on the degree of delinquency.
(c) Financing of REO Properties. In the event there is a foreclosure sale
---------------------------
for any Problem Mortgage Loan, simultaneously with the occurrence of such
foreclosure, NCCC will repurchase such Mortgage Loan from SBRC on such date and
title of the REO Property to be taken
<PAGE>
NC Capital Corporation
New Century Mortgage Corporation
December 11, 1998 Page 12.
in the name of New Century R.E.O. Corp. Liquidation Proceeds, Inc. ("LPI"),
SBRC's affiliate, will provide financing for such REO Property pursuant to the
letter agreement, dated November 18, 1998, between New Century and LPI, the loan
and security agreement, dated November 18, 1998, between the New Century and
LPI, the related Secured Promissory Note, dated November 18, 1998 by New Century
to LPI and the REO Subsidiary Pledge Agreement, dated as of November 18, 1998,
made by New Century, in favor of LPI (collectively, the "REO Financing
Facility").
5. Termination.
-----------
(a) NCCC shall have the right to terminate its obligations hereunder upon
(i) any material default by SBRC of its obligations under this Letter Agreement
which is not cured within 30 days following written notice of such default to
SBRC by NCCC or (ii) the payment by NCCC to SBRC of a termination fee equal to
0.25% times the unfulfilled volume commitment hereunder.
(b) SBRC shall have the right to terminate this Letter Agreement upon the
occurrence of any of the following events (each, a "Termination Event"):
(i) the judgment by SBRC in good faith that a material adverse
change has occurred with respect to the business, properties,
assets or condition (financial or otherwise) of NCCC;
(ii) SBRC shall reasonably request, specifying the reasons for such
request, information, and/or written responses to such
requests, regarding the financial well-being of NCCC and such
information and/or responses shall not have been provided
within three business days of such request;
(iii) Either (A) a change in control of NCCC shall have occurred
without the consent of SBRC, other than in connection with and
as a result of the issuance and sale by NCCC of registered,
publicly offered common stock; or (B) SBRC determines in its
sole discretion that any material adverse change has occurred
in the management of NCCC;
(iv) There is (A) a material breach by NCCC of any representation
and warranty contained in the Purchase and Sale Agreement,
other than a representation or warranty relating to particular
Mortgage Loans, and SBRC has reason to believe in good faith
either that such breach is not curable within 30 days or that
such breach may not have been cured in all material respects at
the expiration of 30 days following discovery thereof by NCCC
or (B) a failure by NCCC to make any payment payable by it
--
under the Purchase and Sale Agreement or (C) any other failure
--
by NCCC to observe and perform in any material respect its
material covenants, agreements and obligations with SBRC,
including
<PAGE>
NC Capital Corporation
New Century Mortgage Corporation
December 11, 1998 Page 13.
without limitation those contained in the Purchase and Sale
Agreement, and SBRC has reason to believe in good faith that
such failure may not have been cured in all material
respects at the expiration of 30 days following discovery
thereof by NCCC;
(v) There shall have occurred any outbreak or material
escalation of hostilities, declaration by the United States
of a national emergency or war or other calamity or crisis,
the effect of which on the financial markets is such as to
make it, in the judgment of SBRC, impracticable to continue
the commitment; or
(vi) NCCC fails to provide written notification to SBRC of any
material change in its loan origination, acquisition or
appraisal guidelines or practices, or NCCC, without the
prior consent of SBRC (which shall not be unreasonably
withheld), amends in any material respect its loan
origination, acquisition or appraisal guidelines or
practices;
provided, that SBRC shall have the right to dispose of any collateral held by
SBRC pursuant to this Letter Agreement. In connection with a Termination Event
under this Paragraph 5, SBRC shall have the right to transfer servicing as
provided in Section 1(b).
(c) Subject to the provisions of Paragraph 3 of this Letter Agreement,
this Letter Agreement shall terminate upon the earlier of (i) satisfaction of
the $1,000,000,000 commitment and (ii) November 30, 1999; provided that the CE
"repo" and equity certificate "repo" facility provided for in Section 4(a) and
the REO Financing Facility provided for in Section 4(c) shall continue under its
terms; provided, further, that SBRC may, in its sole discretion, extend the
terms of this Letter Agreement until such time that NCCC has been able to
fulfill its commitment without payment of a termination fee.
Notwithstanding any other provision of this Section 5, any grace or
notice period provided herein in respect of a notice to be given or action to be
taken by SBRC may be shortened or eliminated by SBRC if, in its sole good faith
discretion, it is unreasonable to do so under the circumstances, taking into
consideration, among other things, the volatility of the market for the Mortgage
Loans or other Securities involved, the extent and nature of any Termination
Event (or events which with the giving of such notice and passage of time would
constitute Termination Events) and the risks inherent in deferring the exercise
of remedies for the otherwise applicable grace or notice period.
6. General Provisions.
------------------
(a) Salomon Smith Barney's Discretion. It is understood that Salomon
---------------------------------
Smith Barney shall have absolute discretion in determining whether to accept or
reject any proposed offer or proposal to securitize any Mortgage Loan.
Notwithstanding the foregoing, however, subject to
<PAGE>
NC Capital Corporation
New Century Mortgage Corporation
December 11, 1998 Page 14.
NCCC's representations, warranties and covenants as set forth herein and in any
related agreements, all Standard Mortgage Loans, Non-Standard Mortgage Loans and
Problem Mortgage Loans originated by New Century in accordance with the
underwriting standards of New Century which were most recently approved by SBRC
shall be eligible for financing under the Aggregation Line in accordance with
the terms hereof. It is further understood that SBRC shall have absolute
discretion in determining whether any Mortgage Loan is a Standard Mortgage Loan,
Non-Standard Mortgage Loan or Problem Mortgage Loan and SBRC shall have the
right to approve or disapprove any Mortgage Loan with an unpaid principal
balance in excess of $1,000,000 (for which such Mortgage Loans, NCCC shall have
obtained two appraisals).
(b) Governing Law. This Letter Agreement shall be governed by and
-------------
construed in accordance with the laws of the State of New York (without regard
to its conflicts of laws principles).
(c) Amendment or Waiver. This Letter Agreement may not be amended or
-------------------
modified except in writing signed by each of the parties hereto.
(d) Counterparts. This Letter Agreement may be executed simultaneously in
------------
any number of counterparts. Each counterpart shall be deemed to be an original,
and all such counterparts shall constitute one and the same instrument.
(e) Severability Clause. Any part, provision, representation or warranty
-------------------
of this Letter Agreement which is prohibited or which is held to be void or
unenforceable shall be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof. Any part,
provision, representation or warranty of this Letter Agreement which is
prohibited or unenforceable or is held to be void or unenforceable in any
jurisdiction shall be ineffective, as to such jurisdiction, to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof. To the extent permitted by applicable law, the parties hereto
waive any provision of law which prohibits or renders void or unenforceable any
provision hereof. If the invalidity of any part, provision, representation or
warranty of this Letter Agreement shall deprive any party of the economic
benefit intended to be conferred by this Letter Agreement, the parties shall
negotiate, in good-faith, to develop a structure the economic effect of which is
nearly as possible the same as the economic effect of this Letter Agreement
without regard to such invalidity.
(f) No Partnership. Nothing herein contained shall be deemed or construed
--------------
to create a co-partnership or joint venture between the parties hereto.
(g) Further Agreements. NCCC and SBRC each agree to execute and deliver to
------------------
the other such reasonable and appropriate additional documents, instruments or
agreements as may be necessary or appropriate to effectuate the purposes of this
Letter Agreement.
<PAGE>
NC Capital Corporation
New Century Mortgage Corporation
December 11, 1998 Page 15.
(h) Termination. Other than those sections intended to survive in the
-----------
letter agreement dated March 31, 1998 among New Century, Salomon Smith Barney
and SBRC (including those sections related to indemnification), such letter
agreement is hereby terminated.
(i) Expenses. In addition to those expenses set forth in Section 2(a)
--------
above, NCCC shall pay subject to prenegotiated caps, all costs and expenses
related to any amendment of this Letter Agreement.
<PAGE>
Please confirm that the foregoing is in accordance with your understanding
by signing this letter of agreement and two enclosed copies and returning to us
the enclosed copies. The letter signed by you shall constitute a binding
agreement between us as of the date first above written.
Yours sincerely,
SALOMON BROTHERS REALTY CORP.
By: /s/ Mathew R. Bolo
----------------------------
Name: Mathew R. Bolo
Title: Authorized Agent
SALOMON SMITH BARNEY INC.
By: /s/ Mathew R. Bolo
----------------------------
Name: Mathew R. Bolo
Title: Vice President
ACCEPTED AND AGREED TO
AS OF THE DATE FIRST ABOVE WRITTEN:
NEW CENTURY MORTGAGE CORPORATION
By: /s/ Patrick J. Flanagan
---------------------------------
Name: Patrick J. Flanagan
Title: Executive Vice President
NC CAPITAL CORPORATION
By: /s/ Patrick J. Flanagan
---------------------------------
Name: Patrick J. Flanagan
Title: President
<PAGE>
EXHIBIT A
FORM OF RECOGNITION LETTER
Salomon Brothers Realty Corp.
Seven World Trade Center
New York, NY 10048
Attention: Mr. Vincent Varca
Facsimile No. (212) 783-3895
Re: [Name and Date of ] Servicing Agreement ("Agreement") between
[Name of Sub-Servicer] and New Century Mortgage Corporation
Ladies and Gentlemen:
The undersigned, _______________ ("Sub-Servicer"), having an address at
_________________, _________ Attention: _______________, has been informed by
New Century Mortgage Corporation ("New Century") that NC Capital Corporation
("NCCC") from time to time enters into transactions with you ("SBRC") in which
SBRC purchases mortgage loans (including the related servicing rights) serviced
by Sub-Servicer for New Century pursuant to the captioned Agreement, and NCCC
agrees to repurchase such mortgage loans (and related servicing rights) on
specified future dates (the agreement that provides for such purchases and
repurchases, the "Purchase and Sale Agreement"). New Century has requested that
Sub-Servicer provide this letter agreement to SBRC in order to, and Sub-Servicer
hereby agrees to, acknowledge that SBRC owns the servicing rights and, upon a
written notice to Sub-Servicer from SBRC that NCCC failed to repurchase a
Mortgage Loan on the related repurchase date or if NCCC defaults under the
Purchase and Sale Agreement and upon written notice to Sub-Servicer from U.S.
Bank National Association ("Custodian") that Custodian holds specified mortgage
loans (the "Salomon Loans") for SBRC, that Sub-Servicer will no longer be sub-
servicer with respect to the Salomon Loans, unless the term of sub-servicing is
extended by SBRC in its sole discretion. NCCC and New Century hereby agree to
indemnify Sub-Servicer for any loss, liability, damage, judgment, cost or
expense in any way related to the exercise of such termination by SBRC with
respect to the Salomon Loans. Any fee payable to the Sub-Servicer shall be paid
by New Century without any right of reimbursement by SBRC.
<PAGE>
NC Capital Corporation
New Century Mortgage Corporation
December 11, 1998 Page 2.
Yours sincerely,
SALOMON BROTHERS REALTY CORP.
By:_______________________________
Name:
Title:
NC CAPITAL CORPORATION
By:_______________________________
Name:
Title:
NEW CENTURY MORTGAGE CORPORATION
By:_______________________________
Name:
Title:
[SUB-SERVICER]
By:_______________________________
Name:
Title:
<PAGE>
EXHIBIT B
FORM OF LIMITED GUARANTY
<PAGE>
EXHIBIT 10.50
NEW CENTURY FINANCIAL CORPORATION
NONQUALIFIED STOCK OPTION AGREEMENT
THIS NONQUALIFIED STOCK OPTION AGREEMENT (this "AGREEMENT") dated as of the
30th day of September, 1998, by and between NEW CENTURY FINANCIAL CORPORATION, a
Delaware corporation (the "COMPANY"), and Fredric Forster (the "OPTIONEE").
W I T N E S S E T H
WHEREAS, the Optionee is a member of the Board of Directors of the Company
(the "BOARD"); and
WHEREAS, the Company has granted to the Optionee effective as of the 17th
day of September, 1998 (the "GRANT DATE") a nonqualified stock option to
purchase all or any part of 10,000 shares of the Company's Common Stock, par
value $0.01 per share (the "COMMON STOCK"), subject to and upon the terms and
conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises and covenants made
herein and the mutual benefits to be derived herefrom and for other good and
valuable consideration, the receipt of which is hereby acknowledged, the parties
agree as follows:
1. GRANT OF OPTION. This Agreement evidences the Company's grant to the
---------------
Optionee of the right and option to purchase, subject to and on the terms
and conditions set forth herein, all or any part of 10,000 shares of the
Company's Common Stock (the "SHARES") at the price of $10.00 per Share (the
"OPTION"), exercisable from time to time, subject to the provisions of this
Agreement, prior to the close of business on the day before the tenth
anniversary of the Grant Date (the "EXPIRATION DATE"), unless earlier
terminated pursuant to Section 4 or 6. Such price equals not less than the
fair market value of the Common Stock as of the Grant Date.
2. EXERCISABILITY OF OPTION. The Option shall vest and become exercisable in
------------------------
installments in accordance with the following schedule: (i) 3,334 of the
total number of Shares subject to the Option shall vest and become
exercisable on the first anniversary of the Grant Date, (ii) an additional
3,333 of the total number of Shares subject to the Option shall vest and
become exercisable on the second anniversary of the Grant Date, and (iii)
the remaining 3,333 Shares subject to the Option shall vest and become
exercisable on the third anniversary of the Grant Date.
If the Optionee does not in any year purchase all or any part of the Shares
to which the Optionee is entitled, the Optionee has the right cumulatively
thereafter to purchase any Shares not so purchased and such right shall
continue until the Option terminates or
<PAGE>
expires. The Option shall only be exercisable in respect of whole Shares,
and fractional Share interests shall be disregarded. The Option may only be
exercised as to at least 100 Shares unless the number purchased is the
total number at the time available for purchase under the Option.
3. METHOD OF EXERCISE OF OPTION. The Option shall be exercisable by the
----------------------------
delivery to the Secretary of the Company of a written notice stating the
number of Shares to be purchased pursuant to the Option and accompanied by
(i) delivery of an executed EXERCISE AGREEMENT in the form attached hereto
as EXHIBIT A, (ii) payment of the full purchase price of the Shares to be
purchased, and (iii) payment in full of any tax withholding obligation
under federal, state or local law. Payment shall be made in the form of
cash, by check payable to the order of the Company, in shares of Common
Stock valued at their fair market value at the close of trading on the
trading date next preceding the date of exercise of the Option, or partly
in such shares and partly in cash. Any shares of Common Stock used by the
Optionee to exercise the Option must have been owned by the Optionee for at
least six months prior to such use. In addition, the Optionee (or the
Optionee's beneficiary or personal representative) must furnish any written
statements required pursuant to Section 9 of this Option Agreement.
4. TERMINATION OF DIRECTORSHIP. If the Optionee's services as a member of the
---------------------------
Board terminate: (i) any portion of the Option which is not vested and
exercisable as of the date of such termination shall terminate; (ii) if
such termination is due to the Optionee's death or Total Disability, the
Optionee (or his successor in the event of his death, or personal
representative in the event of his incapacity) shall have until the date
that is one year after the date of such termination (subject to the term of
the Option set forth in Section 1) to exercise the Option to the extent
that it was vested and exercisable on the date of his termination (the
vested portion of the Option, to the extent not exercised at the end of
such one-year period, shall terminate); and (iii) if such termination is
due to any reason other than the Optionee's death or Total Disability, the
Optionee shall have until the date that is six months after the date of
such termination (subject to the term of the Option set forth in Section 1)
to exercise the Option to the extent that it was vested and exercisable on
the date of his termination (the vested portion of the Option, to the
extent not exercisable at the end of such six-month period, shall
terminate).
For purposes of the foregoing, "Total Disability" means a "permanent and
total disability" within the meaning of Section 22(c)(3) of the Internal
Revenue Code of 1986, as amended.
5. OPTION NOT TRANSFERABLE. The Option may be exercised only by, and shares
-----------------------
issuable pursuant to the Option shall be issued only to the Optionee or, if
the Optionee has died, his beneficiary or, if the Optionee has suffered a
permanent and total disability, his personal representative, if any, or if
there is none, the Optionee or a third party pursuant to such conditions
and procedures as the Board may establish. Other than by will or the laws
of descent and distribution, no right or benefit under the Option shall be
transferrable by the Optionee or shall be subject in any manner to
anticipation, alienation,
2
<PAGE>
sale, transfer, assignment, pledge, encumbrance or charge and any such
attempted action shall be void.
6. ADJUSTMENTS UPON CHANGES IN CAPITALIZATION.
------------------------------------------
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 the Option.
Upon the occurrence of an Event, the Option shall become immediately
exercisable to the full extent theretofore not exercisable.
If the Option has been fully accelerated as described in the foregoing
paragraph but is not exercised prior to (i) a dissolution of the Company,
or (ii) an event described above that the Company does not survive, the
Option shall thereupon terminate.
For purposes of this Section 6, "Event" means any of the following: (i)
approval by the shareholders of the Company of the dissolution or
liquidation of the Company; (ii) 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 (iii) 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 of the Company.
7. SECURITIES LAW COMPLIANCE.
-------------------------
7.1. INVESTMENT REPRESENTATIONS. The Optionee acknowledges that the
--------------------------
Option and Shares are not being registered under the Securities Act of
1933, as amended (the "Securities Act"), based, in part, on reliance that
the issuance of the Shares is exempt from registration under Regulation D
of the Securities Act and exempt from qualification under California
Corporate Securities Law (S) 25102(f) or other applicable exemption. The
Optionee acknowledges that by executing this Agreement he or she makes the
representations below:
NO INTENT TO SELL. The Optionee represents that he/she is acquiring
the Option and if and when he/she exercises the Option will acquire
any Shares solely for his/her own account, for investment purposes
only, and not with a view to or an intent to sell, or to offer for
resale in connection with any unregistered distribution
3
<PAGE>
of all or any portion of the Shares within the meaning of the
Securities Act or applicable state securities laws.
NO RELIANCE ON COMPANY. In evaluating the merits and risks of an
investment in the Shares, the Optionee represents that he/she has and
will rely upon the advice of his/her own legal counsel, tax advisors,
and/or investment advisors.
RELATIONSHIP TO AND KNOWLEDGE ABOUT COMPANY. The Optionee represents
that he/she is knowledgeable about the Company and has a preexisting
personal or business relationship with the Company. As a result of
such relationship, he/she is familiar with, among other
characteristics, its business and financial circumstances and has
access on a regular basis to or may request the Company's condensed
consolidated balance sheet and condensed consolidated income statement
setting forth information material to the Company's financial
condition, operations and prospects.
RISK OF LOSS. The Optionee represents that he/she is aware that the
Option may be of no practical value, that any value it may have
depends on its vesting and exercisability as well as an increase in
the fair market value of the underlying Shares from the date of grant
to the date of exercise.
RESTRICTIONS ON SHARES. The Optionee represents that he/she
understands that any Shares acquired on exercise of the Option will be
characterized as "restricted securities" under the federal securities
laws since the Shares are being acquired from the Company in a
transaction not involving a public offering and that under such laws
and applicable regulations such securities may be resold without
registration under the Securities Act only in certain limited
circumstances. The Optionee acknowledges receiving a copy of Rule 144
promulgated under the Securities Act, as presently in effect, and
represents that he/she is familiar with such rule, and understands the
resale limitations imposed thereby and by the Securities Act and
applicable state securities laws.
ADDITIONAL RESTRICTIONS. The Optionee represents that he/she has read
and understands the restrictions and limitations imposed on the Option
and any Shares which may be acquired thereunder, including, but not
limited to, the non-transferability provisions of Section 5.
NO COMPANY REPRESENTATIONS. The Optionee represents that at no time
was an oral representation made to him/her relating to the Option or
the purchase of Shares and that he/she was not presented with or
solicited by any promotional meeting or material relating to the
Option or the Shares.
SHARE CERTIFICATE LEGEND. The Optionee represents that he/she
understands and acknowledges that any certificate evidencing the
Shares (or evidencing any other securities issued with respect thereto
pursuant to any stock split, stock dividend,
4
<PAGE>
merger or other form of reorganization or recapitalization) if and
when issued shall bear, in addition to any other legends which may be
required by applicable state securities laws, the legend set forth in
Section 8.2.
7.2. STOCK CERTIFICATE LEGEND. The Optionee understands and acknowledges
------------------------
that the certificate evidencing the shares (or evidencing any other
securities issued with respect thereto pursuant to any stock split, stock
dividend, merger or other form of reorganization or recapitalization) if
and when issued shall bear, in addition to any other legends which may be
required by the Exercise Agreement or applicable state securities laws, the
following legends:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, BUT ARE ISSUED IN RELIANCE ON
THE REPRESENTATION THAT THEY ARE TAKEN FOR INVESTMENT AND NOT FOR
REDISTRIBUTION. AS A CONDITION OF ANY TRANSFER HEREOF, THE COMPANY MAY
REQUIRE AN OPINION OF COUNSEL SATISFACTORY TO IT THAT ALL STATUTORY
REGISTRATION PROVISIONS HAVE BEEN MET OR DO NOT APPLY."
8. ASSIGNMENT. This Agreement and all of the provisions hereof shall be
----------
binding upon and inure to the benefit of the parties hereto and their
respective successors and permitted assignees. Neither this Agreement nor
any of the rights, interests or obligations hereunder shall be assigned
(except as otherwise expressly provided herein) by either party without the
prior written consent of the other.
9. PRIVILEGES OF STOCK OWNERSHIP. Except as otherwise expressly authorized by
-----------------------------
the Board, the Optionee shall not be entitled to any privilege of stock
ownership as to any Shares not actually delivered to and held of record by
him. 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.
10. NOTICES. Any notice to be given under the terms of this Agreement shall be
-------
in writing and addressed to the Company at its principal office to the
attention of the Secretary, and to the Employee at the address given
beneath the Employee's signature hereto, or at such other address as either
party may hereafter designate in writing to the other. Any such notice
shall be deemed to have been duly given when enclosed in a properly sealed
envelope addressed as aforesaid, registered or certified, and deposited
(postage and registry or certification fee prepaid) in a post office or
branch post office regularly maintained by the United States Government.
11. ENTIRE AGREEMENT. This Agreement and the Exercise Agreement, together,
----------------
constitute the entire agreement and supersede all prior understandings and
agreements, written or oral, of the parties hereto with respect to the
subject matter hereof. This Agreement and the Exercise Agreement may be
amended only by mutual agreement of the parties. Such amendment must be in
writing and signed by both parties. The Company may, however,
5
<PAGE>
unilaterally waive any provision hereof in writing to the extent such
waiver does not adversely affect the interests of the Optionee hereunder,
but no such waiver shall operate as or be construed to be a subsequent
waiver of the same provision or a waiver of any other provision hereof.
12. GOVERNING LAW. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the State of Delaware without
regard to conflict of law principles thereunder.
13. RIGHTS OF OPTIONEE.
------------------
Nothing contained in this Agreement or in any other documents related to
this Agreement shall confer upon the Optionee 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 the Optionee's compensation or other benefits or to
terminate the services or employment of the Optionee, with or without
cause, but nothing contained in this Agreement or any document related
thereto shall affect any independent contractual right of the Optionee.
Nothing contained in this Agreement 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.
The Option shall be payable in shares of Common Stock (subject to
adjustment as described above) and no special or separate reserve, fund or
deposit shall be made to assure payment of the Option. Neither the
Optionee nor any other person shall have any right, title or interest in
any fund or in any specific asset (including shares of Common Stock) of the
Company by reason of the Option. Neither the provisions of this Agreement
(or of any documents related hereto), nor the grant of the Option shall
create, or be construed to create, a trust of any kind or a fiduciary
relationship between the Company and the Optionee or other person.
14. COMPLIANCE WITH LAWS. Notwithstanding anything else contained herein to
--------------------
the contrary, this Agreement, the granting and vesting of the Option and
the offer, issuance and delivery of Shares under this Agreement are subject
to compliance with all applicable federal and state laws, rules and
regulations (including but not limited to state and federal securities laws
and federal margin requirements) 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. Any
securities delivered in respect of this Agreement will be subject to such
restrictions, and to any restrictions the Company may require to preserve a
pooling of interests under generally accepted accounting principles, and
the person acquiring such securities will, 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
<PAGE>
No holder of any Shares shall sell, pledge or otherwise transfer Shares
acquired pursuant to the Option or any interest in such Shares except in
accordance with the express terms of this Agreement. Any attempted
transfer in violation of this Agreement shall be void and of no effect.
Without in any way limiting the provisions set forth above and subject to
further limitations set forth herein, no holder of Shares shall make any
disposition of all or any portion of Shares acquired pursuant to an Option,
except in compliance with all applicable federal and state securities laws
and unless and until:
(a) there is then in effect a registration statement under the
Securities Act covering such proposed disposition and such disposition
is made in accordance with such registration statement; or
(b) such disposition is made in accordance with Rule 144 under the
Securities Act; or
(c) such holder notifies the Company of the proposed disposition and
furnishes the Company with a statement of the circumstances
surrounding the proposed disposition, and, if requested by the
Company, such holder furnishes the Company with an opinion of counsel
acceptable to the Company's counsel, that such disposition will not
require registration under the Securities Act and will be in
compliance with all applicable state securities laws.
(Remainder of Page Intentionally Left Blank)
7
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Agreement to be executed on
its behalf by a duly authorized officer and the Optionee has hereunto set his or
her hand as of the date first written above.
NEW CENTURY FINANCIAL CORPORATION
a Delaware corporation
By: /s/ Brad Morrice
---------------------------------------
Its: President
-------------------------------------
OPTIONEE
/s/ Fredric Forster
------------------------------------------
Signature
Fredric Jan Forster
------------------------------------------
Print Name
121 Starboard Way
------------------------------------------
Address
Corona del Mar, CA 92625
------------------------------------------
City, State, Zip Code
CONSENT OF SPOUSE
In consideration of the execution of the foregoing Nonqualified Stock
Option Agreement by New Century Financial Corporation, I, Aviva Forster ,
---------------------
the spouse of the Optionee herein named, do hereby agree to be bound by all of
the terms and provisions thereof.
DATED: September 30, 1998 /s/ Aviva Forster
-----------------------------------------
Signature of Spouse
8
<PAGE>
EXHIBIT A
NEW CENTURY FINANCIAL CORPORATION
EXERCISE AGREEMENT
THIS EXERCISE AGREEMENT (this "AGREEMENT") dated as of the ____ day of
______________, _____, by and between NEW CENTURY FINANCIAL CORPORATION, a
Delaware corporation (the "COMPANY"), and Fredric Forster (the "PURCHASER").
R E C I T A L S
WHEREAS, the Company has granted to the Purchaser a nonqualified stock
option (the "OPTION") to purchase all or any part of a designated amount of
authorized but unissued shares of common stock of the Company and in connection
therewith, the Company and the Purchaser entered into that certain Nonqualified
Stock Option Agreement dated as of September 30, 1998 (the "OPTION AGREEMENT")
of which this Agreement is a part and incorporated therein;
WHEREAS, the Purchaser desires to exercise the Option and purchase
from the Company and the Company wishes to issue and sell to the Purchaser
_______ shares of its common stock, par value $0.01 per share (the "COMMON
STOCK"), to be sold at a price of $10.00 per share, in accordance with and
subject to the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the above premises and the
representations, warranties, covenants and agreements contained in this
Agreement, and for other good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto agree as follows:
1. PURCHASE AND SALE OF COMMON STOCK. The Company shall deliver to the
---------------------------------
Purchaser a stock certificate representing the shares of Common Stock
against delivery to the Company by the Purchaser of the purchase price in
the sum of $____________ (which represents the product of the $10.00 price
per share and the number of shares, the "PURCHASE PRICE").
2. INVESTMENT REPRESENTATIONS. The Purchaser acknowledges that the shares of
--------------------------
Common Stock are not being registered under the Securities Act of 1933, as
amended (the "SECURITIES ACT"). The Purchaser hereby affirms as made as of
the date hereof the representations made in Section 8.1 of the Option
Agreement and such representations are incorporated herein by this
reference. The Purchaser has no need for liquidity in this investment, has
the ability to bear the economic risk of this investment, and can afford a
complete loss of the Purchase Price. The Purchaser has received the
Company's consolidated financial information which includes information
material to the Company's financial condition, operations and prospects.
The Purchaser also understands and
9
<PAGE>
acknowledges the restrictive legend provision contained in Section 8.2 of
the Option Agreement.
3. RESTRICTIONS ON SHARES. The shares of Common Stock acquired pursuant to
----------------------
Section 1 hereof are subject to and the Purchaser agrees to be bound by the
provisions of Section 15 of the Option Agreement, incorporated herein by
this reference.
4. MISCELLANEOUS. This Agreement shall be governed by and construed and
-------------
enforced in accordance with the laws of the state of Delaware. This
Agreement and the Option Agreement, together constitute the entire
agreement and supersede all prior understandings and agreements, written or
oral, of the parties hereto with respect to the subject matter hereof.
This Agreement may be amended by mutual agreement of the parties. Such
amendment must be in writing and signed by the Company. The Company may,
however, unilaterally waive any provision hereof in writing to the extent
such waiver does not adversely affect the interests of the Purchaser
hereunder, but no such waiver shall operate as or be construed to be a
subsequent waiver of the same provision or a waiver of any other provision
hereof.
(Remainder of Page Intentionally Left Blank)
10
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
date first written above.
NEW CENTURY FINANCIAL CORPORATION
a Delaware corporation
By:
--------------------------------------
Its:
-------------------------------------
OPTIONEE
-----------------------------------------
Signature
-----------------------------------------
Print Name
-----------------------------------------
Address
-----------------------------------------
City, State, Zip Code
CONSENT OF SPOUSE
In consideration of the execution of the foregoing Exercise Agreement
by New Century Financial Corporation, I, ___________________________, the spouse
of the Optionee herein named, do hereby agree to be bound by all of the terms
and provisions thereof.
DATED:______________, 1998
-----------------------------------------
Signature of Spouse
11
<PAGE>
EXHIBIT 21
NEW CENTURY FINANCIAL CORPORATION
SUBSIDIARIES OF REGISTRANT
State or other Jurisdiction
Name of Incorporation
---- ----------------
New Century Mortgage Corporation California
(also doing business as New Century
Corporation and Century Mortgage
Corporation)
NC Capital Corporation California
NC Residual II Corporation Delaware
New Century R.E.O. Corp. California
NC Residual Corporation Delaware
PWF Corporation California
(also doing business as Primewest
Funding and Western Capital Mortgage)
<PAGE>
Exhibit 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
New Century Financial Corporation:
We consent to incorporation in the registration statements (Nos. 333-36129, 333-
32709, 333-68467 and 333-53665) on Form S-8 of New Century Financial Corporation
of our report dated January 26, 1999, relating to the consolidated balance
sheets of New Century Financial Corporation and Subsidiaries as of December 31,
1998 and 1997 and the related consolidated statements of earnings, changes in
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1998, which report appears in the December 31, 1998
annual report on Form 10-K of New Century Financial Corporation.
/s/ KPMG LLP
Orange County, California
March 30, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF NEW CENTURY FINANCIAL CORPORATION AND SUBSIDIARIES FOR
THE YEAR ENDED DECEMBER 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 30,875,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 356,975,000
<CURRENT-ASSETS> 0
<PP&E> 6,676,000
<DEPRECIATION> 3,032,000
<TOTAL-ASSETS> 624,727,000
<CURRENT-LIABILITIES> 16,056,000
<BONDS> 472,126,000
20,000,000
0
<COMMON> 145,000
<OTHER-SE> 94,468,000
<TOTAL-LIABILITY-AND-EQUITY> 624,727,000
<SALES> 105,060,000
<TOTAL-REVENUES> 176,407,000
<CGS> 0
<TOTAL-COSTS> 83,771,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,328,000
<INCOME-PRETAX> 52,308,000
<INCOME-TAX> 21,193,000
<INCOME-CONTINUING> 31,115,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 31,115,000
<EPS-PRIMARY> 2.20
<EPS-DILUTED> 2.03
</TABLE>
