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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, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM_____________ TO____________
COMMISSION FILE NUMBER 000-22633
NEW CENTURY FINANCIAL CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 33-0683629
(STATE OR OTHER JURISDICTION (I. R. S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
18400 VON KARMAN, SUITE 1000, IRVINE, CALIFORNIA 92612
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (949) 440-7030
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 PAR VALUE
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
The aggregate market value of Common Stock held by non-affiliates of
the Registrant on March 24, 2000 was approximately $36.8 million based on the
closing sales price for the Common Stock on such date of $9.25 as reported on
the Nasdaq National Market.
As of March 24, 2000, the Registrant had 14,737,894 shares of Common
Stock outstanding.
PART III INCORPORATES INFORMATION BY REFERENCE FROM THE REGISTRANT'S
DEFINITIVE PROXY STATEMENT FOR ITS 2000 ANNUAL MEETING OF STOCKHOLDERS TO BE
FILED WITH THE COMMISSION WITHIN 120 DAYS OF DECEMBER 31, 1999.
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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 70.9% of
the Company's total originations and purchases in 1999. Retail originations
are made through the Company's network of retail offices, through its
Primewest subsidiary and through the Internet, and represented 29.1% of the
Company's total originations and purchases in 1999.
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 68.5% of the
principal balance of the loans originated and purchased by the Company in
1999 were to borrowers within the Company's two highest credit grades.
Approximately, 93.6% of its loans originated or purchased during 1999 were
secured by borrowers' primary residences. The average loan-to-value ratio on
loans originated and purchased by the Company in 1999 was approximately
78.8%. Approximately 96.7% of the loans originated and purchased by the
Company during 1999 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 81.4% of the loans originated and purchased
by the Company in 1999 were refinances of existing loans, while the remaining
18.6% 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 1999, whole loan sales
accounted for 25.5% 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 1999, the Company's
servicing portfolio, including loans held for sale, totaled $5.9 billion.
Servicing income also includes interest earned on the Company's residual
interests in securitizations, which grew to $364.7 million as of December 31,
1999. In 1999, servicing revenues totaled $50.8 million, and accounted for
21.7% of the Company's total revenues.
NET INTEREST INCOME. In 1999 the Company earned $8.3 million in net
interest income, which represented approximately 12.4% of the Company's
pre-tax earnings. Net interest income is earned on loans held in inventory
for sale.
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GROWTH AND OPERATING STRATEGIES
"FOCUS 2000" BUSINESS PLAN. In February 2000, the Company announced
its "Focus 2000" initiative that articulated the Company's principal
operating strategies for the coming year. The "Focus 2000" Plan emphasizes
greater efficiencies and improved operating disciplines. Among the most
significant goals are the following:
- - Decreasing all-in acquisition costs to 2.50% by year-end
- - Improving cash flow by selling a greater percentage of whole loans and
securitizing a smaller percentage of total originations
- - Concentrating on originating loans with characteristics for which whole
loan buyers will pay a higher premium
- - Transitioning from a monoline, sub-prime mortgage company to a company
which can offer customers a broader menu of financing products and
services
- - Transitioning from utilizing solely "traditional" delivery channels to
a company that is a leading provider of financial products and services
over the Internet
REDUCING ALL-IN ACQUISITION COSTS PER LOAN. The Company defines the
"all-in acquisition cost" per loan as the fees paid to wholesale brokers and
correspondents, direct loan origination costs (including commissions and
corporate overhead costs), less the sum of points and fees received from
retail borrowers, divided by total production volume. Comparing 1998 to 1999,
the Company's all-in acquisition costs decreased from 3.62% to 2.99% of the
average original principal balance of the Company's loans. During 2000, the
Company intends to emphasize reducing all-in acquisition costs to 2.50% by
year-end and to 2.25% in 2001. The principal strategies to achieve this goal
are (i) improving the fee structure (ii) decreasing corporate overhead and
commission expenses (iii) increasing staff efficiency, and (iv) reducing
marketing costs--all while preserving loan production volume. This strategy
will require the implementation of both improved processes and enhanced
technology, including the Company's automated underwriting system which is in
the final testing stage. During the first quarter of 2000, the Company has
restructured its wholesale and retail commission programs, and has reduced
the total number of employees by approximately 12% from its fourth quarter
1999 high of 1,770 employees. The staff reductions have to date been
accomplished by closing unprofitable branches and by streamlining corporate
operations.
IMPROVING CASH FLOW. During 2000, the Company intends to improve its
cash flow, so as to achieve and then maintain cash neutral operations. The
principal strategy for improving cash flow will be to sell a higher
percentage of loans in whole loan sales, and to securitize a smaller portion
of loan production. In addition, the Company will focus on further improving
cash flow by (i) reducing the all-in-acquisition cost of the Company's loans,
(ii) increasing the cash generated by the Company's servicing operations, and
(iii) improving the ratio of loans funded over total loans submitted.
INCREASE VALUE OF LOAN PRODUCTION. The Company has strengthened 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.
PRODUCT DIVERSIFICATION. During 2000, the Company intends to
continue the process of developing a broader range of loan and other
financial product offerings. The Company has been approved as a
seller/servicer by Freddie Mac, and intends to begin offering conforming loan
products by the end of the second quarter of 2000. Likewise, the Company's
anyloan.com web-site currently offers customers links through which they can
apply for auto loans, credit cards, student loans and other non-mortgage
financial products. The licensing effort is currently in process to allow the
Company to offer more of those products directly. Finally, the Company is
establishing an insurance agency through which it will be able to offer
customers various insurance products tailored to their needs.
3
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INTERNET INITIATIVES. Another key element of the Focus 2000 Plan is
continued expansion of the Company's Internet operations. Development of a
revamped wholesale web-site, which the Company believes is one of the most
advanced business-to-business mortgage web-sites in the industry, was
completed during the fourth quarter and is currently in pilot testing with a
limited number of brokers. The Company's anyloan.com division also unveiled
its second generation web-site which offers consumers a wide variety of loan
products including auto financing and credit cards with on-line applications
and response capabilities. The Company's focus for 2000 is to attract
business through various marketing efforts together with providing the best
financial services to its customers.
IMPROVING PROFITABILITY OF LOAN PRODUCTION WHILE PRESERVING VOLUME.
In 2000, the Company's production units will focus on improving the overall
profitability of loan production by concentrating on originating higher-value
loans and reducing low-margin production. The Retail and Wholesale Divisions
intend to close unprofitable branches and be increasingly selective about new
branch openings. The Company will also evaluate adding profitable loan
production through targeted acquisitions of smaller originators.
MAINTAINING MULTIPLE FINANCING SOURCES AND SECURITIZATION CHANNELS.
During 1999, the Company established aggregation and residual financing
facilities totaling over $600 million with Greenwich Capital and PaineWebber.
In addition, the Company renewed its financing arrangements with Salomon
Smith Barney, Inc. As a result, the Company effected five of its eight
securitizations through Salomon Smith Barney, Inc., with the remaining three
being underwritten by Greenwich and PaineWebber. The Company also established
its own $2 billion shelf registration statement with the Securities and
Exchange Commission to allow it greater flexibility in selecting the
underwriter for future securitizations. During 2000, the Company intends to
continue to maintain at least two active investment-banking relationships for
securitizations and residual financing.
U.S. BANCORP STRATEGIC ALLIANCE. A key element of the Company's
strategy for the Year 2000 is to expand its strategic alliance with U.S. Bank.
To this end, in February 2000 the Company received an additional $10 million
in subordinated debt financing from U.S. Bank. In March 2000, the Company also
received a commitment from U.S. Bank to (i) provide an additional $10 million
in financing to help fund the Company's Year 2000 capital plan, and (ii)
extend the maturity of the subordinated debt to June 2002.
ACQUISITIONS AND STRATEGIC ALLIANCES. In 2000, the Company will
continue to evaluate potential acquisitions and strategic alliances with
mortgage originators. In March 2000, the Company acquired a small Southern
California-based wholesale loan originator called Worth Funding Incorporated.
MARKETING
RETAIL MARKETING. The Company's Retail Division relies primarily on
targeted direct mail and outbound telemarketing to attract borrowers. 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 tracked centrally and
then forwarded to 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 the customer. The Direct
Origination Center sends direct mail 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.
The Company's Primewest and anyloan.com operations also rely on
internet-based advertising such as banner ads, search engines and links to
related web-sites in order to direct potential borrowers to the Company's
web-sites.
In 1999 the Company also completed initial testing of broader
marketing efforts designed to build recognition of the New Century brand. The
Company tested radio and television advertisements in selected markets in the
third and fourth quarters of 1999. In 2000, the Company does not intend to
continue to pursue the television channel for the "New Century" brand.
However, the Company is considering a variety of strategies, including
television and radio, to improve familiarity with its "anyloan.com" brand.
4
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WHOLESALE MARKETING. 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. These efforts are supplemented with direct mail to brokers,
advertisements in trade publications and periodic sales contests.
LOAN ORIGINATIONS AND PURCHASES
The Company originates and purchases loans through its Wholesale and
Retail Divisions, through its Primewest subsidiary and through its
anyloan.com division. The Wholesale Division originates and purchases loans
through a network of independent mortgage brokers and correspondents. The
Retail Division, Primewest and anyloan.com solicit loans directly from
prospective borrowers. All of the Company's loans are secured by first or
second mortgages on one-to-four family residences.
WHOLESALE DIVISION. The Wholesale Division funded $2.9 billion in
loans, or 70.9% of the Company's total loan production, during 1999. As of
December 31, 1999, the Wholesale Division was operating through five regional
operating centers located in Southern California, Northern California,
Chicago, Atlanta, and Tampa and through 41 additional sales offices located
in Arizona, Arkansas, California (2), Colorado, Florida (3), Idaho, Indiana,
Louisiana, Massachusetts, Michigan, Minnesota, Missouri (2), Nevada, New
Mexico, North Carolina (3), Ohio (2), Oregon (3), Pennsylvania, South
Carolina (3), Tennessee, Texas (4), Utah, Virginia, Washington (2), and
Wisconsin (2), employing a total of 176 account executives. As of December
31, 1999, the Company had relationships with approximately 9,000 approved
mortgage brokers and during 1999 originated loans through approximately 4,580
brokers. During 1999, New Century's ten largest producing brokers originated
approximately 6.3% of the Company's loans, with the largest broker, Qualified
Financial Services, accounting for approximately 1.6% 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
application 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 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.
5
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The following table sets forth selected information relating to
wholesale loan originations during the periods shown:
<TABLE>
<CAPTION>
For the Quarters Ended
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March 31, June 30, September 30, December 31,
1999 1999 1999 1999
---------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C>
Principal balance (in
thousands)..................... $ 646,137 $ 668,560 $ 823,551 $ 756,269
Average principal balance per
loan (in thousands)............ $ 103 $ 111 $ 109 $ 109
Combined weighted average
initial loan-to-value ratio.... 79.2% 79.1% 78.8% 78.3%
Percent of first mortgage loans 96.4 95.8 95.1 93.8
Property securing loans:
Owner occupied............... 86.4 87.5 88.7 90.0
Non-owner occupied........... 13.6 12.5 11.3 10.0
Weighted average interest rate:
Fixed-rate................... 10.4 10.2 10.0 10.5
ARMs......................... 9.8 9.8 9.8 10.1
Margin--ARMs................. 6.1 6.1 6.1 6.1
</TABLE>
RETAIL DIVISION, PRIMEWEST AND ANYLOAN.COM. During 1999, the Company
originated $1.2 billion in loans, or 29.1% of the Company's total loan
production through its Retail Operations, including $163.1 million, or 4.0%,
originated through its Primewest subsidiary and $21.7 million, or .05%,
originated through anyloan.com, which commenced operations in August, 1999.
As of December 31, 1999, the Retail Division employed 298 retail loan
officers, located in 83 sales offices in Arizona (4), California (21),
Colorado (2), Delaware, Florida (6), Georgia, Hawaii (2), Illinois (3),
Indiana, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Minnesota
(3), Missouri (2), Montana, Nevada (2), New Jersey, New Mexico, North
Carolina (2), Ohio (4), Oklahoma, Oregon, Pennsylvania (2), Tennessee (2),
Texas (8), Utah, Virginia (2), and Washington (4). As of December 31, 1999,
Primewest employed 44 loan officers and anyloan.com employed 10 loan officers
at their 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.
For the year ended December 31, 1999, the retail loan originations
and purchases included $39 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, 1999,
the Company had service provider relationships with 172 banks and other
financial institutions, 98 of which were producing loan volume for the
Company.
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The following table sets forth selected information relating to
retail loan originations, including Primewest and anyloan.com, during the
periods shown:
<TABLE>
<CAPTION>
For the Quarters Ended
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March 31, June 30, September 30, December 31,
1999 1999 1999 1999
--------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Principal balance (in thousands). $ 245,780 $ 290,426 $ 333,952 $ 315,589
Average principal balance per
loan (in thousands).............. $ 89 $ 90 $ 94 $ 88
Combined weighted average
initial loan-to-value ratio...... 77.6% 78.5% 79.6% 78.9%
Percent of first mortgage loans.. 88.7 84.4 84.8 80.8
Property securing loans:
Owner occupied................. 88.5 90.8 91.4 92.4
Non-owner occupied............. 11.5 9.2 8.6 7.6
Weighted average interest rate:
Fixed-rate..................... 10.1 10.1 10.0 10.4
ARMs........................... 9.6 9.5 8.7 9.5
Margins--ARMs.................. 6.4 6.4 6.4 5.9
</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 $290 million short-term warehouse
credit facility led by U.S. Bank National Association to fund its
originations and purchases. The Company also relies on three aggregation and
residual financing facilities totaling $1.4 billion with Salomon Brothers
Realty Corp., Greenwich Capital and PaineWebber 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.
The Company's borrowers fall into five sub-prime risk
classifications. The Company's 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
$600,000 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 "AAA", "A+" or "A-."
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Loans originated or purchased by the Company in 1999 had an average
loan amount of approximately $102,000 and an average loan-to-value ratio of
approximately 78.8%. Unless prohibited by state law or otherwise waived by
the Company, the Company's loans generally impose a prepayment charge on the
borrower for certain full or partial prepayments early in the loan's term.
Approximately 75.0% of the loans the Company originated or purchased during
1999 provided for the payment by the borrower of a prepayment charge under
some circumstances.
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 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 $600,000. 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 95%,
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.
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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.
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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
History................ Maximum one Maximum three Maximum one Maximum one Maximum of two
30-day late 30-day late 60-day late 90-day late 90-day late
payment and no payments and no payment within payment within payments and one
60-day late 60-day late last 12 months; last 12 120-day late
payments w/in last payments w/in must be less months; must payment w/in
12 mos.; required last 12 mos.; than 60 days be less than last 12 months;
to be current at required to be late at funding. 90 days late less than 120
funding; current at at funding. days late at
must have an LTV funding. funding. No
of 90% or less. current Notice
of Default.
Other credit........... 4 accts w/30-day Past/Present Past/Present Significant Significant
late payments or 30-day late 30-day late prior Defaults
FICO score of 620 payments and 1 payments and 4 defaults acceptable;
or higher; no acct w/60 day accts w/60-day acceptable; collection
more than $500 in late payment or late payments generally, no accounts may
open collection FICO score of and 2 accts more than remain open
accounts or 590 or higher; w/90-day late $5,000 in open after funding.
charge-offs open no more than payments or FICO collection
after funding. $1,000 in open score of 570 or accounts or
collection higher; some charge-offs
accounts or prior defaults open after
charge-offs acceptable; no funding; on a
open after more than $2,500 case by case
funding. in open basis.
collection
accounts or
charge-offs open
after funding.
Bankruptcy filings..... Generally, no Generally, no Generally, no Generally, no Generally, no
Chapter 7 Bankruptcy Bankruptcy or Bankruptcy or Bankruptcy or
Bankruptcy filings in last Notice of Notice of Notice of
discharge or 2 years or Default filings Default Default filings
Notice of Default Notice of in last 2 years. filings in allowed in last
filings in last 3 Default filings last 12 12 months from
years or Chapter in last 3 years. months. discharge date.
13 Bankruptcy
discharge in last
2 years.
Debt service to income
Ratio.................. 45% to 55% 45% to 55% 55% to 59% 55% to 59% 50% to 59%
Maximum loan-to-value
ratio ("LTV"):(2)
Owner occupied:
single family........ 90% 90% 80% 75% 70%
Owner occupied:
condo/three-to-four
unit................. 85% 85% 75% 70% 65%
Non-owner occupied... 85% 80% 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 and must be current at funding. 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 $300,000 and
all derogatory credit report items must either be brought current or paid
through the loan proceeds. A maximum of 3% of the loan proceeds may be paid
to the borrower in cash. If the borrower is in an open Chapter 13 or Chapter
11 bankruptcy, the bankruptcy must be discharged through the proceeds of the
loan.
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,
1999 1999 1999 1999
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
A+ RISK GRADE:
Percent of total purchases and
originations........................ 39.3% 38.6% 39.4% 31.1%
Combined weighted average
initial loan-to-value ratio......... 81.5 81.7 81.8 81.7
Weighted average interest rate:
Fixed-rate...................... 9.8 9.6 9.5 10.1
ARMs............................ 9.4 9.3 9.2 9.6
Margin--ARMs.................... 5.8 5.8 5.9 5.8
A- RISK GRADE:
Percent of total purchases and
originations........................ 29.0% 30.2% 31.4% 34.7%
Combined weighted average initial
loan-to-value ratio................. 80.7 80.4 81.0 80.9
Weighted average interest rate:
Fixed-rate...................... 10.0 9.9 9.8 10.1
ARMs............................ 9.6 9.5 9.5 9.8
Margin--ARMs.................... 6.2 6.2 6.2 6.1
B RISK GRADE:
Percent of total purchases and
originations........................ 16.9% 16.5% 16.1% 18.7%
Combined weighted average initial
loan-to-value ratio................. 76.2 77.2 75.9 75.5
Weighted average interest rate:
Fixed-rate...................... 10.5 10.4 10.2 10.7
ARMs............................ 9.8 9.9 9.8 10.1
Margin--ARMs.................... 6.4 6.5 6.5 6.4
C RISK GRADE:
Percent of total purchases and
originations........................ 9.8% 9.7% 8.2% 8.7%
Combined weighted average initial
loan-to-value ratio................. 72.4 72.1 71.4 71.2
Weighted average interest rate:
Fixed-rate...................... 11.6 11.5 11.4 11.8
ARMs............................ 10.7 10.6 10.6 11.0
Margin--ARMs.................... 6.7 6.7 6.7 6.6
C- RISK GRADE:
Percent of total purchases and
originations........................ 5.0% 5.0% 4.9% 6.8%
Combined weighted average initial
loan-to-value ratio................. 67.2 67.2 66.7 69.1
Weighted average interest rate:
Fixed-rate...................... 12.1 11.8 11.5 11.5
ARMs............................ 11.5 11.6 11.6 11.4
Margin--ARMs.................... 6.7 6.7 6.6 6.4
- --------------------------------------------------------------------------------------------------------------
</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, 1999 June 30, 1999 September 30, 1999 December 31, 1999
------------------- ---------------------- ---------------------- ------------------------
$ % $ % $ % $ %
------------------- ----------- --------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
California..... $ 239,020 26.8% $ 303,263 31.6% $ 375,262 32.4% $ 355,828 33.2%
Illinois....... 65,545 7.3% 66,982 7.0% 79,018 6.8% 81,962 7.6%
Florida........ 65,565 7.4% 64,140 6.7% 68,605 5.9% 57,739 5.4%
Texas.......... 47,114 5.3% 51,959 5.4% 66,649 5.8% 71,987 6.7%
Washington..... 37,827 4.2% 40,317 4.2% 44,709 3.9% 40,114 3.7%
Massachusetts.. 30,782 3.5% 31,896 3.3% 46,135 4.0% 41,171 3.8%
Colorado....... 23,707 2.7% 36,365 3.8% 37,085 3.2% 36,286 3.4%
Minnesota...... 28,221 3.2% 33,856 3.5% 35,133 3.0% 28,857 2.7%
Ohio........... 39,959 4.5% 28,529 3.0% 33,526 2.9% 28,377 2.6%
Michigan....... 25,969 2.9% 22,167 2.3% 31,543 2.7% 33,710 3.1%
Other.......... 288,209 32.2% 279,512 29.2% 339,838 29.4% 295,827 27.8%
------------------- ----------- --------- ----------- ---------- ----------- ----------
Total........ $ 891,917 100.0% $ 958,986 100.0% $1,157,503 100.0% $1,071,858 100.0%
========== ====== ========== ====== ========== ====== ========== ======
</TABLE>
LOAN SALES AND SECURITIZATIONS
The secondary marketing functions of the Company are performed by a
separate subsidiary, NC Capital Corporation, which 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 paid for
the loans approximates the secondary market value of the loans based on
current market conditions. NC Capital then sells the loans through both
securitizations and bulk sales to institutional purchasers of whole loans. NC
Capital is 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 1999, whole loan sales accounted for $1.0 billion, or 25.5% of
the Company's total loan sales. Of this amount, 28.6% were sold
servicing-retained and 71.4% 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 1999 whole loan
sales was equal to 103.2% 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 1999,
the Company sold loans to many institutional purchasers. No whole loan buyer
accounted for more than 10% of the Company's total loan sales and
securitizations in 1999.
13
<PAGE>
Whole loan sales are made on a non-recourse basis pursuant to a
purchase agreement containing customary representations and warranties by the
Company regarding the underwriting criteria applied by the Company and the
origination process. The Company, therefore, may be required to repurchase or
substitute loans in the event of a breach of its representations and
warranties. In addition, the Company sometimes commits to repurchase or
substitute a loan if a payment default occurs within the initial months
following the date the loan is funded, unless other arrangements are made
between the Company and the purchaser. The Company is also required in some
cases to repurchase or substitute a loan if the loan documentation is alleged
to contain fraudulent misrepresentations made by the borrower.
SECURITIZATIONS. During 1999, the Company completed the sale of
loans through eight securitization transactions, five securitizations through
Salomon Smith Barney, Inc., two co-underwritten by Greenwich Capital and
PaineWebber Inc., and one underwritten solely by Greenwich Capital.
In a securitization, the Company sells a pool of loans to a trust
for the following: (i) a cash purchase price and (ii) a certificate
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 are received from the trust
holding the respective loan pool.
Three of the 1999 securitizations were credit enhanced by an
insurance policy provided through a monoline insurance company. The other
five 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. and Duff and
Phelps rating agency. 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.
During 1999, the Company repurchased $15 million in loans out of its
1997 securitizations. Such repurchases are permitted only when the loan
defaults and are undertaken by the Company in order to avoid disruption of
cash flow from certain securitization trusts and to provide the Company with
maximum flexibility in resolving problem loans. In addition, the Company
recorded a total of $28.5 million in write-downs to the carrying value of its
residual securities issued prior to 1999. These adjustments were the result
of a) a continuing increase in prepayment speeds which occurred despite the
increase in interest rates in the latter part of the year, and b) an increase
in overall static pool loss assumption in the fourth quarter to 2.50%. The
Company increased its prepayment speed assumptions to be consistent with its
valuation methodology. See "--Management's Discussion and Analysis of
Financial Condition and Results of Operations--Results of Operations."
14
<PAGE>
NIM-EXCESS CASH FLOW PRIVATE PLACEMENTS. In February 1999, the
Company completed its third "net interest margin" or "excess cash flow"
private placement ("NIM" transaction) with respect to its residual interests
in ten 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 senior interests in the residual securities that were
deposited into the trust.
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 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. Servicing of loans 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.
The Company retains the servicing rights on all loans it sells
through securitizations and a portion of the loans its sells in whole loan
sales. In addition, some purchasers of "servicing-released" whole loans
request the Company to continue to act as servicer for an interim period
following the sale. Finally, the Company services all of the loans its
originates and purchases during the 30 to 90-day period pending their sale or
securitization.
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. The loans in the Company's first five
securitizations were subserviced by Advanta. In September 1997, the Company
began boarding loans on a joint servicing platform with Comerica in which
each party was responsible for part of the servicing process. In July 1998,
the Company terminated the Comerica agreement, and began performing all
servicing functions relating to the loans previously serviced on the joint
platform. Finally, during 1999, the Company assumed responsibility for
servicing all of the loans from the Company's first five securitizations that
had continued to be sub-serviced by Advanta.
As of December 31, 1999, the Company's servicing portfolio consisted
of 60,703 loans with an aggregate principal balance of approximately $5.9
billion, of which 4,543 loans with an aggregate principal balance of $442.7
million were held for sale and serviced on an interim basis, 56,104 loans
with an aggregate principal balance of $5.5 billion were serviced for
securitizations, and 56 loans with an aggregate principal balance of $5.4
million were serviced on behalf of the whole loan purchasers thereof.
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 attorney's 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.
15
<PAGE>
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.
The following tables set forth certain delinquency statistics as of
December 31, 1999 for the Company's 1997, 1998 and 1999 securitized loans
(DOLLARS IN THOUSANDS):
SECURITIES ISSUED IN 1997
<TABLE>
<CAPTION>
DELINQUENCY (% OF CURRENT BALANCE BY RISK GRADE)
------------------------------------------------
RISK ORIGINAL CURRENT 60-89 90+ FORECL./
GRADE BALANCE WALTV* BALANCE DAYS DAYS REO TOTAL REPURCHASE %**
- ----- ------- ------ ------- ----- ---- --- ----- ---------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A+ $ 299,582 73.52% $122,650 0.28% 1.75% 3.95% 5.98% $ 3,159 2.58%
A- 401,319 73.68 162,744 0.19 2.50 7.15 9.84 6,692 4.11
B 208,453 72.73 74,389 0.47 2.56 7.69 10.72 5,508 7.40
C 98,951 68.07 30,224 0.74 4.31 18.98 24.02 3,750 12.41
C- 116,311 68.24 39,877 0.90 5.31 10.26 16.47 5,517 13.84
---------- ----------- ---------
$1,124,616 72.19% $ 429,884 0.37% 2.69% 7.45% 10.50% $ 24,627 5.73%
========== =========== =========
</TABLE>
SECURITIES ISSUED IN 1998
<TABLE>
<CAPTION>
DELINQUENCY (% OF CURRENT BALANCE BY RISK GRADE)
------------------------------------------------
RISK ORIGINAL CURRENT 60-89 90+ FORECL./
GRADE BALANCE*** WALTV* BALANCE DAYS DAYS REO TOTAL REPURCHASE %**
- ----- ---------- ------ ------- ----- ---- --- ----- ---------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A+ $1,004,736 78.04% $ 696,084 0.40% 1.20% 4.24% 5.84% $ ---- 0.00%
A- 895,272 77.09 641,581 0.41 1.35 6.00 7.76 ---- 0.00
B 441,736 74.29 314,846 0.80 3.37 6.89 11.06 ---- 0.00
C 282,537 70.24 192,305 1.18 4.19 12.28 17.64 ---- 0.00
C- 197,469 64.88 121,789 0.71 5.59 11.86 18.16 ---- 0.00
---------- ---------- ---------
$2,821,750 75.72% $1,966,605 0.56% 2.16% 6.49% 9.22% $ ---- 0.00%
========== ========== =========
</TABLE>
SECURITIES ISSUED IN 1999
<TABLE>
<CAPTION>
DELINQUENCY (% OF CURRENT BALANCE BY RISK GRADE)
------------------------------------------------
RISK ORIGINAL CURRENT 60-89 90+ FORECL./
GRADE BALANCE*** WALTV* BALANCE DAYS DAYS REO TOTAL REPURCHASE %**
- ----- ---------- ------ ------- ----- ---- --- ----- ---------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A+ $1,194,119 78.09% $1,113,209 0.19% 0.34% 1.05% 1.57% $ ---- 0.00%
A- 1,037,148 78.34 989,697 0.31 0.40 1.41 2.12 ---- 0.00
B 574,516 74.29 542,435 0.79 0.54 2.62 3.94 ---- 0.00
C 320,019 70.05 295,857 0.97 1.27 4.56 6.80 ---- 0.00
C- 182,613 66.35 168,054 1.18 2.09 6.98 10.26 ---- 0.00
---------- ---------- ---------
$3,308,415 76.08% $3,109,253 0.46% 0.57% 2.09% 3.13% $ ---- 0.00%
========== ========== =========
</TABLE>
16
<PAGE>
COMBINED SECURITIES ISSUED
<TABLE>
<CAPTION>
DELINQUENCY (% OF CURRENT BALANCE BY RISK GRADE)
------------------------------------------------
RISK ORIGINAL CURRENT 60-89 90+ FORECL./
GRADE BALANCE*** WALTV* BALANCE DAYS DAYS REO TOTAL REPURCHASE %**
- ----- ---------- ------ ------- ----- ---- --- ----- ---------- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
A+ $2,498,437 77.73% $1,931,944 0.27% 0.74% 2.38% 3.39% $ 3,159 0.16%
A- 2,333,740 77.22 1,794,022 0.34 0.93 3.57 4.84 6,692 0.37
B 1,224,704 74.23 931,671 0.77 1.65 4.46 6.89 5,508 0.59
C 701,507 70.00 518,387 1.03 2.53 8.26 11.82 3,750 0.72
C- 496,393 66.53 329,719 0.98 3.77 9.18 13.93 5,517 1.67
---------- ---------- ---------
$7,254,781 75.46% $5,505,743 0.49% 1.31% 4.08% 5.88% $ 24,627 0.34%
========== ========== =========
</TABLE>
- -----------
*Weighted Average Loan-to-Value Ratio at origination
**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 the future for the same or other 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. The Company is currently in the
process of renewing and restructuring the problem loan and REO financing
arrangements with Salomon.
U.S. BANCORP INVESTMENT AND STRATEGIC ALLIANCE
In November 1998 U.S. Bancorp, a bank holding company with total
assets in 1999 of approximately $82 billion, purchased 20,000 shares of the
Company's Series 1998A Convertible Preferred Stock for an aggregate purchase
price of $20 million. In December 1998 and April 1999, U.S. Bancorp purchased
an aggregate of 565,000 shares of the Company's Common Stock through third
party private transactions, increasing their equity position in New Century
from 16% to 18.75%. In July 1999, U.S. Bancorp purchased 20,000 shares of the
Company's Series 1999A Convertible Preferred Stock for an aggregate purchase
price of $20 million. Each share of U.S. Bancorp's Series 1998A Preferred
Stock is convertible into 136.24 shares of the Company's Common Stock and
each share of U.S. Bancorp's Series 1999A Preferred Stock is convertible into
46.795 shares of the Company's Common Stock that, upon conversion, will
represent approximately 23% of the Company's total outstanding 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 for Series 1998A and
7.0% per year for Series 1999A Preferred Stock. In addition, as part of the
transactions, U.S. Bancorp has two designees appointed to the Company's Board
of Directors, which is roughly in proportion to its ownership interest in the
Company.
In October 1999 U.S. Bancorp invested an additional $20 million in
the Company and in February 2000 invested an additional $10 million. Each
transaction was structured as subordinated debt provided by U.S. Bancorp's
subsidiary, U.S. Bank National Association. The subordinated debt bears
interest at a rate of 12.0% per year and matures in June 2000.
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In late March 2000, U.S. Bancorp committed (i) to provide an
additional $10 million in subordinated debt over the course of 2000 provided
that the Company achieves certain specified milestones, and (ii) to extend
the term of the subordinated debt to June 2002. In exchange for the
additional capital and subordinated debt extension, the Company will amend
the conversion ratio of the Company's Series 1999A Convertible Preferred
Stock from 46.8 to 69.98, and also provide U.S. Bank with warrants
exercisable for up to 725,000 shares of the Company's Common Stock at an
exercise price equal to the market value on the grant date. Approximately 70%
of the warrants vest immediately. Of the remainder, a portion vest in
quarterly increments if the Company has not prepaid the subordinated debt and
a portion are granted concurrently with funding of the additional $10 million
in subordinated debt. If all of the proposed warrants are ultimately granted,
U.S. Bank would own approximately 27.5% of the Company, assuming conversion
of all preferred stock and exercise of all warrants. The Company expects to
enter into definitive agreements documenting this investment by April 30,
2000.
In addition to these investments, the Company and U.S. Bancorp have
established a strategic alliance pursuant to which (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 may bid on the Company's whole loan sales.
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.
As of December 31, 1999, 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
Although a number of the Company's competitors have either merged,
been acquired or gone out of business altogether, the Company continues to
face intense competition in the business of originating, purchasing and
selling mortgage loans. The Company's competitors include other consumer
finance companies, mortgage banking companies, commercial banks, credit
unions, thrift institutions, credit card issuers and insurance finance
companies. Most notably, in recent quarters, some large, diversified
financial corporations have purchased several of the Company's competitors.
As a result, some of these competitors may have access to capital at a cost
lower than the Company's cost of capital under its warehouse, aggregation and
residual financing facilities. In addition, many of these competitors have
considerably greater technical and marketing resources than the Company.
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 competitive position.
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.
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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 state and federal 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, 1999, the
Company was licensed or exempt from licensing requirements by the relevant
state banking or consumer credit agencies to originate first mortgages in 50
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.
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 1999, Covered Loans
accounted for approximately 6.8% of the Company's total loan originations and
purchases.
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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.
REGULATORY DEVELOPMENTS. In the past year, there have been a number
of significant federal and state legislative and regulatory developments that
could affect the Company. The federal Gramm-Leach-Bliley financial reform
legislation will impose additional privacy obligations on the Company with
respect to its applicants. At the state level, a number of states are
considering legislation targeting so-called "predatory" lending practices.
While well-meaning, these proposed laws impose overly broad restrictions on
legitimate lending activities including some of the Company's activities.
There can be no assurance that these proposed laws, rules and regulations, or
other such laws, rules or regulations, will not be adopted in the future
which could make compliance much more difficult or expensive, restrict the
Company's ability to originate, broker, purchase or sell loans, further limit
or restrict the amount of commissions, interest and other charges earned on
loans originated, brokered, purchased or sold by the Company, or otherwise
adversely affect the business or prospects of the Company.
EMPLOYEES
At December 31, 1999, the Company employed 1,740 full-time employees
and 30 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.
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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.................................. 53 Chairman of the Board, Chief Executive Officer, Director
Brad A. Morrice................................. 43 Vice Chairman, President, Director
Edward F. Gotschall............................. 45 Vice Chairman, Chief Financial Officer, Director
Steve Holder.................................... 42 Vice Chairman, Chief Operating Officer, Director
KEY EMPLOYEES:
Patrick J. Flanagan............................. 35 Executive Vice President of the Company; Director,
Executive Vice President and Chief Operating Officer,
New Century Mortgage (1), and President, NC Capital (2)
George Anderson................................. 61 Director, President Retail Operations, New Century
Mortgage (1)
Shabi S. Asghar................................. 37 Director, President Wholesale Operations, New
Century Mortgage (1)
Paul L. Rigdon.................................. 39 Executive Vice President Retail Operations, New Century
Mortgage (1), and Executive Vice President, anyloan.com
</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.
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<PAGE>
BRAD A. MORRICE has been Vice Chairman of the Company since December
1996, President, 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 and the Company's Secretary from December 1995 to May 1999. 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 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.
STEVE HOLDER has been Vice Chairman of the Company since December
1996, Chief Operating Officer Loan Production/Operations of the Company since
December 1995 and a director of the Company since November 1995. Mr. Holder
also serves as Co-Chairman of the Board and Chief Executive Officer of New
Century Mortgage. From February 1993 to August 1995, he was the Executive
Vice President of Long Beach Mortgage Company ("Long Beach Mortgage"). From
July 1991 to February 1993, Mr. Holder was the Vice President for Business
Development of Transamerica Financial Services. From 1985 to 1990, he was a
Regional Vice President for Nova Financial Services, a startup consumer
finance subsidiary of First Interstate Bank. Mr. Holder has over 22 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 Corporation since
December 1998 and a director of New Century Mortgage since May 1997. From
January 1997 to August 1998, Mr. Flanagan was 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 36 years experience in the
consumer finance and mortgage business.
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<PAGE>
SHABI 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 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 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 of anyloan.com
since April 1999 and Executive 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 from May 1997 to November 1999. 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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<PAGE>
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 residual financing
agreements with Salomon, Greenwich Capital and PaineWebber, pursuant to which
each will provide the Company with financing upon the Company's retention of
residual interests in securitizations and NIM transactions on which each is
the lead underwriter or placement agent. The amount of financing provided to
the Company under its aggregation credit facilities and its residual
financing agreements depends in large part on each company's valuation of the
mortgage loans, based on current market conditions, and residual interests,
respectively, securing the financings. Each company has the right to
reevaluate the collateral securing the Company's outstanding borrowings at
any time and, in the event the underwriting company 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 the underwriting company
with additional collateral or to repay a portion of all of 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 financing secured by the Company's loans and
residual securities, the Company also has borrowed from U.S. Bank $30 million
in subordinated debt ($10 million subsequent to December 31, 1999) secured by
subordinate liens on the loans pledged under the U.S. Bank warehouse
agreement as well as certain rights to the Company's residuals. Unlike the
warehouse, aggregation and residual financing borrowings, which the Company
believes are secured by assets that would cover the borrowings in the event
of a default, the Company does not currently have a source of funds to repay
the subordinated debt in the event of a default, or upon its maturity. In
late March 2000, the Company received a commitment from U.S. Bank to (i)
provide an additional $10 million of subordinated debt during 2000 upon the
Company's achievement of certain milestones, and (ii) extend the maturity of
the subordinated debt to June 2002. The Company's inability to consummate the
transactions contemplated by the U.S. Bank commitment or its inability to
obtain capital or financing to repay the subordinated debt upon its maturity,
would have a material adverse impact on the Company's results of operations,
financial condition and business prospects.
Moreover, 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.
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<PAGE>
DEPENDENCE ON SECURITIZATIONS FOR FUTURE EARNINGS
The Company plans to continue pooling and selling through
securitizations a significant percentage of the loans it originates or
purchases, although the Company expects that the gain on sale from such
securitizations will represent a smaller 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 third and fourth quarter of 1999
interest rates and interest spreads required by bond investors continued to
increase. In addition, overall demand for sub-prime mortgage loans decreased
as investors elected to follow a more conservative investment strategy during
the Y2K transition period. To maximize the overall value of these loans, the
Company elected to securitize a significant portion of its production during
both these periods. Although the Company has continued to sell its loans
through securitizations, 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 Company's current strategy is to rely more heavily on whole loan
sales for future earnings and cash flow. In 1999, the Company sold 25.5% of
its loan originations and purchases through whole loan sales to various
institutional purchasers. The weighted average price of the whole loan sales
was 103.2% of the outstanding principal balance of the loans. During the same
period, the Company's all-in cost of originating loans was 102.99%. In order
to generate sufficient earnings and cash from whole loan sales, the Company
will need to achieve one or a combination of (i) reducing its all-in
acquisition cost for loans, or (ii) increasing the price purchasers are
willing to pay for the Company's loans. There can be no assurance that the
Company will be able to achieve either of these objectives. To the extent the
Company is unable to originate loans at a price lower than what whole loan
purchasers will pay for them, the Company's results of operations, financial
condition and business prospects could be materially and adversely affected.
RESIDUAL INTERESTS IN SECURITIZATIONS
During 1999 a substantial portion of the Company's revenues and earnings
were 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, Greenwich and
PaineWebber residual financing facilities.
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. Approximately 68.5% of the loans originated or purchased by
the Company during 1999 were made to borrowers in the Company's two highest
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.
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<PAGE>
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
cash the Company receives over the life of its residual interests, thereby
requiring the Company to reduce the fair value of such residual interests.
Furthermore, a significant decrease in interest rates could increase the rate
at which loans are prepaid, which would also reduce the amount of cash the
Company receives over the life of its residual interests. Either of these
events could require the Company to reduce the fair value of its residual
interests, which would have a material adverse effect on the Company's
results of operations, financial condition and business prospects.
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, as well as the value
of its residual interests in securitizations.
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.
26
<PAGE>
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 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 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.
RISKS RELATING TO NEW LEGISLATION
Several states, as well as the federal government, are considering
proposed legislation to curb predatory lending practices. As drafted,
however, many of these laws extend far beyond curbing predatory practices to
restrict legitimate lending activities including some of the Company's
activities. For example, some of these laws prohibit any form of prepayment
charge. Passage of these laws in their current form could reduce the
Company's loan origination volume, which would have a material adverse impact
on the Company's results of operation, financial condition and business
prospects.
27
<PAGE>
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. This volatility may
make it difficult for the Company to access the capital markets through a
secondary offering of Common Stock, regardless of the Company's financial
performance.
ITEM 2. PROPERTIES
The Company's executive, administrative and anyloan.com offices are
located in Irvine, California and consist of approximately 211,000 square
feet. The three leases covering the executive, administrative and anyloan.com
offices expire in June 2002, December 2002 and January 2005, and the combined
monthly rent is $331,201.
The Company leases space for its regional operating centers in
Chicago, Illinois, Atlanta, Georgia, Rancho Bernardo, California, and San
Ramon, California. As of December 31, 1999, these facilities had an annual
aggregate base rental of approximately $46,308. The Company also leases space
for its sales offices, which range in size from 100 to 3,552 square feet with
lease terms typically ranging from one to five years. As of December 31,
1999, annual base rents for the sales offices ranged from approximately
$3,000 to $104,244. In general, the terms of these leases vary as to duration
and rent escalation provisions, expire between February 2000 and January 2005
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 1999.
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 1999 FISCAL 1998 FISCAL 1997
----------- ----------- -----------
QUARTER HIGH LOW HIGH LOW HIGH LOW
- ------- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
Fourth................................ $17.56 $13.69 $13.13 $3.44 $19.50 $ 9.63
Third................................. $19.88 $15.75 $11.50 $7.38 $19.25 $14.13
Second (1)............................ $20.25 $11.56 $12.50 $8.50 $14.25 $13.63
First................................. $15.00 $10.69 $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 24, 2000 the closing sales price of the Company's Common
Stock, as reported on the Nasdaq National Market, was $9.25.
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 24, 2000 the number of holders of record of the
Company's Common Stock was approximately 47, and as of March 24, 2000 there
were approximately 1,330 beneficial owners of the Company's Common Stock.
RECENT SALES OF UNREGISTERED STOCK
On March 10, 1999, the Company issued 5,923 shares of Common Stock
to Kirk Redding and 3,949 shares of Common Stock to Paul Akers representing a
portion of the earnout payments 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.
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, 1999, 1998, 1997 have
been derived from the Company's financial statements audited by KPMG LLP,
independent auditors, whose report with respect thereto appears elsewhere
herein. Such selected financial data should be read in conjunction with those
financial statements and the notes thereto and with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" also included
elsewhere herein.
29
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE YEAR ENDED FOR THE YEAR ENDED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Gain on sales of loans........................... $ 121,672 $ 105,060 $ 67,939
Interest income.................................. 61,457 47,655 25,071
Servicing income................................. 50,813 23,692 5,623
--------- --------- --------
Total revenues.............................. 233,942 176,407 98,633
Expenses......................................... 167,056 124,099 68,041
--------- --------- --------
Earnings before income taxes.......................... 66,886 52,308 30,592
Income taxes..................................... 27,377 21,193 12,849
--------- --------- --------
Net earnings..................................... $ 39,509 $ 31,115 $ 17,743
========= ========= ========
Basic earnings per share......................... $ 2.59 $ 2.19 $ 2.18
========= ========= ========
Diluted earnings per share....................... $ 2.11 $ 2.03 $ 1.40
========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF YEAR ENDED AS OF YEAR ENDED AS OF YEAR ENDED
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Loans receivable held for sale, net................... $ 442,653 $ 356,975 $276,506
Residual interests in securitizations................. 364,689 205,395 97,260
Total assets.......................................... 863,709 624,727 398,128
Borrowings under warehouse lines of credit............ 234,778 191,931 184,426
Borrowings under aggregation lines of credit.......... 193,948 153,912 70,937
Subordinated debt..................................... 20,000 ---- ----
Residual financing.................................... 177,493 122,298 53,427
Other borrowings...................................... 3,051 3,985 3,222
Total stockholders' equity............................ 172,963 114,613 60,836
</TABLE>
<TABLE>
<CAPTION>
AS OF OR FOR THE AS OF OR FOR THE AS OF OR FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
(DOLLARS IN THOUSANDS) DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING STATISTICS:
Loan origination and purchase activities:
Wholesale originations........................ $2,894,517 $2,382,784 $1,265,133
Retail originations........................... 1,185,747 942,072 578,674
Bulk acquisitions............................. --- --- 120,794
---------- ----------- ----------
Total loan originations and purchases.... $4,080,264 $3,324,856 $1,964,601
========== ========== ==========
Average principal balance per loan................. $102 $96 $102
Percent of loans secured by first mortgage......... 96.7% 97.2% 96.9%
Weighted average initial loan-to-value ratio....... 78.8% 78.2% 74.0%
Originations by product type
ARMs.......................................... $2,610,475 $1,920,686 $1,394,133
Fixed-rate mortgages.......................... 1,469,789 1,404,170 570,468
Weighted average interest rates:
Fixed-rate mortgages.......................... 10.2% 10.0% 9.8%
ARMs.......................................... 9.8% 9.7% 9.5%
Margin-ARMs................................... 6.2% 6.1% 7.0%
Loan Sales:
Loans sold through whole loan transactions.... $1,033,006 $1,477,225 $ 680,900
Loans sold through securitizations............ 3,017,658 2,265,700 1,123,618
Loans acquired to securitize.................. (61,312) (544,704) (63,718)
---------- ---------- ---------
NET LOAN SALES............................... $3,989,352 $3,198,221 $1,740,800
========== ========== ==========
</TABLE>
30
<PAGE>
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
included elsewhere herein.
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, 1999, the Company's Wholesale Division was
operating through five regional operating centers located in Southern
California, Northern California, Atlanta, Chicago and Tampa, and through 41
additional sales offices located in 27 states. The Wholesale Division funded
$2.9 billion in loans, or 70.9%, of the Company's total loan production
during the year ended December 31, 1999. As of December 31, 1999, the Retail
Division was operating through 21 retail sales offices in California, and 62
retail sales offices in 29 other states. The Retail Division, including
anyloan.com, funded $1.0 billion in loans, or 25.1%, of total loan production
during the year ended December 31, 1999. The Company also funded $163.1
million in loans, or 4.0% of the Company's total loan production through its
Primewest subsidiary during the year ended December 31, 1999.
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, 1999 FOR THE YEAR ENDED DECEMBER 31, 1998
---------------------------------------------- -----------------------------------------------
WHOLESALE RETAIL PRIMEWEST TOTAL WHOLESALE RETAIL PRIMEWEST TOTAL
--------- ------ --------- ----- --------- ------ --------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal balance (in
thousands)..................... $2,894,517 $1,022,689 $163,058 $4,080,264 $2,382,784 $842,764 $99,308 $3,324,856
Number of loans................ 26,821 11,427 1,649 39,897 23,946 9,653 1,032 34,631
Average principal balance
(in thousands)............. $ 108 $ 89 $ 99 $ 102 $ 100 $ 87 $ 96 $ 96
Weighted average interest
rates:
Fixed-rate............. 10.2% 10.2% 9.9% 10.2% 10.0% 9.9% 9.6% 10.0%
ARMs................... 9.9% 9.2% 9.6% 9.8% 9.7% 9.4% 9.3% 9.7%
Margin-ARMs............ 6.1% 6.2% 6.5% 6.2% 6.1% 6.2% 6.5% 6.1%
Weighted average initial
loan-to-value ratios (1).. 78.8% 79.0% 76.8% 78.8% 78.7% 77.3% 74.7% 78.2%
Percentage of loans:
ARMs................... 65.5% 28.3% 30.4% 64.0% 68.1% 26.8% 70.0% 56.6%
Fixed-rate............. 34.5% 71.7% 69.6% 36.0% 31.9% 73.2% 30.0% 43.4%
Percentage of loans
secured by first and second
mortgages:
Percentage of loans
Secured by first
Mortgage............ 95.2% 83.2% 93.3% 96.7% 98.1% 94.0% 95.9% 97.0%
Percentage of loans
Secured by second
Mortgage............ 4.8% 16.8% 6.7% 3.3% 1.9% 6.0% 4.1% 3.0%
</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 1999 as a result of the maturing of offices opened in
1997 and 1998. The following table sets forth the quarterly loan production
results, the number of office locations and the number of sales professionals
at the end of each quarter by division:
<TABLE>
<CAPTION>
AS OF OR FOR THE QUARTERS ENDED
---------------- ------------------ --------------------- -------------------------
MARCH 31, 1999 JUNE 30, 1999 SEPTEMBER 30, 1999 DECEMBER 31, 1999
-------------- ------------- ------------------ -----------------
(DOLLARS IN THOUSANDS)
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
WHOLESALE
Volume................................. $646,137 $668,560 $823,551 $756,269
Offices (including regional
Operating centers)................ 70 70 71 46
Account Executives................... 155 134 184 176
RETAIL (INCLUDING PRIMEWEST)
Volume................................. $245,780 $290,426 $333,952 $315,589
Offices................................ 79 81 80 83
Loan Officers.......................... 309 332 344 342
TOTAL
Volume................................. $891,917 $958,986 $1,157,503 $1,071,858
Offices................................ 149 151 151 129
</TABLE>
32
<PAGE>
LOAN SALES AND SECURITIZATIONS
The Company's loan sale strategy includes both securitizations and
whole loan sales in order to advance the Company's goal of enhancing profits
while managing cash flows. Loan sales through securitizations permit the
Company to enhance operating profits and to benefit from future cash flows
generated by the residual interests retained by the Company. Whole loan sale
transactions enable the Company to generate current cash flow, protect
against the potential volatility of the securitization market and reduce the
risks inherent in retaining residual interests in securitizations.
The Company's primary source of revenue is the recognition of gains
from the sale of its loans through whole loan sales and securitizations. In a
whole loan sale, the Company recognizes and receives a cash gain upon sale.
In a securitization, the Company recognizes a gain on sale at the time the
loans are sold, but receives corresponding cash flows, represented by the
over-collateralization amount ("OC") and the Net Interest Receivable ("NIR"),
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
interest-only and residual certificates. 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 cost basis of the loans and 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, 1999, 74.5% 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 its floating rate securitizations and
funded a portion of the required OC at the closing of its fixed rate
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.
33
<PAGE>
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
(DOLLARS IN THOUSANDS) December 31, 1999 December 31, 1998 December 31, 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Securitizations........................ $3,017,658 $2,265,700 $1,123,618
Whole loan sales....................... 1,033,006 1,477,225 680,900
---------- ---------- ----------
Subtotal............................... $4,050,664 $3,742,925 $1,804,518
Less: Loans acquired to securitize(1) (61,312) (544,704) (63,718)
---------- ---------- ----------
Net loan sales......................... $3,989,352 $3,198,221 $1,740,800
========== ========== ==========
</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.
As part of its overall securitization strategy in 1999, the Company
also completed one NIM excess cash flow private placement with respect to its
residual interests in its securitizations issued prior to 1999. 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 1999, whole loan
prices remained at levels significantly lower than those experienced by the
Company in 1996, 1997 and first half of 1998. In addition, more buyers in the
whole loan market are confining their purchases to loans having very specific
characteristics. Unlike earlier periods, the Company has found it to be more
difficult to identify buyers willing to purchase a pool of loans representing
a cross section of the Company's entire loan production. The Company expects
that in order to achieve higher prices in whole loan sales, it will need to
begin tailoring its production to the desired characteristics of the active
whole loan buyers.
A significant part of the Company's Focus 2000 cash management
strategy involves selling a greater portion of its production through whole
loan sales. If the Company cannot adequately tailor its production to yield
higher premiums in whole loan sales, and cannot find sources of funding to
finance continued securitization, it could have a material adverse effect on
the Company's results of operations, financial condition and business
prospects.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
The Company originated and purchased $4.1 billion in loans for the
year ended December 31, 1999, compared to $3.3 billion for the year ended
December 31, 1998. Loans originated and purchased through the Company's
Wholesale Division were $2.9 billion, or 70.9%, of total originations and
purchases for the year ended December 31, 1999. Loans originated through the
Company's Retail Division, including anyloan.com, were $1.0 billion, or
25.1%, of total originations and purchases for the year ended December 31,
1999. Loans originated through the Company's Primewest subsidiary were $163.1
million, or 4.0%, of total originations and purchases for the year ended
December 31, 1999. For the same period in 1998, Wholesale, Retail and
Primewest originations and purchases totaled $2.4 billion, or 71.7%, $842.8
million, or 25.3%, and $99.3 million, or 3.0%, respectively, of total
originations and purchases for such period.
Total revenues for the year ended December 31, 1999 increased to
$233.9 million, or 32.6%, from $176.4 million for the year ended December 31,
1998, due primarily to the increase in loan originations, purchases and sales
as well as the growth in the servicing portfolio in 1999. Gain on sale of
loans increased to $121.7 million, or 15.8%, for the year ended December 31,
999, from $105.1 million for the year ended December 31, 1998 due to the
increase in loan sales in 1999.
The Company sold $4.0 billion in loans for the year ended December
31, 1999, of which $1.0 billion were sold through whole loan sale
transactions and $3.0 billion were sold through securitizations. Loans sold
through securitization included $61.3 million in loans that were acquired by
the Company from a whole loan investor in the third quarter of 1999 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
(DOLLARS IN THOUSANDS) December 31, 1999 December 31, 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Gain from whole loan sale transactions $ 30,749 $ 58,001
Non-cash gain from securitizations (NIR
gains) 169,908 168,065
Non-cash gain from servicing asset 16,368 8,791
Cash gain (loss) from securitizations/
NIMs transactions (4,670) (4,664)
Securitization expenses (17,161) (13,664)
Accrued interest (14,807) (11,818)
Write-down of NIR (23,000) (5,900)
General valuation allowance for NIR ---- (7,500)
Provision for losses (2,549) (6,400)
Non-refundable fees 54,598 47,933
Premiums, net (22,355) (58,816)
Origination costs (63,300) (62,783)
Hedging losses (2,181) (6,185)
----------- ----------
Gain on sales of loans $121,672 $105,060
=========== ==========
</TABLE>
Whole loan sales for the year ended December 31, 1999, decreased to
$1.0 billion, or 30.1%, from $1.5 billion for the corresponding period in
1998. This decrease is the result of the Company electing to sell a greater
percentage of its loan originations and purchases through securitization due
to whole loan prices remaining at historically low levels.
Interest income for the year ended December 31, 1999 increased to
$61.5 million, or 29.0%, from $47.7 million for the same period in 1998.
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, 1999 is the result of a
higher average inventory of loans held for sale compared to the corresponding
period in 1998. The average inventory held for sale for the year ended
December 1999, based on quarter-end balances, was $387.7 million, compared to
$302.6 million for the corresponding period in 1998.
Servicing income for the year ended December 31, 1999, increased to
$50.8 million, or 114.5%, from $23.7 million for the year ended December 31,
1998, as a result of the increase in the servicing portfolio and the
Company's residual interests in securitizations. Servicing income includes
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. Residual interests in securitizations increased from
$205.4 million at December 31, 1998 to $364.7 million at December 31, 1999.
Another factor contributing to the increase in servicing income was the
assumption of all servicing responsibilities for loans previously
sub-serviced by Advanta Mortgage Corporation.
RESIDUAL SECURITIES
THE CARRYING VALUE OF THE COMPANY'S RESIDUAL SECURITIES AT DECEMBER 31, 1999
AND DECEMBER 31, 1998 IS SUMMARIZED BELOW (DOLLARS IN THOUSDANDS):
<TABLE>
<CAPTION>
1999 1998
----- -----
<S> <C> <C>
Book Value of Securities $369,689 $215,895
Less: General valuation allowance for NIR 5,000 10,500
---------- ----------
Net carrying value $364,689 $205,395
</TABLE>
35
<PAGE>
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 and adjusts the carrying value of the securities
based on actual experience and trends in the industry. During the fourth
quarter the Company recorded a $10 million adjustment to its residual
securities issued prior to 1999, representing approximately 2.7% of the total
carrying value of residual securities, and resulting in a 31 cent decrease in
fourth quarter diluted net earnings per share. This adjustment was the result
of a) a continuing increase in prepayment speeds which occurred despite the
increase in interest rates, and b) an increase in overall static pool loss
assumption to 2.50%.
Total expenses for the year ended December 31, 1999, increased to
$167.1 million, or 34.6%, from $124.1 million for the year ended December 31,
1998. Interest expense increased due to the higher level of loan inventory
and corresponding warehouse and aggregation borrowings. All other expense
components increased from 1998 to 1999 due primarily to (i) higher loan
origination volume in the year ended December 31, 1999 compared to the same
period in 1998; (ii) an increase in staffing from 1,417 employees at December
31, 1998 to 1,770 employees at December 31, 1999; (iii) the costs incurred in
market research and media testing, including radio and television; (iv) the
costs incurred to develop new technology, which includes the Company's
automated underwriting system, and (v) the costs incurred in the development
of the Company's internet division, anyloan.com.
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 71.7%, of total originations and
purchases for the year ended December 31, 1998. Loans originated through the
Company's Retail Division were $842.8 million, or 25.3%, 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 54.8%,
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.
36
<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
(DOLLARS IN THOUSANDS) December 31, 1998 December 31, 1997
------------------------------------------------------------------------=----------------
<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/
NIMs 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 sales 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 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 loans 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.
RESIDUAL SECURITIES
The carrying value of the Company's residual securities at December
31, 1998 and December 31, 1997 is summarized below (000's):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Book value of securities $215,895 $100,260
Less: General valuation allowance for NIR 10,500 3,000
-------- --------
Net carrying value $205,395 $ 97,260
</TABLE>
37
<PAGE>
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.
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 loans from
those 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.
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.
As of December 31, 1999, the Company had a $290.0 million warehouse line of
credit led by U.S. Bank National Association which expires in May 2000 and
bears interest at a rate equal to the one month LIBOR plus 1.25%. At December
31, 1999, the balance outstanding under the warehouse line of credit was
$234.8 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, 1999, the Company's
"zero-collateral" balance was not material, and did not affect the Company's
liquidity.
In October 1999 U.S. Bank provided the Company $20 million in
subordinated debt under the warehouse agreement, and in February 2000 added
$10 million to this debt. The subordinated debt bears interest at a rate of
12% per annum and matures in June 2000. The facility is secured by a
subordinate lien on the collateral under the warehouse agreement as well as a
pledge of the Company's rights under its residual financing repurchase
agreements with an affiliate of Salomon Smith Barney, Inc. ("Salomon"). In
late March 2000, U.S. Bank committed to (i) provide an additional $10 million
in subordinated debt during 2000 subject to the Company's achievement of
certain milestones and (ii) extend the maturity of the subordinated debt to
June 2002. The Company expects the definitive agreements documenting these
arrangements will be executed by April 30, 2000.
As of December 31, 1999, the Company also had a $600 million
aggregation facility with 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%. 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 based on the one month LIBOR, and expires on
April 1, 2000. The Company and Salomon are currently in the process of
negotiating the renewal of the facility. As of December 31, 1999, the balance
outstanding under these facilities was $164.3 million.
38
<PAGE>
As of December 31, 1999, the Company also had an additional $300
million aggregation facility with Greenwich Capital ("Greenwich") and a $300
million aggregation facility, which includes a residual financing facility,
with PaineWebber Inc. ("PaineWebber"), which are subject to renewal in June
and August 2000, respectively, and bear interest rates generally equal to the
one month LIBOR plus 1.25%. At December 31, 1999, the balance outstanding
under each aggregation facility was $17.7 million and $11.9 million,
respectively.
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 an 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,
Greenwich and PaineWebber, whereby each 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, 1999, the balance outstanding under these
facilities was $177.5 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, Greenwich and PaineWebber
aggregation lines and the residual financing facilities in order to finance
its continued operations. If any of Salomon, Greenwich, PaineWebber or U.S.
Bank decided not to renew their respective 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.
INDUSTRY LIQUIDITY ENVIRONMENT. Although the Company was able to
renew its warehouse credit agreement and establish new aggregation credit
facilities in the second and third quarters, the financing environment for
sub-prime mortgage lenders in general remains unfavorable by historical
standards. In recent quarters, several of the Company's competitors have had
warehouse or aggregation facilities withdrawn or substantially curtailed. In
addition, as whole loan prices have fallen, lenders have gradually reduced
the levels at which they will lend against mortgage loans and residual
interests. This reduction in advance rates has had a negative effect on the
Company's cash flow. If the lower advance rates persist, the Company believes
it may affect the Company's secondary marketing strategy, and may have a
material adverse effect on the Company's results of operations, business and
financial condition.
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; and (v) income tax payments arising from the recognition of gain on
sale of loans. The Company also requires cash to fund ongoing operating and
administrative expenses, including capital expenditures and debt service. The
Company's sources of operating cash flow include: (i) the premium advance
component of the aggregation facilities; (ii) premiums obtained in whole loan
sales; (iii) mortgage origination income and fees; (iv) interest income on
loans held for sale; (v) excess cash flow from securitization trusts; and
(vi) servicing income. For the year ended December 31, 1999, the Company's
operations used approximately $117.0 million in cash, which is primarily
attributable to cash invested in the OC Accounts.
39
<PAGE>
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, 1999, the balance outstanding under this facility was $3.1
million, and the weighted-average interest rate was 9.2%.
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 a previous working capital line of
credit component in the warehouse agreement.
The Company had various non-revolving operating lease agreements
totaling $19.1 million at December 31, 1999, 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, 1999, 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. Bancorp, the proceeds of which were used to pay down
outstanding borrowings under the warehouse line of credit. The proceeds
provided the Company greater flexibility in its secondary marketing strategy
in the first and second quarters of 1999 by allowing the Company to
securitize a greater portion of its production.
In July 1999, the Company raised $20 million through the sale of
20,000 shares of Series 1999A Convertible Preferred Stock to U.S. Bancorp. In
October 1999, the Company raised an additional $20 million from U.S. Bancorp
in the form of subordinated debt. In February 2000, the Company raised an
additional $10 million from U.S. Bancorp also in the form of subordinated
debt. Finally, in March 2000, the Company received a commitment from U.S.
Bank to (i) provide an additional $10 million in subordinated debt during
2000 subject to the Company's achievement of certain milestones and (ii)
extend the maturity of the subordinated debt to June 2002. The cash from
these investments and borrowings provided the Company greater flexibility in
the third and fourth quarters of 1999 and the first quarter of 2000 to
continue to securitize a portion of the Company's loan production. The
additional $10 million of subordinated debt is intended to facilitate the
Company's implementation of its Year 2000 business strategy.
LIQUIDITY STRATEGY FOR 2000. In 2000, the Company intends to
concentrate on improving cash flow and reducing the dependence on outside
capital by increasing the proportion of loans the Company sells on a whole
loan basis and reducing the percent of production that is securitized. At the
same time, the Company is emphasizing greater efficiencies and improved
operating discipline so as to reduce the all-in acquisition costs to 2.50% by
year-end. In order to ease the transition to this new strategy, and to allow
the Company to continue to securitize a portion of its production, the
Company will need additional borrowings or capital in the second and third
quarters of 2000. To this end, the Company has received a commitment from
U.S. Bank to provide an additional $10 million in subordinated debt during
the second, third and fourth quarters subject to the Company's achievement of
certain milestones.
There can be no assurance that the Company will be able to
successfully implement its cost cutting and whole loan strategies.
Furthermore, there can be no assurance that the Company will be able to raise
additional capital or borrow additional sums after consummation of the
transactions contemplated by the additional U.S. Bank commitment. The failure
to successfully implement the Company's cost-cutting and whole loan
strategies in 2000 could have a material adverse effect on the Company's
results of operations, business and financial condition.
Subject to the various uncertainties described above, and assuming
that (i) the Company can successfully cut its all-in acquisition costs to
2.50% by year-end, (ii) the Company is able to adjust its production mix in
order to receive higher premiums on whole loan sales, and (iii) the Company
receives the additional subordinated debt committed by U.S. Bank, the Company
anticipates that its liquidity, credit facilities and capital resources will
be sufficient to fund its operations for the foreseeable future.
40
<PAGE>
INCOME TAXES
The Company accounts for income taxes by using the asset and
liability method. Under the asset and liability method, deferred tax assets
and liabilities are recognized for the future tax consequences attributable
to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date.
ACCOUNTING CONSIDERATIONS
In June 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 has
determined that application of this statement will not have a material impact
on the Company.
41
<PAGE>
YEAR 2000
The Company undertook a variety of steps in order to ensure that the
Year 2000 issue would not disrupt its operations. A detailed designation of
the Company's "Y2K Plan" is set forth in the Company's report on Form 10-Q
for the quarter ended September 30, 1999.
As of March 29, 2000, the Company has not experienced any material
consequences relating to the Year 2000 issue. The Company's total Year 2000
costs were less than $700,000.
The Company will continue to monitor its systems for Year 2000
compliance.
42
<PAGE>
SAFE HARBOR STATEMENT
The preceding "Business" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations" sections contain certain
forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 (the "Securities Act") and Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"), and the Company intends
that such forward-looking statements be subject to the safe harbors created
thereby. These forward-looking statements 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 improve cash flow by selling a greater percentage of
whole loans and securitizing a smaller percentage of total originations, (ii)
the Company's ability to originate loans with characteristics for which loan
buyers will pay a higher premium, (iii) the ability of the Company to
transition from a monoline, sub-prime mortgage company to a company which can
offer customers a broader menu of financing products and services, (iv) the
ability of the Company to become a leading provider of financial products and
services over the Internet, (v) the ability of the Company's production units
to improve the overall profitability of loan production by concentrating on
higher-value loans and reducing low-margin production, (vi) the Company's
plans to close unprofitable branches and the ability to be more selective in
new branch openings, (vii) the Company's ability to maintain at least two
active investment-banking relationships for securitizations and residual
financing, (viii) the Company's ability to execute definitive agreements
documenting U.S. Bancorp's additional capital commitment, and to satisfy the
conditions to receiving the additional $10 million in subordinated debt, (ix)
the Company's intention to focus on improving profitability by controlling
costs, (x) the Company's ability to increase consumer marketing, expand
Internet loan origination efforts and initiate a broader national marketing
program to increase brand recognition, (xi) the Company's ability to continue
to reduce the "all-in acquisition cost" per loan, (xii) the Company's
intention to diversify its financing sources, (xiii) the Company's plan to
diversify whole loan sale and securitization channels, (xiv) the Company's
objective of reaching a cash-neutral operations, (xv) the Company's plan to
improve communication of secondary marketing conditions to its production
units, (xvi) the Company's ability to successfully implement and expand the
various aspects of the U.S. Bancorp strategic alliance, (xvii) the Company's
intention to continue to evaluate potential acquisitions and strategic
alliances with mortgage originators, (xviii) the Company's ability to
periodically modify its Underwriting Guidelines to reflect market conditions,
(xix) the adequacy of the write-down in the value of the residual securities
from 1997-NC-1, NC-2 and NC-3, (xx) the intention that the Company will
continue to execute NIM private placement transactions as part of its overall
securitization strategy, (xxi) the intention that the Company may repurchase
additional loans from its securitizations if necessary to avoid disruption of
cash flow to the Company, (xxii) the Company's intention to mitigate interest
rate risk through hedging, (xxiii) the belief that the Company's practices
comply with applicable rules and regulations in all material respects, (xxiv)
the belief that the Company's relations with its employees are satisfactory,
(xxv) 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, (xxvi) the accuracy of the Company's
assumptions underlying valuation of its residual securities and their affect
on the anticipated returns and future cash flow to the Company from its
residual securities, (xxvii) the Company's ability to maintain adequate
financing to fund its operations, (xxviii) the expectation that the Company
will be able to implement its automated underwriting system on schedule, and
(xxix) the expectation that the Company's future Year 2000 expenditures will
not be material to its business, results of operations or financial condition.
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, (iii) an increase in the prepayment speed or
default rate of the Company's borrowers; (iv) management's ability to manage
the Company's past growth and planned expansion; (v) the effect of changes in
interest rates; (vi) the effect of the competitive pressures from other
sub-prime lenders or suppliers of credit in the Company's market; (vii) the
negative impact of economic slowdowns or recessions; (ix) the ability of the
Company to attract, retain and motivate qualified personnel, (x) the impact
of new state or federal legislation restricting the activities of sub-prime
lenders; and (xi) 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
alone or 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.
43
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
GENERAL
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. 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, 1999.
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 2000. 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 TO 1-2 3-4 5-6
DESCRIPTION MONTHS ONE YEAR YEARS YEARS YEARS THEREAFTER TOTAL
- -------------------------------------- ------------- ----------------- ----------- ---------- ---------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
INTEREST-SENSITIVE ASSETS:
Cash and cash equivalents 4,496 ---- ---- ---- ---- ---- 4,496
Loans receivable held for sale, net 442,653 ---- ---- ---- ---- ---- 442,653
Residual interests in
securitizations 7,753 7,817 128,682 106,594 66,640 47,203 364,689
- -------------------------------------- ------------- ----------------- ----------- ---------- ---------- ------------- ----------
TOTAL INTEREST-SENSITIVE ASSETS 454,902 7,817 128,682 106,594 66,640 47,203 811,838
- -------------------------------------- ------------- ----------------- ----------- ---------- ---------- ------------- ----------
INTEREST-SENSITIVE LIABILITIES:
Warehouse and aggregation lines of
credit 428,726 ---- ---- ---- ---- ---- 428,726
Residual financing payable 177,493 ---- ---- ---- ---- ---- 177,493
Subordinated debt 20,000 ---- ---- ---- ---- ---- 20,000
Note payable 958 835 1,026 232 ---- ---- 3,051
- -------------------------------------- ------------- ----------------- ----------- ---------- ---------- ------------- ----------
TOTAL INTEREST-SENSITIVE LIABILITIES 627,177 835 1,026 232 ---- ---- 629,270
- -------------------------------------- ------------- ----------------- ----------- ---------- ---------- ------------- ----------
EXCESS OF INTEREST-SENSITIVE ASSETS
OVER INTEREST-SENSITIVE LIABILITIES (172,275) 6,982 127,656 106,362 66,640 47,203 182,568
- -------------------------------------- ------------- ----------------- ----------- ---------- ---------- ------------- ----------
CUMULATIVE NET INTEREST-SENSITIVITY
GAP (172,275) (165,293) (37,637) 68,725 135,365 182,568
====================================== ============= ================= =========== ========== ========== ============= ==========
</TABLE>
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.
44
<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 2000 Annual
Meeting of Stockholders to be filed with the Commission within 120 days of
December 31, 1999, 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 2000 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of December 31,
1999 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 2000 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of December 31,
1999 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 2000 Annual Meeting of
Stockholders to be filed with the Commission within 120 days of December 31,
1999 under the caption "Certain Relationships and Related Transactions", and
is incorporated herein by this reference as if set forth in full herein.
45
<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) The Company did not file any reports on form 8-K during the
fourth quarter of 1999.
46
<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
BY: /s/BRAD A. MORRICE
----------------------------------
Brad A. Morrice
Vice Chairman and President
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 and Director March 30, 2000
- ---------------------------------
Brad A. Morrice
/s/ EDWARD F. GOTSCHALL Vice Chairman, Chief Financial Officer and Director March 30, 2000
- ---------------------------------
Edward F. Gotschall
/s/ ROBERT K. COLE Chairman of the Board and Chief Executive Officer and Director March 30, 2000
- ---------------------------------
Robert K. Cole
/s/ STEVEN G. HOLDER Vice Chairman, Chief Operating Officer and Director March 30, 2000
- ---------------------------------
Steven G. Holder
/s/ JOHN C. BENTLEY Director March 30, 2000
- ---------------------------------
John C. Bentley
/s/ FREDRIC J. FORSTER Director March 30, 2000
- ---------------------------------
Fredric J. Forster
/s/ FRANCIS J. PARTEL, JR. Director March 30, 2000
- ---------------------------------
Frank J. Partel, Jr.
/s/ MICHAEL M. SACHS Director March 30, 2000
- ---------------------------------
Michael M. Sachs
/s/ TERRENCE P. SANDVIK Director March 30, 2000
- ---------------------------------
Terrence P. Sandvik
</TABLE>
47
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
3.1 First Amended and Restated Certificate of Incorporation of the
Company (1)
3.2 Certificate of Designation for Series 1998A Convertible Preferred
Stock (2)
3.3 Certificate of Designation for Series 1999A Convertible Preferred
Stock (3)
3.4 First Amended and Restated Bylaws of the Company (1)
4.1 Specimen Stock Certificate (1)
4.2 Specimen Series 1998A Convertible Preferred Stock Certificate (4)
4.3 Specimen Series 1999A Convertible Preferred Stock Certificate (3)
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. 333-84099) as
filed with the Securities and Exchange Commission on July 29, 1999
10.3 Founding Managers' Incentive Compensation Plan (1)
10.4 Office Building Lease by and between Koll Center Irvine Number Two
and New Century Financial Corporation dated April 11, 1997 (1)
10.5 Registration Rights Agreement, dated May 30, 1997, by and between
the Company and certain stockholders of the Company (1)
10.6 Form of Equalization Option granted to two executive officers of the
Company (1)
10.7 New Century Financial Corporation Comerica Warrant to Purchase
Common Stock issued to Comerica on May 30, 1997 (1)
10.8 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)
10.9 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 (5)
10.10 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 (5)
10.11 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 (5)
10.12 Office Building Lease by and between AGBRI Cowan and New Century
Financial Corporation dated November 6, 1997 (5)
10.13 Employee Stock Purchase Plan, as amended
10.14 Merger Agreement, dated as of December, 17, 1997, by and among New
Century, NC Acquisition Corp., PWF, Kirk Redding and Paul Akers (6)
10.15 First Amendment to Merger Agreement, dated January 12, 1998, by and
among New Century, NC Acquisition Corp., PWF, Kirk Redding and Paul
Akers (6)
10.16 Master Lease Agreement by and between New Century Mortgage
Corporation and General Electric Capital Corporation, dated as of
October 24, 1997 (5)
48
<PAGE>
EXHIBIT INDEX - (CONTINUED)
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.17 First Amendment to Founding Managers' Incentive Compensation Plan
(7)
10.18 Letter Agreement dated March 31, 1998 among Salomon Brothers Realty
Corp., Salomon Brothers Inc. and New Century Mortgage Corporation
(7)
10.19 Fourth Amendment to Second Amended and Restated Credit Agreement
between the Company and U.S. Bank National Association dated May 1,
1998 (8)
10.20 Third Amended and Restated Credit Agreement between the Company and
U.S. Bank National Association dated May 29, 1998 (8)
10.21 First Amendment to Third Amended and Restated Credit Agreement
between the Company and U.S. Bank National Association dated
July 27, 1998 (9)
10.22 Second Amendment to Third Amended and Restated Credit Agreement
between the Company and U.S. Bank National Association dated
June 30, 1998 (9)
10.23 Third Amendment to Third Amended and Restated Credit Agreement
between the Company and U.S. Bank National Association dated
November 23, 1998 (4)
10.24 Fourth Amendment to Third Amended and Restated Credit Agreement
between the Company and U.S. Bank National Association dated
December 11, 1998 (4)
10.25 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
10.26 Preferred Stock Purchase Agreement, dated as of October 18, 1998,
between the Company and U.S. Bancorp (2)
10.27 Registration Rights Agreement, dated as of November 24, 1998,
between the Company and U.S. Bancorp (2)
10.28 Flow Purchase Agreement, dated as of November 24, 1998, between
New Century Mortgage Corporation and U.S. Bank National
Association, ND (2)
10.29 Service Provider Agreement, dated as of November 24, 1998, between
New Century Mortgage Corporation and U.S. Bank National Association,
ND (2)
10.30 Form of Founding Managers' Shareholder Agreement, dated November 24,
1998 (4)
10.31 Form of Founding Managers' Employment Agreement, dated January 1,
1999 (4)
10.32 Letter Agreement by and between NC Capital Corporation, New Century
Mortgage Corporation and Salomon Brothers Realty Corp., dated
December 11, 1998 (4)
49
<PAGE>
EXHIBIT INDEX - (CONTINUED)
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<S> <C>
10.33 Non-qualified Stock Option Agreement dated May 17, 1999 between the
Company and Francis J. Partel, Jr. (3)
10.34 Non-qualified Stock Option Agreement dated May 17, 1999 between the
Company and Terrence P. Sandvik (3)
10.35 Fourth Amended and Restated Credit Agreement between the Company and
U.S. Bank National Association dated May 26, 1999 (3)
10.36 Master Loan and Security Agreement by and between NC Capital
Corporation and Greenwich Capital Financial Products, Inc., dated
June 23, 1999 (3)
10.37 Residual Financial Facility Agreement by and between NC Capital
Corporation and Greenwich Capital Financial Products, Inc., dated
June 23, 1999 (3)
10.38 Master Loan and Security Agreement by and among New Century Mortgage
Corporation, NC Capital Corporation and Paine Webber Real Estate
Securities, Inc., dated as of July 20, 1999 (3)
10.39 Preferred Stock Purchase Agreement, dated as of July 26, 1999,
between the Company and U.S. Bancorp (3)
10.40 Amended and Restated Registration Rights Agreement, dated as of July
26, 1999, between the Company and U.S. Bancorp (3)
10.41 First Amendment to Fourth Amended and Restated Credit Agreement
between the Company and U.S. Bank National Association, dated August
31, 1999 (10)
10.42 Letter Agreement by and between NC Capital Corporation, New Century
Mortgage Corporation and Salomon Brothers Realty Corp., dated
September 1, 1999 (10)
10.43 Amendment to Master Loan and Security Agreement dated as of July 20,
1999 by and among New Century Mortgage Corporation, NC Capital
Corporation and Paine Webber Real Estate Securities, Inc., dated as
of September 30, 1999 (10)
10.44 Industrial Lease, dated October 11, 1999, between the Company and
the Irvine Company (10)
10.45 Second Amendment to Fourth Amended and Restated Credit Agreement
between the Company and U.S. Bank National Association, dated
October 15, 1999 (10)
10.46 Amendment Number One to Master Loan and Security Agreement dated as
of June 23, 1999 by and between NC Capital Corporation and Greenwich
Capital Financial Products, Inc., dated as of October 23, 1999 (10)
10.47 Third Amendment to Pledge and Security Agreement dated February 17,
2000 between New Century Mortgage Corporation and U.S. Bank National
Association
10.48 Amendment to Letter Agreement dated as of September 1, 1999 by and
between NC Capital Corporation, New Century Mortgage Corporation and
Salomon Brothers Realty Corp., dated March 7, 2000
21.1 List of Subsidiaries
23.1 Consent of KPMG LLP
27.1 Financial Data Schedule
</TABLE>
50
<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 Quarterly Report on Form 10-Q
as filed with the Securities and Exchange Commission on August 16, 1999.
(4) Incorporated by reference from the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 1998 on file with the Securities
and Exchange Commission.
(5) 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.
(6) Incorporated by reference from the Company's Form 8-K as filed with the
Securities and Exchange Commission on January 26, 1998
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
as filed with the Securities and Exchange Commission on May 15, 1998
(8) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
as filed with the Securities and Exchange Commission on August 14, 1998
(9) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
as filed with the Securities and Exchange Commission on November 13, 1998
(10) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
as filed with the Securities and Exchange Commission on November 15, 1999
51
<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, 1999 and 1998......................................... F-3
Consolidated Statements of Earnings for the years ended December 31, 1999, 1998
and 1997.......................................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997.................................................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31,
1999, 1998 and 1997............................................................................... F-6
Notes to Consolidated Financial Statements for the years ended December 31, 1999 and
1998.............................................................................................. 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, 1999 and 1998 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, 1999. 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, 1999 and
1998 and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1999 in conformity with
generally accepted accounting principles.
KPMG LLP
Orange County, California
February 2, 2000, except as to Notes 8
and 22 to the consolidated financial
statements, which are as of March 28, 2000.
F-2
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
ASSETS 1999 1998
---------------- --------------
<S> <C> <C>
Cash and cash equivalents $ 4,496 30,875
Loans receivable held for sale, net (notes 2 and 7) 442,653 356,975
Residual interests in securitizations (notes 3 and 7) 364,689 205,395
Mortgage servicing asset (note 4) 22,145 8,665
Accrued interest receivable 1,538 1,536
Office property and equipment (notes 6 and 9) 3,780 3,644
Income taxes receivable (note 12) 548 --
Prepaid expenses and other assets (notes 5 and 10) 23,860 17,637
---------------- --------------
$ 863,709 624,727
================ ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Warehouse and aggregation lines of credit (note 7) $ 428,726 345,843
Residual financing payable (note 7) 177,493 122,298
Subordinated debt (note 8) 20,000 --
Notes payable (note 9) 3,051 3,985
Income taxes payable (note 12) -- 1,690
Accounts payable and accrued liabilities (notes 11 and 14) 26,484 16,056
Deferred income taxes (note 12) 34,992 20,242
---------------- --------------
690,746 510,114
---------------- --------------
Stockholders' equity (notes 14 and 15):
Preferred stock, $.01 par value. Authorized 7,500,000 shares:
Series 1998 A convertible preferred stock - issued and
outstanding 20,000 shares at December 31, 1999 and 1998 -- --
Series 1999 A convertible preferred stock - 20,000 and zero
shares issued and outstanding at December 31, 1999 and
1998, respectively -- --
Common stock, $.01 par value. Authorized 45,000,000 shares;
issued 14,694,984 and 14,517,242 shares and outstanding
14,694,984 and 14,473,566 shares at December 31, 1999
and 1998, respectively 147 145
Additional paid-in capital 85,625 65,241
Retained earnings, restricted 87,351 49,953
Deferred compensation costs (160) (726)
---------------- --------------
Total stockholders' equity 172,963 114,613
Commitments and contingencies (notes 11 and 13)
---------------- --------------
$ 863,709 624,727
================ ==============
</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, 1999, 1998 and 1997
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
1999 1998 1997
---------------- -------------- --------------
<S> <C> <C> <C>
Revenues:
Gain on sales of loans (note 2) $ 121,672 105,060 67,939
Interest income (note 2) 61,457 47,655 25,071
Servicing income (note 3) 50,813 23,692 5,623
---------------- -------------- --------------
Total revenues 233,942 176,407 98,633
---------------- -------------- --------------
Expenses:
Personnel 54,634 41,345 24,840
General and administrative (note 16) 42,732 30,994 16,037
Interest 53,193 40,328 20,579
Advertising and promotion 11,767 8,681 5,620
Professional services 4,730 2,751 965
---------------- -------------- --------------
Total expenses 167,056 124,099 68,041
---------------- -------------- --------------
Earnings before income taxes 66,886 52,308 30,592
Income taxes (note 12) 27,377 21,193 12,849
---------------- -------------- --------------
Net earnings $ 39,509 31,115 17,743
================ ============== ==============
Basic earnings per share (note 19) $ 2.59 2.19 2.18
================ ============== ==============
Diluted earnings per share (note 19) $ 2.11 2.03 1.40
================ ============== ==============
</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, 1999, 1998 and 1997
(in thousands)
<TABLE>
<CAPTION>
SERIES A SERIES B
PREFERRED PREFERRED PREFERRED COMMON COMMON
SHARES STOCK STOCK SHARES STOCK
OUTSTANDING AMOUNT AMOUNT OUTSTANDING AMOUNT
----------- --------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 5,820 $ 54 4 529 $ 6
Proceeds from issuance of common stock -- -- -- 7,447 74
Conversion of preferred stock (5,820) (54) (4) 5,820 58
Issuance of warrants -- -- -- -- --
Issuance of restricted stock -- -- -- 370 4
Unamortized deferred compensation -- -- -- -- --
Net earnings -- -- -- -- --
----------- --------- --------- ----------- --------
Balance, December 31, 1997 -- -- -- 14,166 142
Proceeds from issuance of common stock -- -- -- 317 1
Issuance of common stock for acquisition
of subsidiary -- -- -- 19 2
Proceeds from issuance of preferred stock 20 -- -- -- --
Cancellation of warrants -- -- -- -- --
Issuance of restricted stock -- -- -- 16 --
Purchase of treasury stock -- -- -- (44) --
Amortization of deferred compensation -- -- -- -- --
Net earnings -- -- -- -- --
Preferred stock dividends -- -- -- -- --
----------- --------- --------- ----------- --------
Balance, December 31, 1998 20 -- -- 14,474 145
Proceeds from issuance of common stock -- -- -- 271 3
Issuance of common stock for acquisition
of subsidiary -- -- -- 10 --
Proceeds from issuance of preferred stock 20 -- -- -- --
Purchase of treasury stock -- -- -- (60) (1)
Amortization of deferred compensation -- -- -- -- --
Net earnings -- -- -- -- --
Preferred stock dividends -- -- -- -- --
----------- --------- --------- ----------- --------
Balance, December 31, 1999 40 $ -- -- 14,695 $ 147
=========== ========= ========= =========== ========
<CAPTION>
ADDITIONAL RETAINED
PAID-IN EARNINGS DEFERRED
CAPITAL RESTRICTED COMPENSATION TOTAL
---------- ---------- ------------ -------
<S> <C> <C> <C> <C>
Balance, December 31, 1996 3,086 1,253 -- 4,403
Proceeds from issuance of common stock 36,129 -- -- 36,203
Conversion of preferred stock -- -- -- --
Issuance of warrants 1,500 -- -- 1,500
Issuance of restricted stock 2,771 -- -- 2,775
Unamortized deferred compensation -- -- (1,788) (1,788)
Net earnings -- 17,743 -- 17,743
---------- ---------- ------------ -------
Balance, December 31, 1997 43,486 18,996 (1,788) 60,836
Proceeds from issuance of common stock 830 -- -- 831
Issuance of common stock for acquisition
of subsidiary 1,998 -- -- 2,000
Proceeds from issuance of preferred stock 20,000 -- -- 20,000
Cancellation of warrants (825) -- -- (825)
Issuance of restricted stock 174 -- -- 174
Purchase of treasury stock (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 65,241 49,953 (726) 114,613
Proceeds from issuance of common stock 1,135 -- -- 1,138
Issuance of common stock for acquisition
of subsidiary 108 -- -- 108
Proceeds from issuance of preferred stock 20,000 -- -- 20,000
Purchase of treasury stock (859) -- -- (860)
Amortization of deferred compensation -- -- 566 566
Net earnings -- 39,509 -- 39,509
Preferred stock dividends -- (2,111) -- (2,111)
---------- ---------- ------------ -------
Balance, December 31, 1999 85,625 87,351 (160) 172,963
========== ========== ============ =======
</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, 1999, 1998 and 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
------------- -------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 39,509 31,115 17,743
Adjustments to reconcile net earnings to net cash used in
operating activities:
Depreciation and amortization 6,226 3,900 2,835
Deferred income taxes 14,750 12,205 7,909
NIR gains (169,980) (168,065) (89,770)
Initial deposits to over-collateralization accounts (87,940) (64,942) (20,445)
Deposits to over-collateralization accounts (43,288) (31,284) (11,376)
Release of cash from over-collateralization accounts 36,475 27,658 10,597
Non-cash servicing gains (16,368) (8,791) --
Amortization of NIR 11,282 15,935 5,559
Write down of NIR 23,000 5,900 5,175
General valuation provision for NIR -- 7,500 3,000
Net proceeds from NIMS transactions 76,098 99,163 --
Provision for losses 2,549 6,400 3,986
Loans originated or acquired for sale (4,082,145) (3,326,027) (1,968,842)
Loan sales, net 3,984,597 3,198,221 1,740,800
Principal payments on loans receivable held for sale 12,336 37,440 9,526
Increase in warehouse and aggregation lines of credit 82,883 90,480 199,704
Net increase in other assets and liabilities (6,985) (5,432) 5,439
------------- -------------- -------------
Net cash used in operating activities (117,001) (68,624) (78,160)
------------- -------------- -------------
Cash flows from investing activities:
Purchase of office property and equipment, net of sales (2,131) (1,603) (3,706)
Net assets acquired of subsidiary -- (1,642) --
------------- -------------- -------------
Net cash used in investing activities (2,131) (3,245) (3,706)
------------- -------------- -------------
Cash flows from financing activities:
Net proceeds from residual financing 55,195 68,871 53,427
Net proceeds from issuance of subordinated debt 20,000 -- --
Net proceeds (payments of) from notes payable (934) 763 1,896
Proceeds from issuance of stock 21,138 20,831 36,203
Payment of dividends on convertible preferred stock (1,786) -- --
Repurchase of treasury stock (860) (422) --
------------- -------------- -------------
Net cash provided by financing activities 92,753 90,043 91,526
------------- -------------- -------------
Net increase (decrease) in cash and cash
equivalents (26,379) 18,174 9,660
Cash and cash equivalents at beginning of year 30,875 12,701 3,041
------------- -------------- -------------
Cash and cash equivalents at end of year $ 4,496 30,875 12,701
============= ============== =============
Supplemental cash flow disclosure:
Interest paid $ 52,005 40,467 19,135
Income taxes 14,865 9,087 3,990
============= ============== =============
Supplemental non-cash financing activities:
Restricted stock issued to founding managers $ -- 174 2,775
Stock issued in connection with acquisition 108 2,000 --
Warrants issued to Comerica -- -- 1,500
Conversion of preferred stock -- -- 58
Accrued dividends convertible preferred stock 483 158 --
Cancellation of warrants -- 825 --
============= ============== =============
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(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. Anyloan Financial Corporation, a 98.1%
owned subsidiary of the Company, and its wholly owned subsidiary,
Anyloan.com, were formed during 1999 to conduct the Company's
web-based lending operations.
(b) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the
financial statements of the Company's wholly owned subsidiaries,
New Century Mortgage Corporation, Primewest Funding Corporation
and 98.1% of the assets and liabilities of Anyloan Financial
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.
F-7 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
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) 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, 1999.
(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, is being amortized over a seven-year period using
the straight-line method. Goodwill is reviewed for possible
impairment when events or changed circumstances may affect the
underlying basis of the asset. Impairment is measured by
discounting the operating income at an appropriate discount rate.
Accumulated amortization was $1.1 million and $503,000 at
December 31, 1999 and 1998, respectively.
F-8 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(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, 1999 as follows (dollars in
thousands):
<TABLE>
<S> <C>
Current assets $ 518,860
Current liabilities 654,496
-------------
Net working capital $ (135,636)
=============
</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
$4.5 million each at December 31, 1999.
(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
F-9 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
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.
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 14.0% on the
estimated cash flows released from the Trust to value Residuals
through NIMS.
F-10 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
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 Account 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 0.55% to 1.25% for
adjustable rate first trust deeds, and 0.40% to 0.80% annual
default rate estimate for fixed rate first trust deeds and 0.75%
to 1.30% 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 2.06% to 3.57% for adjustable rate first trust deeds, 1.95% to
2.97% for fixed rate first trust deeds and 2.84% to 2.97% 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 curve
and default estimates have resulted in weighted average lives of
between 1.93 to 3.23 years for its adjustable mortgage loans and
3.80 to 4.37 for its fixed rate mortgage loans.
F-11 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
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 has historically
established a general valuation allowance. 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. The Company has also historically
recorded write-downs in the carrying value of its residual
interests as a result of actual prepayment loss experience.
During the years ended December 31, 1999 and 1998, the Company
recorded $28.5 million and $5.9 million, respectively, in
write-downs of the carrying value of its residual interests.
During the year ended December 31, 1998, the Company added $7.5
million to its general valuation allowance, and reduced its
general valuation allowance by $5.5 million during the year
ended December 31, 1999.
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
F-12 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
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.
(p) EARNINGS PER SHARE
Basic earnings per share (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 have been reclassified to
conform to the current year's presentation.
(t) SEGMENT REPORTING
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
Companywide 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, (ii) a hedge of the
F-13 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
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. This
statement is effective for the Company on January 1, 2001.
Management has determined that application of this statement is
not expected to 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, 1999 and 1998 follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
---------------- ---------------
<S> <C> <C>
Mortgage loans receivable:
First trust deeds $ 404,034 346,016
Second trust deeds 37,769 9,859
Net deferred origination costs 850 1,100
---------------- ---------------
$ 442,653 356,975
================ ===============
</TABLE>
At December 31, 1999 and 1998, the Company had loans receivable held for
sale of approximately $26.7 million and $16.8 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 $501,000 and $721,000 in the years ended
December 31, 1999 and 1998, respectively.
(a) INTEREST INCOME
The following table presents the components of interest income for
the years ended December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------------- -------------- --------------
<S> <C> <C> <C>
Interest on loans receivable held for sale
$ 59,504 46,409 24,546
Interest on cash and cash equivalents 1,953 1,246 525
--------------- -------------- --------------
$ 61,457 47,655 25,071
=============== ============== ==============
</TABLE>
F-14 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(b) GAIN ON SALES OF LOANS
Gain on sales of loans for the years ended December 31, 1999, 1998
and 1997 was comprised of the following components (dollars in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- ------------------- -------------------
<S> <C> <C> <C>
Gain from whole loan sale transactions $ 30,749 58,001 27,707
Non-cash gain from securitizations (NIR
gains) 169,980 168,065 89,770
Non-cash gain from servicing asset 16,368 8,791 --
Cash gain (loss) from securitizations/NIM
transactions (4,670) (4,664) 6,105
Securitization expenses (17,161) (13,664) (5,624)
Accrued interest (14,807) (11,818) (7,188)
Write down of NIR (23,000) (5,900) (5,175)
General valuation allowance for NIR -- (7,500) (3,000)
Provision for losses (2,549) (6,400) (3,986)
Nonrefundable fees 54,598 47,933 24,514
Premiums, net (22,355) (58,816) (24,739)
Origination costs (63,300) (62,783) (28,716)
Hedging losses (2,181) (6,185) (1,729)
-------------------- ------------------- -------------------
$ 121,672 105,060 67,939
==================== =================== ===================
</TABLE>
(c) ORIGINATIONS AND PURCHASES
During the year ended December 31, 1999, approximately 31.2% and
7.2% of the Company's total loan originations and purchases were
in the states of California and Illinois, respectively. During the
year ended December 31, 1998, approximately 32.4% and 8.6% of
total loan originations and purchases were in the states of
California and Illinois, respectively.
(d) SIGNIFICANT CUSTOMERS
During the year ended December 31, 1998, the Company entered into
a number of transactions with two customers which accounted for
more than 10% of the Company's total loan sales. During 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, 1999, no investor
accounted for more than 10% of total loans sold.
F-15 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(3) RESIDUAL INTEREST IN SECURITIZATIONS
Residual interests in securitizations consist of the following components
at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------- --------------------
<S> <C> <C>
Over-collateralization amount $ 184,545 89,792
Net interest receivable (NIR) 185,144 126,103
General valuation allowance (5,000) (10,500)
------------------- --------------------
$ 364,689 205,395
=================== ====================
</TABLE>
The following table summarizes activity in the over-collateralization
account at December 31, 1999 and 1998 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------- --------------------
<S> <C> <C>
Balance, beginning of year $ 89,792 21,224
Initial deposits to OC accounts 87,940 64,942
Additional deposits to OC accounts 43,288 31,284
Release of cash from OC accounts (36,475) (27,658)
------------------- --------------------
$ 184,545 89,792
=================== ====================
</TABLE>
The following table summarizes activity in NIR interests at December 31
(dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------------- -------------------
<S> <C> <C>
Balance, beginning of year $ 126,103 79,036
NIR gains 169,980 168,065
NIR amortization (11,282) (15,935)
Sale of NIRs through NIMs (71,157) (99,163)
Writedown of NIR (28,500) (5,900)
-------------------- -------------------
$ 185,144 126,103
==================== ===================
</TABLE>
F-16 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The following table summarizes activity in the general valuation
allowance at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------------- -------------------
<S> <C> <C>
Balance, beginning of year $ 10,500 3,000
Provision -- 7,500
Writedown of NIR (5,500) --
-------------------- -------------------
Balance, end of year $ 5,000 10,500
==================== ===================
</TABLE>
In December 1998, 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 sold this residual interest in a NIMS transaction
during the year ended December 31, 1999.
SERVICING INCOME
The following table presents the components of servicing income for the
years ended December 31, 1999, 1998 and 1997 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- --------------------
<S> <C> <C> <C>
Servicing fees collected $ 26,017 8,820 427
Amortization of mortgage servicing asset (2,888) (126) --
Residual interest income 38,668 30,555 10,597
NIR amortization (11,282) (15,935) (5,559)
Prepayment penalties collected 298 378 158
------------------- ------------------- --------------------
$ 50,813 23,692 5,623
=================== =================== ====================
</TABLE>
(4) MORTGAGE SERVICING ASSET
The following table summarizes activity in mortgage servicing asset for
the years ended December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------- -------------------
<S> <C> <C>
Beginning balance $ 8,665 --
Additions 16,368 8,791
Amortization (2,888) (126)
------------------- -------------------
$ 22,145 8,665
=================== ===================
</TABLE>
F-17 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(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. During 1999, the Company paid
$215,000 as goodwill based on the 1998 net earnings of Primewest.
Goodwill is being amortized over seven years using the straight-line
method.
The following table summarizes activity in goodwill, included in prepaid
expenses and other assets at December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
------------------- --------------------
<S> <C> <C>
Balance, beginning of year $ 3,139 --
Additions 215 3,642
Amortization (558) (503)
------------------- --------------------
$ 2,796 3,139
=================== ====================
</TABLE>
(6) OFFICE PROPERTY AND EQUIPMENT
Office property and equipment consist of the following at December 31
(dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------------- -------------------
<S> <C> <C>
Leasehold improvements $ 812 589
Furniture and office equipment 1,623 1,937
Computer hardware and software 5,763 4,150
-------------------- -------------------
8,198 6,676
Less accumulated depreciation and amortization (4,418) (3,032)
-------------------- -------------------
$ 3,780 3,644
==================== ===================
</TABLE>
F-18 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(7) SHORT-TERM FINANCING
Warehouse and aggregation lines of credit consist of the following at
December 31 (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998
-------------------- -------------------
<S> <C> <C>
A $290 million line of credit expiring in May 2000 secured by loans
receivable held for sale, bearing interest based on one month LIBOR
(5.82% at December 31, 1999) $ 234,778 191,931
A $603 million master repurchase agreement bearing interest based on one
month LIBOR (5.82% at December 31, 1999). The agreement may be
terminated by the lender after giving 28 days written notice 164,326 153,912
A $300 million loan and security agreement bearing interest based on one
month LIBOR (5.82% at December 31, 1999), secured by loans receivable
held for sale, expiring in June 2000 17,682 --
A $293 million loan and security agreement bearing interest based on one
month LIBOR (5.82% at December 31, 1999), secured by loans receivable
held for sale. This facility renews automatically for successive
12-month periods starting in August 2000, but is
uncommitted 11,940 --
-------------------- -------------------
$ 428,726 345,843
==================== ===================
</TABLE>
Residual financing payable:
<TABLE>
<CAPTION>
1999 1998
-------------------- -------------------
<S> <C> <C>
$160 million in residual financing lines renewable monthly, secured by
residual interests in securitizations bearing interest based on
one month LIBOR (5.82% at December 31, 1999) $ 159,900 122,298
$30 million in residual financing lines renewable monthly, secured by
residual interests in securitizations, bearing interest based on one
month LIBOR (5.82% at December 31, 1999) 11,285 --
$7 million in residual financing lines renewable monthly, secured by
residual interests in securitizations, bearing interest based on one
month LIBOR (5.82% at December 31, 1999) 6,308 --
-------------------- -------------------
$ 177,493 122,298
==================== ===================
</TABLE>
F-19 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The weighted-average interest rate on the warehouse and aggregation lines
of credit payable was 7.10% and 6.33% at December 31, 1999 and 1998,
respectively. The weighted-average interest rate on residual financing
payable was 7.44% and 6.46% at December 31, 1999 and 1998, 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, 1999, 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) SUBORDINATED DEBT
In October 1999, the Company entered into an agreement with US Bancorp to
amend the warehouse line of credit agreement to include a subordinated
debt component. The Company borrowed $20.0 million in subordinated debt
in October 1999. Such debt bears interest at a rate of 12.0% per annum
and matures in June 2000. Subsequent to year-end, the Company entered
into a commitment to extend the maturity date of the subordinated debt
to June 2002.
(9) NOTES PAYABLE
Notes payable consists of a revolving, uncommitted financing line of
credit of $5.0 million, collateralized by office property and equipment
and bears interest at revolving, uncommitted rates varying from 7.99% to
10.59%. The borrowings are payable in blended monthly payments of
principal and interest and mature commencing from March 2000 to September
2002.
The maturities of notes payable at December 31 for the years ended are as
follows (dollars in thousands):
<TABLE>
<S> <C>
Due in 2000 $ 1,793
Due in 2001 1,026
Due in 2002 232
--------------------
$ 3,051
====================
</TABLE>
(10) LOAN SERVICING
The Company's portfolio of mortgage loans serviced for others was
comprised of approximately $5.5 billion and $3.4 billion at December 31,
1999 and 1998, respectively, the majority of which represents loans
securitized by the Company. The Company commenced full servicing
operations on its in-house platform in July 1998 and performs all
servicing functions for its entire portfolio.
At December 31, 1999 and 1998, 33.2% and 33.6%, respectively, of the
servicing portfolio was collateralized by real estate properties located
in California.
F-20 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
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, 1999 (dollars in thousands):
<TABLE>
<S> <C>
Impounded collections, taxes and
insurance $ 9,398
Principal and interest collections 92,617
-------------------
$ 102,015
===================
</TABLE>
As master servicer, the Company is required to make advances for
delinquent payments and other servicing-related costs. At December 31,
1999 and 1998, such advances totaled $12.2 million and $1.6 million,
respectively, and are included in prepaid expenses 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. Amounts deemed to be unrecoverable are written off and
the expense is included in general and administrative expenses.
(11) COMMITMENTS AND CONTINGENCIES
(a) RELATED PARTY
The Company has entered into employment agreements with the 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. Then, in January 1999, the agreements were
superseded by new employment agreements, also extending until
December 31, 20002. Thereafter, the term of each agreement is
extended automatically for successive one-year periods unless
terminated. 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 Managers' salary to
$281,600 for 1998, plus a $500 per month auto allowance. Effective
January 1, 1999, the Board of Directors increased the Founding
Managers' salary to $333,000 for 1999, plus a $500 per month auto
allowance.
In December 1996, the Company adopted the Founding Managers'
Incentive Compensation Plan (the FMIC Plan) and the Company has
amended the terms thereof effective for 1997 and subsequent plan
years. The Compensation Committee (the Committee) of the Board of
Directors administered the FMIC Plan. The Committee had full
discretion to construe and interpret the terms and provisions of
the FMIC Plan and related agreements. In addition, the Committee
had the authority to make all determinations under the FMIC Plan,
and to prescribe, amend and rescind rules relating to its
administration.
Under the FMIC Plan, each of the Founding Managers was entitled to
one quarter of amounts payable. Subject to the limitations
described below, the amounts available for incentive awards (the
Incentive Pool) for each fiscal year, commencing in 1997, was an
amount equal to a percentage of the Company's earnings (Earnings)
before income taxes and without deducting amounts payable under
F-21 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
the FMIC Plan. The specific percentage of Earnings that was used
to determine the Incentive Pool was based on the ratio (the Ratio)
of Earnings to Total Stockholders' Equity. If the Ratio was at
least 25% but less than 50%, the Incentive Pool was an amount
equal to 5% of Earnings in excess of 25% of Total Stockholders'
Equity. If the Ratio was at least 50%, the Incentive Pool was 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 was 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 FMIC Plan were payable in either cash or
restricted stock if agreed by the Committee and the respective
Founding Manager. In the absence of such an agreement, incentive
compensation to each Founding Manager would be paid in cash up to
200% of such base salary. If the Incentive Pool exceeded the cash
portion of the incentive compensation and there is no agreement
between the Committee and respective Founding Manager regarding
the distribution of the excess, such excess would be paid to the
respective Founding Manager in the form of restricted stock.
In February 1999, the Board of Directors approved the 1999
Incentive Compensation Plan (the Incentive Compensation Plan), and
simultaneously terminated the FMIC Plan. The Board designed the
Incentive Compensation Plan so that the Founding Managers' bonuses
would qualify as performance-based compensation under Section
162(m) of the Internal Revenue Code. The Company's stockholders
approved the Incentive Compensation Plan in May 1999.
The Founding Managers' January 1999 employment agreements
provide for two awards for 1999 under the Incentive
Compensation Plan: one for the Company's performance during the
first six months of the year, and the second for the Company's
performance for the entire year. The awards base the potential
incentive compensation on the Ratio of the Company's Earnings
to its Total Stockholders' Equity, using definitions virtually
identical to those used in the FMIC Plan. For the January 1,
1999 to June 30, 1999 performance period, if the Ratio is at
least 10% but less than 20%, each Founding Manager is entitled
to 1.25% of Earnings in excess of 10% of Total Stockholders'
Equity. If the Ratio is at least 20%, each Founding Manager
will receive incentive payments equal to the sum of (i) 1.25%
of Earnings in excess of 10% of Total Stockholders' Equity,
plus (ii) 0.50% of Earnings in excess of 20% of Total
Stockholders' Equity. For the January 1, 1999 to December 31,
1999 performance period, if the Ratio is at least 20% but less
than 40%, each Founding Manager is entitled to 1.25% of the
Earnings in excess of 20% of Total Stockholders' Equity. If the
Ratio is at least 40%, each Founding Manager will receive
incentive payments equal to the sum of (i) 1.25% of Earnings in
excess of 20% of Total Stockholders' Equity, plus (ii) 0.50% of
Earnings in excess of 40% of Total Stockholders' Equity. The
amount of any incentive award paid for the 12-month performance
period will be reduced by any amounts paid for the six-month
performance period. Award amounts up to 200% of the Founding
Manager's current annual salary are paid in cash. Any amounts
exceeding 200% of the base salary are paid in restricted stock,
unless the Committee and Founding Manager agree otherwise.
Included in personnel expense for the years ended December 31,
1999, 1998 and 1997, respectively, are $1.7 million related to
the Incentive Compensation Plan and $2.4 million and $1.0 million
related to the FMIC Plan.
F-22 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(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 $7.0 million, $6.1 million and $2.6 million for the
years ended December 31, 1999, 1998 and 1997, respectively. The
Company and its subsidiaries lease office property and equipment
from various equipment leasing companies under operating lease
agreements. Total lease commitments available under these
facilities are $19.1 million, all of which was utilized as of
December 31, 1999. These operating leases expire from April 2000
to October 2002. Total rental expenditures under these office
property and equipment leases were approximately $5.9 million,
$2.4 million and $1.1 million for the years ended December 31,
1999, 1998 and 1997, respectively.
F-23 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Minimum rental commitments for these leases are as follows
(dollars in thousands):
<TABLE>
<S> <C>
Years ending December 31:
2000 $ 11,130
2001 8,895
2002 5,285
2003 1,252
2004 204
-------------------
$ 26,766
===================
</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 $602.1 million and $1.2 billion at December 31, 1999
and 1998, respectively.
The Company had commitments to sell loans of $100 million and
$300 million at December 31, 1999 and 1998, respectively, to an
investment banker.
As of December 31, 1999, 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 $750.0 million, $611.7 million of which was
fulfilled at December 31, 1999. 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 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.
F-24 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
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 and
$3.5 million, respectively, for the years ended December 31, 1998
and 1997.
At December 31, 1999 and 1998, included in accounts payable and
accrued liabilities are approximately $3.7 million and $2.4
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>
1999 1998
------------------- -------------------
<S> <C> <C>
Balance, beginning of year $ 2,382 1,597
Provision for losses 2,549 6,400
Charge-offs, net (1,266) (5,615)
------------------- -------------------
Balance, end of year $ 3,665 2,382
=================== ===================
</TABLE>
(e) 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.
(12) INCOME TAXES
Components of the Company's provision for income taxes for the years
ended December 31, 1999 and 1998 and 1997 are as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- --------------------
<S> <C> <C> <C>
Current:
Federal $ 10,418 7,184 3,739
State 2,209 1,804 1,201
------------------- ------------------- --------------------
12,627 8,988 4,940
------------------- ------------------- --------------------
Deferred:
Federal 12,075 9,512 5,789
State 2,675 2,693 2,120
------------------- ------------------- --------------------
14,750 12,205 7,909
------------------- ------------------- --------------------
$ 27,377 21,193 12,849
=================== =================== ====================
</TABLE>
F-25 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Actual income taxes differ from the amount determined by applying the
statutory Federal rate of 35% for the years ended December 31, 1999, 1998
and 1997 to earnings before income taxes as follows (dollars in
thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- -------------------
<S> <C> <C> <C>
Computed "expected" income taxes $ 23,410 18,309 10,707
State tax, net of Federal benefit 3,173 2,923 2,157
Other 794 (39) (15)
-------------------- -------------------- -------------------
$ 27,377 21,193 12,849
==================== ==================== ===================
</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>
1999 1998
------------------- -------------------
<S> <C> <C>
Deferred tax assets:
Allowance for loan losses $ 824 1,471
State taxes 3,328 1,838
Office property and equipment 523 330
Other 250 196
------------------- -------------------
4,925 3,835
------------------- -------------------
Deferred tax liabilities:
Non-cash gain from securitization 36,968 22,144
Deferred loan fees 2,922 1,933
Other 27 --
------------------- -------------------
39,917 24,077
------------------- -------------------
Net deferred income tax liability $ 34,992 20,242
=================== ===================
</TABLE>
There was no valuation allowance for deferred tax assets at December 31,
1999 and 1998, 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,
F-26 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(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, 1999
and 1998.
(13) 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, 1999, 1998 and 1997 were $538,000, $407,000 and $194,000,
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 88,524 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.
(14) 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 were entitled to convert each share of
Series A preferred stock into one share of common stock. Upon
liquidation, the Series A preferred stock was 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.
F-27 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
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 were 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 was
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. In July 1999, the Company
issued 20,000 shares of Series 1999 A convertible preferred stock
to US Bancorp. The Company received $20.0 million from this issue.
The holders of Series 1999 A preferred stock are entitled to
convert each share of Series 1999 A preferred stock into 46.795
shares of common stock. The Series 1999 A preferred stock earns a
dividend at a rate of 7.0% per annum, payable quarterly. At
December 31, 1999 and 1998, accrued dividends of $483,000 and
$158,000, respectively, are included in accounts payable and
accrued liabilities. Upon liquidation, the holders of Series
1998 A and 1999 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.
(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,
1999 and 1998 are $566,000 and $1,286,000, respectively, related
to the amortization of deferred compensation.
F-28 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
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 16,204 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 were held as Treasury stock as of December 31, 1998
and the Treasury shares were cancelled in August 1999.
In March 1999, the Company issued 9,872 shares of common stock in
connection with its obligations under the Primewest acquisition
agreement.
In May 1999, the Company received 59,756 shares of common stock
from its Founding Managers as payment of the Company's withholding
obligations upon vesting of the second installment of the May 1997
Founding Managers' Restricted Stock Awards and the first
installment of the April 1998 Restricted Stock Award. The fair
market value of the stock at the time it was paid to the Company
was $860,000. These shares were cancelled in August 1999.
In August 1999, the Company issued 42,377 shares of common stock
upon the exercise of 100,000 warrants held by Comerica.
(c) WARRANTS
Each share of common stock issued on November 22, 1995 had a
warrant attached which entitled the holder to purchase 2.78 shares
of common stock of the Company at $1.00, $2.00 and $3.00 per
share. All of these warrants were exercised in May 1997.
In December 1996, the Company issued warrants to purchase an
aggregate of 512,384 shares of common stock, exercisable at $3.50
per share, to the Company's existing stockholders at that time.
Such warrants were granted to stockholders on a pro rata basis in
satisfaction of the stockholders' respective preemptive rights.
These warrants were exercised in May 1997.
In May 1997, the Company issued to Comerica warrants to purchase
100,000 shares of common stock 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
F-29 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
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. As of December 31, 1999, the
value of the warrants had been amortized as general and
administrative expenses. As of December 31, 1999, 50,000
warrants remain outstanding.
(15) 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 3.0
million shares of authorized but unissued common stock. Stock options
granted under the Plan have terms of ten years and vest over a range from
December 1996 to September 2004. 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,
(iii) 10,000 granted to a nonemployee director of the Company in
September 1998, vesting over five years and expiring ten years from the
grant date, and (iv) 30,000 granted to two non-employee directors of the
Company in May 1999, vesting over five 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, 1999, there were 565,705 shares available for grant under
the Plan. Of the options outstanding at December 31, 1999 and 1998,
1,166,500 and 919,344, respectively, were exercisable with
weighted-average exercise prices of $8.23 and $7.52, respectively. The
per share weighted-average fair value of stock options granted during the
year ended December 31, 1999 and 1998 was $7.68 and $5.07, respectively,
at the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions:
<TABLE>
<CAPTION>
1999 1998
----------------- --------------------
<S> <C> <C>
Expected life (years) 4.5 4.5
Risk-free interest rate 7.0% 6.0%
Volatility 55.0% 55.0%
Expected dividend yield -- --
================= ====================
</TABLE>
F-30 (Continued)
b<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
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>
1999 1998 1997
-------------------- -------------------- -------------------
<S> <C> <C> <C>
Net earnings:
As reported $ 39,509 31,115 17,743
Pro forma 38,135 30,018 16,108
==================== ==================== ===================
Basic earnings per share:
As reported $ 2.59 2.19 2.18
Pro forma 2.50 2.11 1.98
==================== ==================== ===================
Diluted earnings per share:
As reported $ 2.11 2.03 1.40
Pro forma 2.04 1.96 1.27
==================== ==================== ===================
</TABLE>
Stock options activity during the years ended December 31, 1999 and 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER OF SHARES EXERCISE PRICE
-------------------- --------------------
<S> <C> <C>
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
Granted 448,000 14.54
Exercised (179,165) 4.63
Canceled (62,575) 11.92
-------------------- --------------------
Balance at December 31, 1999 2,273,380 $ 9.62
==================== ====================
</TABLE>
F-31 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
At December 31, 1999, the range of exercise prices, the number
outstanding, weighted-average remaining term and weighted-average
exercise price of options outstanding and the number exercisable and
weighted-average price of options currently exercisable are as follows:
<TABLE>
<CAPTION>
RANGE OF WEIGHTED-AVERAGE WEIGHTED-AVERAGE
EXERCISE NUMBER WEIGHTED-AVERAGE EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING REMAINING TERM PRICE EXERCISABLE PRICE
---------------- ------------------ ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.50-0.50 52,050 6.23 $ 0.50 13,650 $ 0.50
1.75-1.75 61,954 6.67 1.75 9,454 1.75
3.50-3.50 142,300 6.92 3.50 127,100 3.50
7.50-7.50 655,429 7.33 7.50 591,889 7.50
8.38-8.38 90,000 8.67 8.38 23,700 8.38
9.00-9.00 10,700 8.83 9.00 4,517 9.00
9.50-9.53 97,150 8.41 9.52 33,050 9.52
10.00-10.75 200,259 8.35 10.19 55,734 10.17
11.00-11.75 483,538 7.50 11.06 263,331 11.01
12.00-12.75 255,700 9.09 12.43 8,900 12.50
15.00-15.00 10,000 8.58 15.00 10,000 15.00
16.25-16.25 7,500 9.67 16.25 -- --
17.00-17.00 51,300 7.67 17.00 25,175 17.00
18.25-18.25 155,500 9.58 18.25 -- --
================ ================== ================ ================ ================= ================
</TABLE>
(16) GENERAL AND ADMINISTRATIVE EXPENSES
A summary of general and administrative expenses for the year ended
December 31, 1999 and 1998 and 1997 follows (dollars in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- -------------------
<S> <C> <C> <C>
Other administrative expenses $ 6,346 3,469 2,415
Occupancy 8,488 7,596 3,233
Depreciation and amortization 2,778 2,550 1,848
Telephone 4,575 3,467 1,577
Postage and courier 3,633 2,892 1,443
Travel, entertainment and conferences 3,454 3,246 1,503
Servicing 2,896 1,840 1,536
Equipment rental 7,074 4,207 1,371
Data processing 1,477 54 37
Office supplies 2,011 1,673 1,074
-------------------- -------------------- -------------------
$ 42,732 30,994 16,037
==================== ==================== ===================
</TABLE>
F-32 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(17) 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.
The estimated fair values of the Company's financial instruments as of
December 31, 1999 and 1998 are as follows (dollars in thousands):
<TABLE>
<CAPTION>
1999
------------------------------------------
CARRYING FAIR
VALUE VALUE
------------------- --------------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 4,496 4,496
Loans receivable held for sale, net 442,653 444,599
Residual interests in securitizations 364,689 364,689
Financial liabilities:
Warehouse and aggregation lines of
credit 428,726 428,726
Residual financing payable 177,493 177,493
Subordinated debt 20,000 20,000
Notes payable 3,051 3,051
=================== ====================
<CAPTION>
1998
------------------------------------------
CARRYING FAIR
VALUE 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 -- --
=================== ===================
</TABLE>
F-33 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
The following methods and assumptions were used in estimating the
Company's fair value disclosures for financial instruments.
Cash and cash equivalents: The fair value of cash and cash equivalents
approximates the carrying value reported in the balance sheet.
Loans receivable held for sale: The fair value of loans receivable held
for sale is determined in the aggregate based on outstanding whole loan
commitments from investors or current investor yield requirements.
Residual interests in securitizations: The fair value of residual
interests in securitizations is determined by calculating the net present
value of estimated future cash flows using a discount rate commensurate
with the risks involved.
Warehouse lines of credit and residual financing payable: The carrying
value reported in the balance sheet approximates fair value as the
warehouse lines of credit and residual financing payable are due upon
demand and bear interest at a rate that approximates current market
interest rates for similar type lines of credit.
Subordinated debt: The fair value of subordinated debt is estimated to
approximate carrying value as the subordinated debt is short-term and
bears interest at a rate that approximates current market rate for
similar borrowings.
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.
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 note commensurate with the risks involved.
F-34 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(18) 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
------------------------------------------
ASSETS 1999 1998
-------------------- -------------------
<S> <C> <C>
Cash and cash equivalents $ 1,328 567
Investment in and receivable from subsidiaries 172,196 112,312
Other assets 411 2,137
-------------------- -------------------
$ 173,935 115,016
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 972 403
Stockholders' equity 172,963 114,613
-------------------- -------------------
$ 173,935 115,016
==================== ===================
</TABLE>
Condensed Statements of Earnings
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- -------------------
<S> <C> <C> <C>
Interest income $ 3,187 44 230
Equity in undistributed earnings of subsidiaries 39,206 32,940 18,991
-------------------- -------------------- -------------------
42,393 32,984 19,221
-------------------- -------------------- -------------------
Personnel 1,602 1,979 1,149
General and administrative 571 236 1,106
Professional services 479 289 126
-------------------- -------------------- -------------------
2,652 2,504 2,381
-------------------- -------------------- -------------------
Earnings before income taxes (benefit) 39,741 30,480 16,840
Income taxes (benefit) 232 (635) (903)
-------------------- -------------------- -------------------
Net earnings $ 39,509 31,115 17,743
==================== ==================== ===================
</TABLE>
F-35 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
Condensed Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- -------------------- -------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 39,509 31,115 17,743
Adjustments to reconcile net earnings to net
cash provided by (used in) operating
activities:
Depreciation and amortization 668 1,035 1,797
Decrease (increase) in other assets 1,624 (1,027) (908)
Increase in other liabilities 244 186 49
Equity in undistributed earnings of
subsidiaries (39,206) (32,940) (18,991)
-------------------- -------------------- -------------------
Net cash provided by (used in)
operating activities 2,839 (1,631) (310)
-------------------- -------------------- -------------------
Cash flows from investing activity - increase in (20,570) (18,211) (35,897)
investment in and receivables from subsidiary -------------------- -------------------- -------------------
Cash flows from financing activities:
Net proceeds from issuance of stock 21,138 20,831 36,203
Repurchase of treasury stock (860) (422) --
Dividends paid on preferred stock (1,786) -- --
-------------------- -------------------- -------------------
Net cash provided by financing
activities 18,492 20,409 36,203
-------------------- -------------------- -------------------
Net increase (decrease) in cash
and cash equivalents 761 567 (4)
Cash and cash equivalents, beginning of period 567 -- 4
-------------------- -------------------- -------------------
Cash and cash equivalents, end of period $ 1,328 567 --
==================== ==================== ===================
</TABLE>
F-36 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(19) 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>
1999 1998 1997
-------------------- -------------------- -------------------
<S> <C> <C> <C>
Numerator:
Net earnings $ 39,509 31,115 17,743
Less: preferred stock dividends 2,111 158 --
-------------------- -------------------- -------------------
Income available to common stockholders $ 37,398 30,957 17,743
==================== ==================== ===================
Denominator:
Denominator for basic earnings per share -
weighted-average common shares outstanding 14,414,565 14,165,307 8,139,052
Effect of dilutive securities:
Convertible preferred stock 3,132,490 283,678 2,375,834
Restricted stock award 180,954 258,397 197,926
Warrants 29,569 22,879 1,226,463
Stock options 941,326 591,332 766,459
-------------------- -------------------- -------------------
Denominator for diluted earnings per share 18,698,904 15,321,593 12,705,734
==================== ==================== ===================
Basic earnings per share $ 2.59 2.19 2.18
==================== ==================== ===================
Diluted earnings per share $ 2.11 2.03 1.40
==================== ==================== ===================
</TABLE>
For 1999, 1998, and 1997, 224,300, 798,850 and 138,500 stock options,
respectively and 50,000 warrants for 1998, whose exercise price exceeded
the average market price of the common shares are excluded from
calculation of dilutive number of shares.
F-37 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(20) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Selected quarterly financial data are presented below by quarter for the
years ended December 31, 1999 and 1998 (dollars in thousands, except per
share amounts):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, JUNE 30, MARCH 31,
1999 1999 1999 1999
------------------- --------------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Gain on sale of loans $ 26,782 35,275 30,187 29,428
Interest income 16,469 16,014 13,656 15,318
Servicing income 17,486 11,747 12,115 9,465
------------------- --------------------- ------------------ ------------------
Total revenues 60,737 63,036 55,958 54,211
Operating expenses 49,365 42,748 37,357 37,586
------------------- --------------------- ------------------ ------------------
Earnings before income
taxes 11,372 20,288 18,601 16,625
Income taxes 4,482 8,360 7,722 6,813
------------------- --------------------- ------------------ ------------------
Net earnings $ 6,890 11,928 10,879 9,812
=================== ===================== ================== ==================
Basic earnings per share $ 0.42 0.78 0.73 0.66
=================== ===================== ================== ==================
Diluted earnings per share $ 0.36 0.62 0.60 0.55
=================== ===================== ================== ==================
<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 $ 0.61 0.61 0.53 0.45
=================== ===================== ================== ==================
Diluted earnings per share $ 0.55 0.57 0.50 0.42
=================== ===================== ================== ==================
</TABLE>
F-38 (Continued)
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(21) 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. The Company's
strategies for mitigating the effects of a loss of financing would most
likely include (i) reducing production levels, (ii) shifting its
secondary marketing strategy to rely more heavily on whole loan sales,
(iii) accelerating the disposal of its loan inventory and (iv)
attempting to find interim financing from alternative sources.
(22) SUBSEQUENT EVENT
On March 28, 2000 the Company and U.S. Bank entered into a commitment
letter in which U.S. Bank agreed to (i) extend the maturity date of
its subordinated debt to June 1, 2002, and (ii) provide an additional
$10 million in subordinated debt financing during 2000. In exchange, the
Company agreed to (i) amend the conversion rate of the Series 1999A
Convertible Preferred Stock from 46.80 to 69.98 and (ii) grant U.S.
Bank up to 725,000 warrants at an exercise price equal to the market
value of the Company's Common Stock on the grant date. Approximately
70% of the warrants vest immediately. Of the remainder, a portion
vest in quarterly increments if the Company has not prepaid the
subordinated debt and a portion are granted concurrently with funding
of the additional $10 million in subordinated debt.
U.S. Bank's commitment to fund the additional subordinated debt is
subject the Company achieving certain operating milestones. In
addition, the entire transaction is subject to execution of definitive
agreements satisfactory to U.S. Bank, as well as the receipt of
consents from the other lenders party to the Company's warehouse credit
agreement.
F-39
<PAGE>
EXHIBIT 10.13
NEW CENTURY FINANCIAL CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
(Composite Plan Document Incorporating Amendments through 1999-III)
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
1. PURPOSE................................................................ 3
2. DEFINITIONS............................................................ 3
3. ELIGIBILITY............................................................ 5
4. STOCK SUBJECT TO THIS PLAN; SHARE LIMITATIONS.......................... 5
5. OFFERING PERIODS....................................................... 5
6. PARTICIPATION.......................................................... 6
7. METHOD OF PAYMENT OF CONTRIBUTIONS..................................... 6
8. GRANT OF OPTION........................................................ 7
9. EXERCISE OF OPTION..................................................... 7
10. DELIVERY............................................................... 8
11. TERMINATION OF EMPLOYMENT; CHANGE IN ELIGIBLE STATUS................... 8
12. ADMINISTRATION......................................................... 8
13. DESIGNATION OF BENEFICIARY............................................. 9
14. TRANSFERABILITY........................................................ 10
15. USE OF FUNDS; INTEREST................................................. 10
16. REPORTS................................................................ 10
17. ADJUSTMENTS OF AND CHANGES IN THE STOCK................................ 10
18. TERM OF PLAN; AMENDMENT OR TERMINATION................................. 11
19. NOTICES................................................................ 12
20. CONDITIONS UPON ISSUANCE OF SHARES..................................... 12
21. PLAN CONSTRUCTION...................................................... 12
22. EMPLOYEES' RIGHTS...................................................... 13
23. MISCELLANEOUS.......................................................... 13
24. TAX WITHHOLDING........................................................ 13
</TABLE>
-i-
<PAGE>
NEW CENTURY FINANCIAL CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
(Composite Plan Document Incorporating Amendments through 1999-III)
The following constitute the provisions of the New Century
Financial Corporation Employee Stock Purchase Plan.
1. PURPOSE
The purpose of this Plan is to provide Eligible Employees with an
incentive to advance the best interests of the Corporation (and those
Subsidiaries which may be designated by the Committee as "Participating
Corporations") by providing a method whereby they may voluntarily
purchase Common Stock at a favorable price and upon favorable terms.
2. DEFINITIONS
Capitalized terms used herein which are not otherwise defined shall
have the following meanings.
"ACCOUNT" shall mean the bookkeeping account maintained by the
Corporation, or by a recordkeeper on behalf of the
Corporation, for a Participant pursuant to Section 7(a).
"BOARD" shall mean the Board of Directors of the Corporation.
"CODE" shall mean the Internal Revenue Code of 1986, as amended.
"COMMITTEE" shall mean the committee appointed by the Board to
administer this Plan pursuant to Section 12.
"COMMON STOCK" shall mean the common stock of the Corporation.
"COMPANY" shall mean the Corporation and its Subsidiaries.
"COMPENSATION" shall mean an Eligible Employee's regular
earnings, overtime pay, sick pay, commissions, vacation pay,
incentive compensation and bonuses. Compensation also includes
any amounts contributed as salary reduction contributions to a
plan qualifying under Section 401(k), 125 or 129 of the Code.
Any other form of remuneration is excluded from Compensation,
including (but not limited to) the following: prizes, awards,
housing allowances, stock option exercises, stock appreciation
rights, restricted stock exercises, performance awards, auto
allowances, tuition reimbursement and other forms of imputed
income. Compensation shall be determined before giving effect
to any deferral election under the Corporation's nonqualified
Deferred Compensation Plan and
3
<PAGE>
Compensation shall not include any amounts paid under such
plan.
"CONTRIBUTIONS" shall mean all bookkeeping amounts credited to
the Account of a Participant pursuant to Section 7(a).
"CORPORATION" shall mean New Century Financial Corporation, a
Delaware corporation.
"ELIGIBLE EMPLOYEE" shall mean any employee of the
Corporation, or of any Subsidiary which has been designated in
writing by the Committee as a "Participating Corporation"
(including any Subsidiaries which have become such after the
date that this Plan is approved by shareholders).
Notwithstanding the foregoing, "Eligible Employee" shall not
include any employee who (i) has not as of the Grant Date
completed at least 90 days of continuous full-time employment
with the Company, (ii) whose customary employment is for less
than 20 hours per week, or (iii) whose customary employment is
for not more than five months in a calendar year.
"EFFECTIVE DATE" shall mean October 13, 1997.
"EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended.
"EXERCISE DATE" shall mean, with respect to an Offering
Period, the last day of that Offering Period.
"FAIR MARKET VALUE" shall mean the closing price of a Share on
The New York Stock Exchange on such date (or, in the event
that the Common Stock is not traded on such date, on the
immediately preceding trading date), as reported in THE WALL
STREET JOURNAL or, in the event the Common Stock is not listed
on The New York Stock Exchange, the "Fair Market Value" shall
be the closing price of the Common Stock for such date (or, in
the event that the Common Stock is not traded on such date, on
the immediately preceding trading date), as reported by the
National Association of Securities Dealers Automated Quotation
("NASDAQ") or, if such price is not reported, the mean of the
bid and asked prices per Share as reported by NASDAQ or, if
such prices are not so listed or reported, as determined by
the Committee (or its delegate), in its discretion
"GRANT DATE" shall mean the first day of each Offering Period.
"OFFERING PERIOD" shall mean the six-consecutive month period
commencing on each January 1 and July 1; provided, however,
that the initial Offering Period shall be a short Offering
Period which shall commence on the Effective Date and end on
December 31, 1997.
"OPTION" shall mean the stock option to acquire Shares granted
to a Participant pursuant to Section 8.
4
<PAGE>
"OPTION PRICE" shall mean the per share exercise price of an
Option as determined in accordance with Section 8(b).
"PARTICIPANT" shall mean an Eligible Employee who has elected
to participate in this Plan and who has filed a valid and
effective Subscription Agreement to make Contributions
pursuant to Section 6.
"PLAN" shall mean this New Century Financial Corporation
Employee Stock Purchase Plan, as amended from time to time.
"RULE 16B-3" shall mean Rule 16b-3 promulgated under Section
16.
"SECTION 16" shall mean Section 16 of the Exchange Act.
"SHARE" shall mean a share of Common Stock.
"SUBSCRIPTION AGREEMENT" shall mean the written agreement
filed by an Eligible Employee with the Corporation pursuant to
Section 6 to participate in this Plan.
"SUBSIDIARY" shall mean any corporation in an unbroken chain
of corporations (beginning with the Corporation) in which each
corporation (other than the last corporation) owns stock
possessing 50% or more of the total combined voting power of
all classes of stock in one or more of the other corporations
in the chain.
3. ELIGIBILITY
Any person employed as an Eligible Employee as of a Grant Date shall be
eligible to participate in this Plan during the Offering Period in
which such Grant Date occurs, subject to the Eligible Employee
satisfying the requirements of Section 6.
4. STOCK SUBJECT TO THIS PLAN; SHARE LIMITATIONS
The total number of Shares to be made available under this Plan is
2,000,000 authorized and unissued or treasury shares of Common Stock,
or Shares repurchased on the open market, subject to adjustments
pursuant to Section 17. In the event that all of the Shares made
available under this Plan are subscribed prior to the expiration of
this Plan, this Plan may be terminated in accordance with Section 18.
5. OFFERING PERIODS
During the term of this Plan, the Corporation will offer Options to
purchase Shares to all Participants during each Offering Period. Each
Option shall become effective on the Grant Date. The term of each
Option shall be six months (except with respect to those Options
granted during the first Offering Period) and shall end on the Exercise
Date. The first Offering Period shall commence on or after the
Effective Date. Offering Periods shall continue until this Plan is
terminated in accordance with Section 18, or, if earlier, until no
Shares remain available for Options pursuant to Section 4.
5
<PAGE>
6. PARTICIPATION
An Eligible Employee may become a participant in this Plan by
completing a Subscription Agreement on a form approved by and in a
manner prescribed by the Committee (or its delegate). To become
effective, Subscription Agreements must be filed with the Corporation
prior to the applicable Grant Date and must set forth the amount or
whole percentage of the Eligible Employee's Compensation (which shall
not be less than 1% and not more than 10% of such Eligible Employee's
Compensation) to be credited to the Participant's Account as
Contributions each pay period. The Committee may permit Eligible
Employees to make separate Contribution elections with respect to the
bonus portion of their Compensation, on such terms and conditions as
the Committee may prescribe. Subscription Agreements shall contain the
Eligible Employee's authorization and consent to the Corporation's
withholding from his or her Compensation the amount of his or her
Contributions. A Participant's Subscription Agreement (as it may
periodically be changed in accordance with Section 7(d)) shall remain
valid for all Offering Periods until (i) the Participant terminates his
or her Contributions in accordance with Section 7(c), (ii) the date the
Participant's employment with the Company is terminated, or (iii) the
date the Participant is no longer an Eligible Employee.
7. METHOD OF PAYMENT OF CONTRIBUTIONS
(a) The Corporation shall maintain on its books, or cause to be
maintained by a recordkeeper, an Account in the name of each
Participant. The percentage of Compensation elected to be
applied as Contributions by a Participant shall be deducted
from such Participant's Compensation on each payday during the
period for payroll deductions set forth below and such payroll
deductions shall be credited to that Participant's Account as
soon as administratively practicable after such date. A
Participant may not make any additional payments to his or her
Account. A Participant's Account shall be reduced by any
amounts used to pay the Option Price of Shares acquired, or by
any other amounts distributed pursuant to the terms hereof.
(b) Payroll deductions with respect to an Offering Period shall
commence as of the first day of the payroll period which
coincides with or immediately follows the applicable Grant
Date and shall end on the last day of the payroll period which
coincides with or immediately precedes the applicable Exercise
Date, unless sooner terminated by the Participant as provided
in this Section or until his or her participation terminates
pursuant to Section 11.
(c) A Participant may terminate his or her Contributions during an
Offering Period by completing and filing with the Corporation,
in such form and on such terms as the Committee (or its
delegate) may prescribe, a written withdrawal form which shall
be signed by the Participant. Such termination shall be
effective as soon as administratively practicable after its
receipt by the Corporation.
6
<PAGE>
(d) A Participant may discontinue or otherwise change the level of
his or her Contributions (within Plan limits) during an
Offering Period by completing and filing with the Corporation,
in such form and on such terms as the Committee (or its
delegate) may prescribe, a written change in Contributions
election which shall be signed by the Participant. Such change
shall be effective as soon as administratively practicable
after its receipt by the Corporation. A Participant shall make
no more than two elections pursuant to this Section 7(d) in
any one Offering Period and any elections in excess of such
limit shall be invalid.
8. GRANT OF OPTION
(a) On each Grant Date, each Eligible Employee who is a
participant during that Offering Period shall be granted an
Option to purchase a number of Shares. The Option shall be
exercised on the Exercise Date. The number of Shares subject
to the Option shall be determined by dividing the
Participant's Account balance as of the applicable Exercise
Date by the Option Price.
(b) The Option Price per Share of the Shares subject to an Option
shall be the lesser of: (i) 90% of the Fair Market Value of a
Share on the applicable Grant Date; or (ii) 90% of the Fair
Market Value of a Share on the applicable Exercise Date.
(c) Notwithstanding anything else contained herein, a person who
is otherwise an Eligible Employee shall not be granted any
Option or other right to purchase Shares under this Plan to
the extent (i) it would, if exercised, cause the person to own
"stock" (as such term is defined for purposes of Section
423(b)(3) of the Code) possessing 5% or more of the total
combined voting power or value of all classes of stock of the
Corporation, or any Subsidiary, or (ii) such Option causes
such individual to have rights to purchase stock under this
Plan and any other plan of the Company qualified under Section
423 of the Code which accrue at a rate which exceeds $25,000
of the fair market value of the stock of the Corporation or of
a Subsidiary (determined at the time the right to purchase
such Stock is granted) for each calendar year in which such
right is outstanding. For this purpose a right to purchase
Shares accrues when it first become exercisable during the
calendar year. In determining whether the stock ownership of
an Eligible Employee equals or exceeds the 5% limit set forth
above, the rules of Section 424(d) of the Code (relating to
attribution of stock ownership) shall apply.
9. EXERCISE OF OPTION
Unless a Participant's Plan participation is terminated as provided in
Section 11, his or her Option for the purchase of Shares shall be
exercised automatically on the Exercise Date for that Offering Period,
without any further action on the Participant's part, and the maximum
number of Shares subject to such Option shall be purchased at the
Option Price with the balance of such Participant's Account. The
Committee, in its discretion and prior to the applicable Offering
Period, may limit the purchase of fractional Shares under the Plan;
provided that if any amount (which is not sufficient to purchase a
whole Share)
7
<PAGE>
remains in a Participant's Account after the exercise of his or her
Option on the Exercise Date: (i) such amount shall be credited to such
Participant's Account for the next Offering Period, if he or she is
then a Participant; or (ii) if such Participant is not a Participant in
the next Offering Period, or if the Committee so elects, such amount
shall be refunded to such Participant as soon as administratively
practicable after such date.
10. DELIVERY
As soon as administratively practicable after the Exercise Date, the
Corporation shall deliver to each Participant a certificate
representing the Shares purchased upon exercise of his or her Option.
The Corporation may make available an alternative arrangement for
delivery of Shares to a recordkeeping service. The Committee (or its
delegate), in its discretion, may either require or permit the
Participant to elect that such certificates be delivered to such
recordkeeping service. In the event the Corporation is required to
obtain from any commission or agency authority to issue any such
certificate, the Corporation will seek to obtain such authority.
Inability of the Corporation to obtain from any such commission or
agency authority which counsel for the Corporation deems necessary for
the lawful issuance of any such certificate shall relieve the
Corporation from liability to any Participant except to return to the
Participant the amount of the balance in his or her Account.
11. TERMINATION OF EMPLOYMENT; CHANGE IN ELIGIBLE STATUS
(a) Upon a Participant's termination from employment with the
Company for any reason or in the event that a Participant is
no longer an Eligible Employee or if the Participant elects to
terminate Contributions pursuant to Section 7(c), at any time
prior to the last day of an Offering Period in which he or she
participates, such Participant's Account shall be paid to him
or her or in cash, or, in the event of such Participant's
death, paid to the person or persons entitled thereto under
Section 13, and such Participant's Option for that Offering
Period shall be automatically terminated.
(b) A Participant's termination from Plan participation precludes
the Participant from again participating in this Plan during
that Offering Period. However, such termination shall not have
any effect upon his or her ability to participate in any
succeeding Offering Period, provided that the applicable
eligibility and participation requirements are again then met.
A Participant's termination from Plan participation shall be
deemed to be a revocation of that Participant's Subscription
Agreement and such Participant must file a new Subscription
Agreement to resume Plan participation in any succeeding
Offering Period.
12. ADMINISTRATION
(a) The Board shall appoint the Committee, which shall be composed
of not less than two members of the Board. Each member of the
Committee, in respect of any transaction at a time when an
affected Participant may be subject to Section 16 of
8
<PAGE>
the Exchange Act, shall be a "non-employee director" within
the meaning of Rule 16b-3 promulgated under Section 16. The
Board may, at any time, increase or decrease the number of
members of the Committee, may remove from membership on the
Committee all or any portion of its members, and may appoint
such person or persons as it desires to fill any vacancy
existing on the Committee, whether caused by removal,
resignation, or otherwise. The Board may also, at any time,
assume or change the administration of this Plan.
(b) The Committee shall supervise and administer this Plan and
shall have full power and discretion to adopt, amend and
rescind any rules deemed desirable and appropriate for the
administration of this Plan and not inconsistent with the
terms of this Plan, and to make all other determinations
necessary or advisable for the administration of this Plan.
The Committee shall act by majority vote or by unanimous
written consent. No member of the Committee shall be entitled
to act on or decide any matter relating solely to himself or
herself or any of his or her rights or benefits under this
Plan. The Committee shall have full power and discretionary
authority to construe and interpret the terms and conditions
of this Plan, which construction or interpretation shall be
final and binding on all parties including the Corporation,
Participants and beneficiaries. The Committee may delegate
ministerial non-discretionary functions to third parties,
including officers of the Corporation.
(c) Any action taken by, or inaction of, the Corporation, the
Board or the Committee relating to this Plan shall be within
the absolute discretion of that entity or body. No member of
the Board or Committee, or officer of the Corporation shall be
liable for any such action or inaction.
13. DESIGNATION OF BENEFICIARY
(a) A Participant may file, in a manner prescribed by the
Committee (or its delegate), a written designation of a
beneficiary who is to receive any Shares or cash from such
Participant's Account under this Plan in the event of such
Participant's death. If a Participant's death occurs
subsequent to the end of an Offering Period but prior to the
delivery to him or her of any Shares deliverable under the
terms of this Plan, such Shares and any remaining balance of
such Participant's Account shall be paid to such beneficiary
(or such other person as set forth in Section 13(b)) as soon
as administratively practicable after the Corporation receives
notice of such Participant's death and any outstanding
unexercised Option shall terminate. If a Participant's death
occurs at any other time, the balance of such Participant's
Account shall be paid to such beneficiary (or such other
person as set forth in Section 13(b)) in cash as soon as
administratively practicable after the Corporation receives
notice of such Participant's death and such Participant's
Option shall terminate. If a Participant is married and the
designated beneficiary is not his or her spouse, spousal
consent shall be required for such designation to be
effective.
9
<PAGE>
(b) Beneficiary designations may be changed by the Participant
(and his or her spouse, if required) at any time on forms
provided and in the manner prescribed by the Committee (or its
delegate). If a Participant dies with no validly designated
beneficiary under this Plan who is living at the time of such
Participant's death, the Corporation shall deliver all Shares
and/or cash payable pursuant to the terms hereof to the
executor or administrator of the estate of the Participant, or
if no such executor or administrator has been appointed, the
Corporation, in its discretion, may deliver such Shares and/or
cash to the spouse or to any one or more dependents or
relatives of the Participant, or if no spouse, dependent or
relative is known to the Corporation, then to such other
person as the Corporation may designate.
14. TRANSFERABILITY
Neither Contributions credited to a Participant's Account nor any
Options or rights with respect to the exercise of Options or right to
receive Shares under this Plan may be anticipated, alienated,
encumbered, assigned, transferred, pledged or otherwise disposed of in
any way (other than by will, the laws of descent and distribution, or
as provided in Section 13) by the Participant. Any such attempt at
anticipation, alienation, encumbrance, assignment, transfer, pledge or
other disposition shall be without effect and all amounts shall be paid
and all shares shall be delivered in accordance with the provisions of
this Plan. Amounts payable or Shares deliverable pursuant to this Plan
shall be paid or delivered only to the Participant or, in the event of
the Participant's death, to the Participant's beneficiary pursuant to
Section 13.
15. USE OF FUNDS; INTEREST
All Contributions received or held by the Corporation under this Plan
will be included in the general assets of the Corporation and may be
used for any corporate purpose. No interest will be paid to any
Participant or credited to his or her Account under this Plan.
16. REPORTS
Statements shall be provided to Participants as soon as
administratively practicable following each Exercise Date. Each
Participant's statement shall set forth, as of such Exercise Date, that
Participant's Account balance immediately prior to the exercise of his
or her Option, the Fair Market Value of a Share, the Option Price, the
number of Shares purchased and his or her remaining Account balance, if
any.
17. ADJUSTMENTS OF AND CHANGES IN THE STOCK
(a) The following provisions will apply if any extraordinary
dividend or other extraordinary distribution occurs in respect
of the Shares (whether in the form of cash, Common Stock,
other securities, or other property), or any reclassification,
recapitalization, stock split (including a stock split in the
form of a stock dividend), reverse stock split,
reorganization, merger, combination, consolidation,
10
<PAGE>
split-up, spin-off, combination, repurchase, or exchange of
Common Stock or other securities of the Corporation, or any
similar, unusual or extraordinary corporate transaction (or
event in respect of the Common Stock) or a sale of
substantially all the assets of the Corporation as an entirety
occurs. The Committee will, in such manner and to such extent
(if any) as it deems appropriate and equitable
(i) proportionately adjust any or all of (1) the number
and type of Shares (or other securities) that
thereafter may be made the subject of Options
(including the specific maxima and numbers of Shares
set forth elsewhere in this Plan), (2) the number,
amount and type of Shares (or other securities or
property) subject to any or all outstanding Options,
(3) the Option Price of any or all outstanding
Options, or (4) the securities, cash or other
property deliverable upon exercise of any outstanding
Options, or
(ii) in the case of an extraordinary dividend or other
distribution, recapitalization, reclassification,
merger, reorganization, consolidation, combination,
sale of assets, split up, exchange, or spin off, make
provision for the substitution, settlement, or
exchange of any or all outstanding Options or the
cash, securities or property deliverable to the
holder of any or all outstanding Options based upon
the distribution or consideration payable to holders
of the Common Stock upon or in respect of such event.
In each case, no such adjustment will be made that would cause
this Plan to violate Section 423 of the Code or any successor
provisions without the written consent of the holders
materially adversely affected thereby. In any of such events,
the Committee may take such action sufficiently prior to such
event if necessary to permit the Participant to realize the
benefits intended to be conveyed with respect to the
underlying shares in the same manner as is available to
stockholders generally.
(b) Upon a dissolution of the Corporation, or any other event
described in Section 17(a) that the Corporation does not
survive, the Plan and, if prior to the last day of an Offering
Period, any outstanding Option granted with respect to that
Offering Period shall terminate, subject to any provision that
has been expressly made by the Committee through a plan or
reorganization approved by the Board or otherwise for the
survival, substitution, assumption, exchange or other
settlement of the Plan and Options. In the event a
Participant's Option is terminated pursuant to this Section
17(b), such Participant's Account shall be paid to him or her
in cash.
18. TERM OF PLAN; AMENDMENT OR TERMINATION
(a) This Plan shall become effective as of the Effective Date. No
new Offering Periods shall commence on or after the tenth
anniversary of the Effective Date and
11
<PAGE>
this Plan shall terminate on such date unless sooner
terminated pursuant to this Section 18.
(b) The Board may amend, modify or terminate this Plan at any time
without notice. Shareholder approval for any amendment or
modification shall not be required, except to the extent
required by Section 423 of the Code or other applicable law,
or deemed necessary or advisable by the Board. No amendment,
modification, or termination pursuant to this Section 18(b)
shall, without written consent of the Participant, affect in
any manner materially adverse to the Participant any rights or
benefits of such Participant or obligations of the Corporation
under any Option granted under this Plan prior to the
effective date of such change. Changes contemplated by Section
17 shall not be deemed to constitute changes or amendments
requiring Participant consent. Notwithstanding the foregoing,
the Committee shall have the right to designate from time to
time the Subsidiaries whose employees may be eligible to
participate in this Plan and such designation shall not
constitute any amendment to this Plan requiring shareholder
approval.
19. NOTICES
All notices or other communications by a Participant to the Corporation
contemplated by this Plan shall be deemed to have been duly given when
received in the form and manner specified by the Committee (or its
delegate) at the location, or by the person, designated by the
Committee (or its delegate) for that purpose.
20. CONDITIONS UPON ISSUANCE OF SHARES
Shares shall not be issued with respect to an Option unless the
exercise of such Option and the issuance and delivery of such Shares
complies with all applicable provisions of law, domestic or foreign,
including, without limitation, the Securities Act of 1933, as amended,
the Exchange Act, any applicable state securities laws, the rules and
regulations promulgated thereunder, and the requirements of any stock
exchange upon which the Shares may then be listed.
As a condition precedent to the exercise of any Option, if, in the
opinion of counsel for the Corporation such a representation is
required under applicable law, the Corporation may require any person
exercising such Option to represent and warrant that the Shares subject
thereto are being acquired only for investment and without any present
intention to sell or distribute such Shares.
21. PLAN CONSTRUCTION
(a) It is the intent of the Corporation that transactions in and
affecting Options in the case of Participants who are or may
be subject to the prohibitions of Section 16 satisfy any then
applicable requirements of Rule 16b-3 so that such persons
(unless they otherwise agree) will be entitled to the
exemptive relief of Rule 16b-3 in respect of those
transactions and will not be subject to avoidable liability
12
<PAGE>
thereunder. Accordingly, this Plan shall be deemed to contain
and the Shares issued upon exercise thereof shall be subject
to, such additional conditions and restrictions as may be
required by Rule 16b-3 to qualify for the maximum exemption
from Section 16 with respect to Plan transactions.
(b) This Plan and Options are intended to qualify under Section
423 of the Code.
(c) If any provision of this Plan or of any Option would otherwise
frustrate or conflict with the intents expressed above, that
provision to the extent possible shall be interpreted so as to
avoid such conflict. If the conflict remains irreconcilable,
the Committee may disregard the provision if it concludes that
to do so furthers the interest of the Corporation and is
consistent with the purposes of this Plan as to such persons
in the circumstances.
22. EMPLOYEES' RIGHTS
Nothing in this Plan (or in any agreement related to this Plan) shall
confer upon any Eligible Employee or Participant any right to continue
in the service or employ of the Company or constitute any contract or
agreement of service or employment, or interfere in any way with the
right of the Company to reduce such person's compensation or other
benefits or to terminate the services or employment or such Eligible
Employee or Participant, with or without cause, but nothing contained
in this Plan or any document related hereto shall affect any other
contractual right of any Eligible Employee or Participant. No
Participant shall have any rights as a shareholder until a certificate
for Shares has been issued in the Participant's name following exercise
of his or her Option. No adjustment will be made for dividends or other
rights as a shareholder for which a record date is prior to the
issuance of such Share certificate. Nothing in this Plan shall be
deemed to create any fiduciary relationship between the Corporation and
any Participant.
23. MISCELLANEOUS
(a) This Plan and related documents shall be governed by, and
construed in accordance with, the laws of the State of
California. If any provision shall be held by a court of
competent jurisdiction to be invalid and unenforceable, the
remaining provisions of this Plan shall continue to be fully
effective.
(b) Captions and headings are given to the sections of this Plan
solely as a convenience to facilitate reference. Such captions
and headings shall not be deemed in any way material or
relevant to the construction of interpretation of this Plan or
any provision hereof.
(c) The adoption of this Plan shall not affect any other
compensation or incentive plans in effect for the Company.
Nothing in this Plan shall be construed to limit the right of
the Company (i) to establish any other forms of incentives or
compensation for employees of the Company, or (ii) to grant or
assume options
13
<PAGE>
(outside the scope of and in addition to those contemplated by
this Plan) in connection with any proper corporate purpose.
24. TAX WITHHOLDING
Notwithstanding anything else contained in this Plan herein to the
contrary, the Company may deduct from a Participant's Account balance
as of an Exercise Date, before the exercise of the Participant's Option
is given effect on such date, the amount of any taxes which the Company
reasonably determines it may be required to withhold with respect to
such exercise. In such event, the maximum number of whole Shares
subject to such Option (subject to the other limits set forth in this
Plan) shall be purchased at the Option Price with the balance of the
Participant's Account (after reduction for the tax withholding amount).
Should the Company for any reason be unable, or elect not to, satisfy
its tax withholding obligations in the manner described in the
preceding paragraph with respect to a Participant's exercise of an
Option, or should the Company reasonably determine that it has a tax
withholding obligation with respect to a disposition of Shares acquired
pursuant to the exercise of an Option prior to satisfaction of the
holding period requirements of Section 423 of the Code, the Company
shall have the right at its option to (i) require the Participant to
pay or provide for payment of the amount of any taxes which the Company
reasonably determines that it is required to withhold with respect to
such event or (ii) deduct from any amount otherwise payable to or for
the account of the Participant the amount of any taxes which the
Company reasonably determines that it is required to withhold with
respect to such event.
14
<PAGE>
EXHIBIT 10.47
THIRD AMENDMENT TO
PLEDGE AND SECURITY AGREEMENT
THIS THIRD AMENDMENT TO PLEDGE AND SECURITY AGREEMENT (the "Amendment")
dated as of February 17, 2000 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 Fourth
Amended and Restated Credit Agreement dated as of May 26, 1999, a First
Amendment to Fourth Amended and Restated Credit Agreement and a Second Amendment
to Fourth Amended and Restated Credit Agreement and Pledge and Security
Agreement dated as of October 14, 1999 (as 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 Agent are parties to a Pledge and Security
Agreement dated as of May 29, 1998 and a First Amendment to Fourth Amended and
Restated Credit Agreement and Pledge and Security Agreement (as amended, the
APledge and Security Agreement"); and
WHEREAS, the Company and the Lenders have agreed to amend the Pledge
and Security 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 PLEDGE AND SECURITY AGREEMENT. The Pledge and Security
Agreement is hereby amended as follows:
(a) Section 1 of the Pledge and Security Agreement is hereby
amended to add the following definitions thereto in the appropriate
alphabetical order:
<PAGE>
"SUBORDINATED NOTE": The promissory note dated as of
October 14, 1999 made by the Company in the original principal
amount of $20,000,000 as amended and restated pursuant to the
promissory note dated as of February , 2000 made by the
Company in the original principal amount of $30,000,000.
"SUBORDINATED NOTE OBLIGATIONS": The obligations of
the Company to pay principal and interest on the Subordinated
Note and all fees, costs, expenses and indemnities for which
the Company is liable in connection therewith.
(b) The first paragraph of Section 2 is hereby amended in its
entirety to read as follows:
As collateral security for the due and punctual
payment and performance of all of the Obligations, Lease
Obligations and Subordinated Note Obligations, the Company
does hereby pledge, hypothecate, assign, transfer and convey
to the Agent, for the benefit of the Lenders, the Lessor and
the holders of the Subordinated Note, and grants to the Agent,
for the benefit of the Lenders, the Lessor and the holders of
the Subordinated Note, a security interest in and to, the
following described property (the "Collateral")
(c) Clause Fifth of Section 17 of the Pledge and Security
Agreement is hereby amended in its entirety as follows:
Fifth: to the payment of the Subordinated Note
Obligations until all of the Subordinated Note Obligations
have been paid in full;
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, 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.
-2-
<PAGE>
(b) The Agent shall have received the consent of the Required
Lenders to the increase of the Subordinated Note.
(c) The Agent shall have received such other documents,
instruments, opinions and approvals as the Agent may reasonably
request.
4. ACKNOWLEDGMENTS. The Company and each Lender acknowledge that, as
amended hereby, the Pledge and Security Agreement remains in full force and
effect with respect to the Company and the Lenders, and that each reference to
the Pledge and Security Agreement in the Loan Documents shall refer to the
Pledge and Security 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
-3-
<PAGE>
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.
-4-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed as of the day and year first above written.
<TABLE>
<S><C>
NEW CENTURY MORTGAGE
CORPORATION
By /s/ [ILLEGIBLE]
-------------------------------------------
Its Vice President
--------------------------------------
U.S. BANK NATIONAL ASSOCIATION,
By /s/ [ILLEGIBLE]
--------------------------------------------
Its Senior Vice President
--------------------------------------
GUARANTY FEDERAL BANK, FSB
By /s/ W. James Meintjes
--------------------------------------------
Its Vice President
--------------------------------------
[Signature Page for Third Amendment to
Pledge and Security Agreement]
<PAGE>
BANK UNITED
By /s/ [ILLEGIBLE]
---------------------------------------------
Its Vice President
---------------------------------------
RESIDENTIAL FUNDING CORPORATION
By /s/ [ILLEGIBLE]
---------------------------------------------
Its Director
---------------------------------------
BANK ONE, TEXAS, N.A.
By /s/ [ILLEGIBLE]
--------------------------------------------
Its Senior Vice President
---------------------------------------
UNION BANK OF CALIFORNIA
By /s/ [ILLEGIBLE]
--------------------------------------------
Its Vice President
---------------------------------------
</TABLE>
[Signature Page for Third Amendment to
Pledge and Security Agreement]
<PAGE>
AMENDED AND RESTATED SUBORDINATED
PROMISSORY NOTE
$30,000,000.00 February 17, 2000
FOR VALUE RECEIVED, the undersigned, NEW CENTURY MORTGAGE CORPORATION
(the "Maker"), hereby promises to pay to the order of U.S. BANK NATIONAL
ASSOCIATION (the "Payee", which term includes any subsequent holder hereof) at
Minneapolis, Minnesota or at such other place as the Payee may from time to time
hereafter designate to the Maker in writing the principal sum of all loans made
by the Payee to the Maker under the terms of this Note (each an "Advance" and
collectively, the "Advances"). The aggregate principal amount of all Advances
outstanding hereunder shall not exceed THIRTY MILLION DOLLARS AND NO CENTS
($30,000,000.00). The amount and date and each Advance shall be entered by the
Lender into its records, which records shall be conclusive evidence of the
subject matter thereof absent manifest error.
The unpaid principal balance hereof from time to time outstanding shall
bear interest at the rate of twelve percent (12%) per annum. Interest shall be
computed on the basis of actual days elapsed and a year of 360 days. Upon the
happening of any Event of Default, this Note, at the option of the Payee, shall
bear interest until paid in full at a rate per annum equal to the rate of
interest applicable immediately prior to such Event of Default plus 2.0%.
The principal hereof is payable on June 1, 2000 in the amount of the
entire principal balance.
Interest shall be payable monthly in arrears five (5) business days
after the end of the preceding calendar month, and at final maturity.
Except with the prior written consent of the Payee, this Note may not
be prepaid.
This Note is secured by liens granted pursuant to (i) the Pledge and
Security Agreement dated as of May 29, 1998, made and given by the Maker (as the
same may hereafter be amended, modified or supplemented, or any agreement
entered into in substitution or replacement therefor, the "Pledge and Security
Agreement") and (ii) the Security Agreement dated as of February , 2000, made
and give by NC Capital Corporation (as the same may hereafter be amended,
modified or supplemented, or any agreement entered into in substitution or
replacement therefor, the "NCCC Security Agreement").
The occurrence of any one or more of the following events shall
constitute an Event of Default, and upon the occurrence of any Event of Default
the Payee may declare this
<PAGE>
Note to be, and the same shall forthwith become, immediately due and payable and
the Payee may exercise all rights and remedies under the Pledge and Security
Agreement and the NCCC Security Agreement and as may otherwise be allowed by
applicable law:
(1) The Maker shall fail to make any payment of principal or
interest hereon when due.
(2) The Maker shall become insolvent or shall generally not 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 for the Maker 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 Maker or for a substantial part of
the property thereof; or any bankruptcy, reorganization, debt
arrangement or other proceedings under any bankruptcy or
insolvency law shall be instituted by or against the Maker.
(3) The maturity of any material indebtedness of the Maker (other
than the indebtedness on this Note) shall be accelerated or
the Maker shall fail to pay any such material indebtedness
when due or, in the case of indebtedness payable on demand,
when demanded. For these purposes, indebtedness of the Maker
shall be deemed material if it exceeds $250,000 as to any item
of indebtedness or in the aggregate for all items of
indebtedness with respect to which any of the events described
in this paragraph has occurred.
(4) Any default shall occur under the terms of the Pledge and
Security Agreement and shall continue for more than the period
of grace, if any, applicable thereto.
(5) Any default shall occur under the terms of the NCCC Security
Agreement and shall continue for more than the period of
grace, if any, applicable thereto.
(6) 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 Maker and the Maker shall not discharge the same or
provide for its discharge, or procure a stay of execution
thereof, prior to any execution on such judgment, within 60
days from the date of entry thereof, and within said period of
60 days, or such longer period during which execution shall be
stayed, appeal therefrom and cause the execution to be stayed
during such appeal.
(7) Any execution or attachment shall be issued whereby any
substantial part of the property of the Maker shall be taken
or attempted to be taken and the
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<PAGE>
same shall not have been vacated or stayed within 30 days
after the issuance thereof.
(8) An "Event of Default" as defined in that certain Subordination
Agreement dated as of October 14, 1999 given by U.S. Bank
National Association (the "Subordination Agreement") shall
occur and continue thereunder.
This Note is subject to the terms set forth in the Subordination
Agreement and is the Subordinated Note as defined in the Subordination
Agreement.
THE VALIDITY, CONSTRUCTION AND ENFORCEABILITY OF THIS NOTE SHALL BE
GOVERNED BY THE INTERNAL LAWS OF THE STATE OF MINNESOTA, WITHOUT GIVING EFFECT
TO CONFLICT OF LAWS PRINCIPLES THEREOF.
AT THE OPTION OF THE PAYEE THIS NOTE MAY BE ENFORCED IN ANY FEDERAL
COURT OR MINNESOTA STATE COURT SITTING IN HENNEPIN COUNTY OR RAMSEY COUNTY,
MINNESOTA; AND THE MAKER CONSENTS TO THE JURISDICTION AND VENUE OF ANY SUCH
COURT AND WAIVES ANY ARGUMENT THAT THE VENUE IN SUCH FORUMS IS NOT CONVENIENT.
IF THE MAKER COMMENCES ANY ACTION IN ANOTHER JURISDICTION OR VENUE UNDER ANY
TORT OR CONTRACT THEORY ARISING DIRECTLY OR INDIRECTLY FROM THE RELATIONSHIP
CREATED BY THIS NOTE, THE PAYEE AT ITS OPTION SHALL BE ENTITLED TO HAVE THE CASE
TRANSFERRED TO ONE OF THE JURISDICTIONS AND VENUES ABOVE-DESCRIBED, OR, IF SUCH
TRANSFER CANNOT BE ACCOMPLISHED UNDER APPLICABLE LAW, TO HAVE SUCH CASE
DISMISSED WITHOUT PREJUDICE.
The Maker hereby waives presentment for payment, notice of dishonor,
protest and notice of protest.
If this Note is not paid when due, the Maker shall pay all of the
Payee's costs of collection including reasonable attorneys' fees.
This Note amends and restates the remaining unpaid principal
indebtedness of the undersigned to the Bank evidenced by a Subordinated
Promissory Note dated October 14, 1999, in the original principal amount of
$20,000,000 issued by the undersigned to the order of the Payee (the "Prior
Subordinated Note"). It is expressly intended, understood and agreed that this
note shall replace the Prior Subordinated Note as evidence of the remaining
unpaid principal indebtedness of the undersigned to Payee under the Prior
Subordinated Note and accrued and unpaid interest thereon, and such indebtedness
of the undersigned to the Payee heretofore represented by the Prior Subordinated
Note, as of the
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<PAGE>
date hereof, shall be considered outstanding hereunder from and after the date
hereof and shall not be considered paid (nor shall the undersigned's obligation
to pay the same be considered discharged or satisfied) as a result of the
issuance of this note.
MAKER:
New Century Mortgage Corporation
By /s/ BRAD A. MORRICE
--------------------------------
Its CHIEF EXECUTIVE OFFICER
----------------------------
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<PAGE>
SECURITY AGREEMENT
SECURITY AGREEMENT dated as of February 17, 2000 by and between NC
CAPITAL CORPORATION, a California corporation ("NCCC" or a "Grantor"), NC
RESIDUAL II CORPORATION , a Delaware corporation ("NCRC" or a "Grantor" and
together with NCCC, the "Grantors"), and U.S. BANK NATIONAL ASSOCIATION, a
national banking association ("USBNA"), as collateral agent (in such capacity,
together with any successor agent under the Credit Agreement referred to below,
which shall also be a successor collateral agent hereunder, the "Agent") for (A)
the Lenders (as defined below), (B) U.S. Bancorp Leasing & Financial, successor
in interest to FBS Business Finance Corp. (the "Lessor"), as lessor under any
present or future leases of equipment by the Lessor, as the lessor, to New
Century Mortgage Corporation (the "Company") or New Century Financial
Corporation ("NCFC"), as lessee, or as lender under any present or future loan
by the Lessor, as lender, to the Company or NCFC, as Company, secured by
equipment, and (C) the holder(s) of the Subordinated Note (as defined below).
RECITALS
A. The Company, the lenders party thereto (the "Lenders") and the Agent
are party to the Fourth Amended and Restated Credit Agreement dated as of May
26, 1999 (as the same has heretofore been amended and as may hereafter be
amended, modified, extended or restated and in effect from time to time, the
"Credit Agreement").
B. The Lessor has, and may from time to time hereafter, lease equipment
to the Company or NCFC, or make loans to the Company or NCFC secured by
equipment.
C. The Company has requested that USBNA make additional loans to the
Company under the promissory note dated as of October 14, 1999 made by the
Company in the original principal amount of $20,000,000 as amended and restated
pursuant to the promissory note dated as of February 17, 2000 made by the
Company in the original principal amount of $30,000,000 (the "Subordinated
Note").
D. It is a condition precedent to the agreement of the holder(s) of the
Subordinated Note to loan or advance additional monies under the Subordinated
Note that each Grantor executes and delivers this Security Agreement granting
the Agent a security interest in the property of the Grantors hereinafter
described.
E. NCCC is a wholly owned subsidiary of the Company and NCRC is a
wholly owned subsidiary of NCCC. Each Grantor participates with the Company in
Company Securitization Transactions, and has concluded that it is in its best
interests that the Company borrow the additional loans from USBNA.
Accordingly, each Grantor and the Agent hereby agree as follows:
<PAGE>
Section 1. DEFINED TERMS.
Section 1.01. TERMS DEFINED IN CREDIT AGREEMENT. All terms used herein
that are not otherwise defined herein but that are defined in the Credit
Agreement, including Exhibit E thereto, shall have the respective meanings
assigned to them therein unless otherwise expressly defined herein.
Section 1.02. DEFINITION OF CERTAIN TERMS. As used herein, the
following terms shall have the following respective meanings (such terms to be
equally applicable to both the singular and plural forms of the terms defined):
"BANKRUPTCY CODE" shall mean 11 U.S.C. Section 101 ET. SEQ., as
amended from time to time.
"COLLATERAL" shall mean all property and rights in property now owned
or hereafter at any time acquired by either Grantor in or upon which a Lien is
granted to the Agent by such Grantor under this Security Agreement or under any
other document or instrument executed by such Grantor pursuant to this Security
Agreement, including, without limitation, the property described in Section 2.
"COMPANY" shall have the meaning assigned to it in the first recital
hereto.
"FINANCING STATEMENT" shall have the meaning given to such term in
Section 4(c).
"GCFPI" shall mean Greenwich Capital Financial Products, Inc., a
Delaware corporation.
"GRANTOR ADDRESS" shall mean 18400 Von Karman, Suite 1000, Irvine,
California 92612.
"LEASE AGREEMENT" shall mean each and any agreement for the lease of
equipment or for the making of a loan secured by equipment now existing or at
anytime entered into between the Lessor, as lessor or lender, and the Company or
NCFC, as lessee or Company.
"LEASE OBLIGATIONS" shall mean all of the obligations now or hereafter
arising owed by the Company or NCFC to the Lessor in connection with any lease
of equipment or loan secured by equipment.
"PROCEEDS" shall mean any consideration received from the sale,
exchange, lease or other disposition of any asset or property which constitutes
Collateral, any value received as a consequence of the possession of any
Collateral and any payment received from any
2
<PAGE>
insurer or other person or entity as a result of the destruction, loss, theft,
damage or other involuntary conversion of whatever nature of any asset or
property which constitutes Collateral, and shall include all cash and negotiable
instruments received or held on behalf of the Agent pursuant to this Security
Agreement.
"RESIDUAL FINANCING" shall have the meaning assigned to it in Section
4(c).
"SBI": Salomon Brothers International, Limited, an English corporation.
"SECURED PARTIES" shall mean the Agent, the Lenders, the Lessor, and
the holder(s) of the Subordinated Note.
"SECURITIZATION DOCUMENTS" shall mean all agreements, instruments,
certificates, and other documents executed and delivered in connection with any
Company Securitization Transaction, as the same may be amended, modified,
extended or restated and in effect from time to time.
"SUBORDINATED NOTE" shall have the meaning assigned to it in the
Recital C hereto.
"SUBORDINATED NOTE OBLIGATIONS" shall mean the obligations of the
Company to pay principal and interest on the Subordinated Note and all fees,
costs, expenses and indemnities for which the Company is liable in connection
therewith.
Section 1.03. TERMS DEFINED IN UNIFORM COMMERCIAL CODE. All other terms
used in this Agreement that are not specifically defined herein or the
definitions of which are not incorporated herein by reference shall have the
meaning assigned to such terms in the Uniform Commercial Code in effect in the
State of Minnesota as of the date first above written (the "Uniform Commercial
Code") to the extent such other terms are defined therein.
Section 1.04. RULES OF INTERPRETATION. Unless the context of this
Security and Agreement otherwise clearly requires, references to "or" has the
inclusive meaning represented by the phrase "and/or." The words "hereof,"
"herein," "hereunder," and similar terms in this Security Agreement refer to
this Security Agreement as a whole and not to any particular provision of this
Security Agreement. References to Sections, Attachments and Schedules are
references to Sections in, and Attachments and Schedules to, this Security
Agreement unless otherwise provided.
Section 2. GRANT OF SECURITY INTEREST. As security for the payment and
performance of all of the Obligations (as defined in the Credit Agreement),
Lease Obligations, and Subordinated Note Obligations, each Grantor hereby
assigns and pledges to the Agent for
3
<PAGE>
the benefit of the Lenders, the Lessor, the holder(s) of the Subordinated Note
and their respective successors and assigns, and hereby grants to the Agent for
the benefit of the Lenders, the Lessor, the holder(s) of the Subordinated Note
and their respective successors and assigns, a security interest in and to, all
of such Grantor's right, title, and interest in and to the following:
(a) all Junior Securitization Interests described on Schedule
1 and 2 hereto, and all Junior Securitization Interests hereafter
arising (the "Pledged Junior Securitization Interests");
(b) all rights, remedies and other interests of such Grantor
to and under any agreement pursuant to which any Pledged Junior
Securitization Interest was, is or may be acquired, sold or financed,
either before or after the date hereof;
(c) all rights, remedies and other interests of such Grantor
in any Securitization Documents related to the Pledged Junior
Securitization Interests;
(d) all sums paid or payable to such Grantor under or by
virtue of any Pledged Junior Securitization Interests;
(e) all books, correspondence, credit files, records,
invoices, bills of lading, and other documents, including, without
limitation, all tapes, cards, computer runs, and other papers and
documents in the possession or control of such Grantor or any computer
bureau from time to time acting for such Grantor relating to the
foregoing;
(f) any and all Hedging Arrangements related to the Pledged
Junior Securitization Interests or the Mortgage Loans backing the
related Company Securitization Transactions, and any and all rights,
remedies and other interests of such Grantor therein or thereunder;
(g) any and all balances, credits, deposits, accounts or
moneys of, or in the name of, such Grantor representing or evidencing
the foregoing or any proceeds thereof; and
(h) all Proceeds of any of the foregoing;
provided, however, that with respect to the Junior Securitization Interests
listed on Schedule 1 hereto, and any related Collateral described in clauses
(b), (c), (d), (e), (f), (g) and (h) above, such security interest shall not
take effect until consented to by GCFPI.
4
<PAGE>
Section 3. THE GRANTORS REMAIN LIABLE. Anything herein to the contrary
notwithstanding, (a) each Grantor shall remain liable under the contracts and
agreements included in the Collateral to the extent set forth therein to perform
all of its duties and obligations thereunder to the same extent as if this
Security Agreement had not been executed, (b) the exercise by the Agent of any
of the rights hereunder shall not release either Grantor from any of its duties
or obligations under the contracts and agreements included in the Collateral,
and (c) none of the Agent or the Lenders shall have any obligation or liability
under the contracts and agreements included in the Collateral by reason of this
Security Agreement, nor shall the Agent or the Lenders be obligated to perform
any of the obligations or duties of either Grantor thereunder or to take any
action to collect or enforce any claim for payment assigned hereunder.
Section 4. REPRESENTATIONS AND WARRANTIES. Each Grantor represents and
warrants as follows:
(a) The chief place of business and the office where each
Grantor keeps its books and records concerning the Collateral is
located at the Grantor Address. The chief executive office of each
Grantor is located at the Grantor Address.
(b) Each Junior Securitization Interest described in Schedule
1 or 2, or which is at any time hereafter created or acquired by either
Grantor is, or upon the creation or acquisition thereof by such Grantor
will be, in full force and effect without modification or amendment of
any kind.
(c) Each Grantor is the legal and beneficial owner of the
Collateral free and clear of any Lien except for the security interests
created by this Security Agreement and (i) in the case of Junior
Securitization Interests listed on Schedule 1, a Lien in favor of
GCFPI, (ii) in the case of Junior Securitization Interests listed on
Schedule 2, a Lien in favor of SBI, and (iii) in the case of future
Junior Securitization Interests, a Lien in favor of the Person(s)
providing financing described in Section 4.08(d) of the Credit
Agreement ("Residual Financing") secured by such Junior Securitization
Interests. No effective financing statement or other similar document
used to perfect and preserve a security interest under the laws of any
jurisdiction (a "Financing Statement") covering all or any part of the
Collateral is on file in any recording office, except such as may have
been filed in favor of the Agent relating to this Security Agreement or
to perfect permitted Liens as described above.
(d) Each Grantor has good right, power and lawful authority to
pledge, assign and deliver the Collateral in the manner hereby done or
contemplated.
5
<PAGE>
(e) No consent or approval of any governmental body,
regulatory authority, person, trust, or entity is or will be (i)
necessary to the validity of the rights created hereunder or (ii)
required prior to the assignment, transfer and delivery of any of the
Collateral to the Agent, except for the consent of SBI and GCFPI to the
Agent's security interest in the Junior Securitization Interests listed
on Schedule 2, which has been obtained.
(f) To each Grantor's knowledge, no material dispute, right of
setoff, counterclaim or defense exists with respect to all or any part
of the Collateral.
(g) This Security Agreement constitutes the legal, valid and
binding obligation of each Grantor enforceable against such Grantor and
the Collateral in accordance with its terms (subject to limitations as
to enforceability which might result from bankruptcy, reorganization,
arrangement, insolvency or other similar laws affecting creditors'
rights generally and general principles of equity).
(h) Immediately upon the acquisition by either Grantor of
rights in the Collateral and the filing of an appropriate financing
statement in the appropriate filing office or offices, the Agent shall
have a valid, perfected security interest and lien in the Collateral,
subject to no other security interest or lien except as provided in
this Security Agreement.
(i) Neither Grantor has used any trade names and styles in its
business during the last five years. No such trade names or styles and
no trademarks or other similar marks owned by either Grantor are or
have been registered with any governmental unit during the last five
years.
Section 5. COVENANTS OF THE GRANTORS.
(a) NAME CHANGE. Without the prior written consent of the
Agent, neither Grantor will change its name from that set forth in the
first paragraph of this Security Agreement nor use any other name.
(b) CHANGE OF LOCATION. Each Grantor shall give at least 30
days' prior written notification to the Agent of the opening of a new
place of business where any of the Collateral or records relating
thereto are to be located, any other change in the location of the
office where it keeps its books and records concerning the Collateral,
and of any change in the location of its chief executive office.
6
<PAGE>
(c) USE OF TRADE NAMES OR STYLES. Neither Grantor will, except
after giving at least 30 days' prior written notice to the Agent, use
any trade names or styles in its business in any state.
(d) INSPECTION AND VERIFICATION OF BOOKS RECORDS AND
COLLATERAL. The Agent, or any persons designated by the Agent, shall
have the right, at reasonable times, without hindrance or delay, to
inspect the books and records of each Grantor relating to the
Collateral. The Agent, or any persons designated by the Agent, shall
have the right to make such verifications concerning each Grantor's
business and the Collateral as may be reasonable.
(e) MARKING COLLATERAL AND RECORDS. Promptly upon the request
of the Agent, each Grantor will mark, or will permit the Agent to mark
in a reasonable manner, such Grantor's books, records and accounts
showing or dealing with the Collateral with a notation clearly setting
forth that a security interest in the Collateral has been granted to
the Agent for the benefit of the Lenders and of the Subordinated
Lender, which notations shall be in form and substance reasonably
satisfactory to the Agent.
(f) REPORTS AND SCHEDULES. Each Grantor will from time to time
as the Agent may reasonably request, deliver to the Agent such
schedules and such certificates and reports respecting all or any of
the Collateral, and the items or amounts received by such Grantor in
full or partial payment, or otherwise as proceeds of any of the
Collateral, all to such extent as the Agent may reasonably request. Any
such schedule, certificate or report shall be executed by a duly
authorized officer of such Grantor and shall be in such form and detail
as the Agent may reasonably specify. Each Grantor will also furnish the
Agent such additional information concerning the Collateral as it may
from time to time reasonably request.
(g) MAINTENANCE OF SECURITY INTEREST. Each Grantor will do all
acts and things, and will execute and file or record all instruments
(including, but not limited to, mortgages, pledges, assignments,
security agreements, financing statements, amendments to financing
statements, continuation statements, etc.) required, or reasonably
requested by the Agent, to establish, perfect, maintain and continue
the perfection and priority of the interests of the Agent in the
Collateral. Each Grantor will also pay the costs and expenses of: all
filings and recordings, including taxes thereon; all searches
necessary, or reasonably deemed necessary by the Agent, to establish
and determine the validity and the priority of such interests; and also
to satisfy all other liens which in the reasonable opinion of the Agent
might prejudice, imperil or otherwise affect the Collateral or the
existence or priority of such
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<PAGE>
interests. A carbon, photographic or other reproduction of this
Security Agreement or of a financing statement shall be sufficient as a
financing statement and may be filed in lieu of the original in any or
all jurisdictions which accept such reproductions. On or before April
30, 2000, the Grantors shall cause SBI to enter into intercreditor and
agency agreements, on terms reasonably acceptable to the Agent,
concerning the Agent's security interest in the Junior Securitization
Interests described in Schedules 2.
(h) COLLECTIONS. Until notified in writing by the Agent to the
contrary, each Grantor shall, at its own expense, endeavor to collect
as and when due, all amounts due with respect to amounts payable under
or with respect to the Collateral, including the taking of such action
with respect to collection as such Grantor may deem advisable. Whenever
an Event of Default shall have occurred and be continuing, all
collections of the Collateral received by either Grantor shall be held
in trust for the Agent and shall be promptly remitted to the Agent in
the form received, properly endorsed, or as the Agent may otherwise
direct in writing.
(i) INDEMNITY. Each Grantor will indemnify and save and hold
the Secured Parties harmless from and against any and all claims,
damages, losses, liability or judgments which may be incurred or
sustained by, or asserted against, any one or more of the Secured
Parties, directly or indirectly, in connection with the existence of or
the exercise of any of its or their rights under this Security
Agreement; PROVIDED, that such Grantor shall not be liable to any
Secured Party for any portion of such claims, damages, losses,
liabilities or judgments resulting from (i) the gross negligence or
willful misconduct of the Secured Party seeking indemnification, (ii)
any breach by the Secured Party seeking indemnification of the terms of
the Loan Documents to which such Secured Party is a party, or (iii) any
violation of law by the Secured Party seeking indemnification.
(j) THIRD-PARTY CLAIMS. Each Grantor will defend the
Collateral and the security interests therein against all claims and
demands of all Persons, at any time claiming any adverse interest with
respect thereto, except for claims of (i) GCFPI with respect to the
Junior Securitization Interests listed on Schedule 1 and (ii) SBI with
respect to the Junior Securitization Interests listed on Schedule 2,
and (iii) in the case of future Junior Securitization Interests, the
Person(s) providing Residual Financing secured by such Junior
Securitization Interests.
(k) TAXES. Each Grantor will promptly pay any and all taxes,
assessments and governmental charges upon the Collateral prior to the
date that penalties are attached thereto or the same become a lien on
any of the Collateral, except to the
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extent that such taxes, assessments and charges shall be contested by
such Grantor in good faith and through appropriate proceedings.
(l) ADDITIONAL JUNIOR SECURITIZATION INTERESTS. With respect
to any Junior Securitization Interests created or acquired after the
date hereof, the Grantors will promptly deliver the following documents
to the Agent: (i) copies of all Securitization Documents relating
thereto, (ii) such amendments to this Security Agreement and the
related financing statements as the Agent may deem necessary to
describe more fully such Junior Securitization Interests and any
related Hedging Arrangements or other Collateral, and (iii) a consent
of the Person providing Residual Financing to either Grantor with
respect to such Junior Securitization Interests.
(m) DISPOSITION OF COLLATERAL. Neither Grantor will sell or
offer to sell or otherwise assign, transfer or dispose of any of the
Collateral or any interest therein except as and to the extent
permitted under the Credit Agreement and the Repurchase Agreements.
Section 6. REMEDIES.
(a) COLLECTIONS.
(i) Each Grantor shall have the right to collect all
amounts payable under the Collateral in the ordinary course of
its business; PROVIDED, HOWEVER, that during the occurrence
and continuation of an Event of Default, each Grantor agrees,
upon the request of the Agent, promptly to deposit all
payments received by such Grantor on account of the
Collateral, whether in the form of cash, checks, notes,
drafts, bills of exchange, money orders or otherwise, in one
or more accounts designated by the Agent in precisely the form
received (but with any endorsements of such Grantor necessary
for deposit or collection), subject to withdrawal by the Agent
only, as hereinafter provided, and until they are deposited,
such payments shall be deemed to be held in trust by such
Grantor for and as the property of the Lenders and shall not
be commingled with any of such Grantor's other funds.
Notwithstanding the occurrence and continuation of an Event of
Default, each Grantor agrees to perform under all
Securitization Documents in accordance with its normal
collection practices, whether the remittances received in
connection with the Junior Subordination Interests are
transferred to an account for the benefit of the Agent or
otherwise.
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(ii) Upon receipt by the Agent of notice that an
Event of Default has occurred and is continuing, the Agent
shall have the right, as the true and lawful agent of each
Grantor, with power of substitution for each Grantor and in
either Grantor's name, the Agent's name or otherwise, for the
use and benefit of the Secured Parties, (A) to receive,
endorse, assign and/or deliver any and all notes, acceptances,
checks, drafts, money orders or other evidences of payment
relating to the Collateral or any part thereof; (B) to demand,
collect, receive payment of, give receipt for and give
discharges and releases of all or any of the Collateral; (C)
to sign the name of either Grantor on any invoice or bill of
lading relating to any of the Collateral; (D) to commence and
prosecute any and all suits, actions or proceedings at law or
in equity in any court of competent jurisdiction to collect or
otherwise realize on all or any of the Collateral or to
enforce any rights in respect of any Collateral; (E) to
settle, compromise, compound, adjust or defend any actions,
suits or proceedings relating to all or any of the Collateral;
(F) to notify, or to require either Grantor to notify, the
Person obligated on any of or all the Collateral to make
payment thereof directly to the Agent; and (G) to use, sell,
assign, transfer, pledge, make any agreement with respect to
or otherwise deal with all or any of the Collateral, and to do
all other acts and things necessary to carry out the purposes
of this Security Agreement, as fully and completely as though
the Agent were the absolute owner of the Collateral for all
purposes; PROVIDED, HOWEVER, that nothing herein contained
shall be construed as requiring or obligating the Agent or the
Secured Parties to make any commitment or to make any inquiry
as to the nature or sufficiency of any payment received by the
Agent or the Secured Parties, or to present or file any claim
or notice, or to take any action with respect to the
Collateral or any part thereof or the moneys due or to become
due in respect thereof or any property covered thereby, and no
action taken or omitted to be taken by the Agent or the
Secured Parties with respect to the Collateral or any part
thereof shall give rise to any defense, counterclaim or offset
in favor of either Grantor or to any claim or action against
the Agent or the Secured Parties. It is understood and agreed
that the appointment of the Agent as the agent of each Grantor
for the purposes set forth above is coupled with an interest
and is irrevocable. The provisions of this Section 6(a) shall
in no event relieve either Grantor of any of its obligations
hereunder or under any of the other Loan Documents with
respect to the Collateral or any part thereof or impose any
obligation on the Agent or the Secured Parties to proceed in
any particular manner with respect to the Collateral or any
part thereof, or in any way limit the exercise by the Agent or
any Secured Party of any other or further right which it may
have on the date of this Security
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Agreement or hereafter, whether hereunder, under any Loan Documents or
by law or otherwise.
(iii) the rights of the Agent set forth in clauses
(i) and (ii) above, in Section 5(h) above and in Section 6(c)
below are subject to (A) with respect to the Junior
Securitization Interests described on Schedule 1, the rights
of GCFPI, and (B) with respect to the Junior Securitization
Interests described on Schedule 2, the rights of SBI, and (C)
with respect to future Junior Securitization Interests, the
rights of the Person providing Residual Financing therefor.
(b) RIGHT TO USE CERTAIN ASSETS OF THE GRANTORS. Upon receipt
by the Agent of notice that an Event of Default has occurred and is
continuing, the Agent and any representatives of the Agent shall have,
in addition to all its other rights under this Security Agreement, the
right to obtain access to each Grantor's data processing equipment,
computer hardware and software relating to the Collateral and to use
all of the foregoing and the information contained therein in any
manner the Agent deems necessary for the purpose of effectuating its
rights under this Security Agreement and any other Loan Documents. Each
Grantor agrees that the Agent has no obligation to preserve rights to
the Collateral against any other parties. The Agent is hereby granted a
license or other right to use, without charge, each Grantor's labels,
patents, copyrights, rights of use of any name, trade secrets, trade
names, trademarks, service marks and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in
advertising for sale and selling any Collateral and each Grantor's
rights under all licenses and all franchise agreements shall inure to
the Agent's benefit until the Obligations are paid in full.
(c) OTHER REMEDIES. Upon receipt by the Agent of notice that
an Event of Default has occurred and is continuing, the Agent may, in
addition to any other right or remedy available to the Agent or the
Secured Parties under any Loan Documents, exercise any and all rights
and remedies available to it and/or the Secured Parties under the
Uniform Commercial Code as in effect in the State of Minnesota and any
other applicable law to the fullest extent permitted thereby. Without
limiting the foregoing, upon receipt of notice by the Agent that an
Event of Default has occurred and is continuing, the Agent may exercise
any of the following rights and remedies: (a) in the name of either
Grantor, any Secured Party or otherwise, to demand, collect, receive
and receipt for, compound, compromise, settle and give acquittance for,
and prosecute and discontinue any suits or proceedings in respect of
any or all of the Collateral; (b) upon written notice to either Grantor
and any other Person entitled to receive such notice under any Junior
Securitization Interest or the related Securitization Documents,
specifying the effective date of any assumption thereof,
11
<PAGE>
to assume, become bound by, and agree to perform and observe the
covenants, agreements, obligations and conditions to be performed and
observed under any Servicing Contract specified in such notice and to
exercise all of the rights, powers and privileges of such Grantor
thereunder; (c) to sell and assign to any other Person or Persons the
right, title and interest of either Grantor in any Servicing Contract
or Servicing Rights; (d) to require each Grantor to, and each Grantor
hereby agrees that it will at its expense and upon request of the Agent
forthwith, assemble all or part of the Collateral as directed by the
Agent and make it available to the Agent at a place to be designated by
the Agent that is reasonably convenient to both the Agent and the
Grantors; (e) without notice except as specified below, to sell the
Collateral or any part thereof in one or more parcels at public or
private sale, at any of the Agent's offices or elsewhere, for cash, on
credit, or for future delivery, and upon such other terms as the Agent
may reasonably believe are commercially reasonable; (f) to occupy any
premises owned or leased by either Grantor where the Collateral or any
part thereof or any books and records relating thereto is assembled for
a reasonable period in order to effectuate the Agent's rights and
remedies hereunder or under law, without obligation to compensate such
Grantor for such occupation; (g) to take any action which the Agent may
reasonably deem necessary or desirable in order to realize on the
Collateral, including, the power to endorse in the name of either
Grantor any checks, drafts, notes or other instruments or documents
received in payment of or on account of the Collateral; and (h) to
exercise any and all rights and remedies of either Grantor under or in
connection with the Collateral. Each Grantor agrees that, to the extent
notice of sale shall be required by law, at least ten days' prior
written notice to such Grantor (which such Grantor agrees is reasonable
notification within the meaning of Section 9-504(3) of the Uniform
Commercial Code) of the time and place of any public sale or the time
after which any private sale is to be made shall constitute reasonable
notification. The Agent shall not be obligated to make any sale of
Collateral regardless of notice of sale having been given. The Agent
may adjourn any public or private sale from time to time by
announcement at the time and place fixed therefor, and such sale may,
without further notice, be made at the time and place to which it was
so adjourned.
(d) WAIVER OF CERTAIN CLAIMS. Each Grantor acknowledges that
because of present or future circumstances, a question may arise under
the Securities Act of 1933, as from time to time amended (the
"Securities Act"), with respect to any disposition of the Collateral
permitted hereunder. Each Grantor understands that compliance with the
Securities Act may very strictly limit the course of conduct of the
Agent if the Agent were to attempt to dispose of all or any portion of
the Collateral and may also limit the extent to which or the manner in
which any subsequent transferee of the Collateral or any portion
thereof may dispose of the same. There may be other legal restrictions
or limitations affecting the Agent in any
12
<PAGE>
attempt to dispose of all or any portion of the Collateral under the
applicable Blue Sky or other securities laws or similar laws analogous
in purpose or effect. The Agent may be compelled to resort to one or
more private sales to a restricted group of purchasers who will be
obliged to agree, among other things, to acquire such Collateral for
their own account for investment only and not to engage in a
distribution or resale thereof. Each Grantor agrees that the Agent
shall not incur any liability, and any liability of either Grantor for
any deficiency shall not be impaired, as a result of the sale of the
Collateral or any portion thereof at any such private sale in a manner
that in all other respects is commercially reasonable (within the
meaning of Section 9-504(3) of the Uniform Commercial Code). Each
Grantor hereby waives any claims against the Agent arising by reason of
the fact that the price at which the Collateral may have been sold at
such sale was less than the price that might have been obtained at a
public sale or was less than the aggregate amount of the Obligations,
even if the Agent shall accept the first offer received and does not
offer any portion of the Collateral to more than one possible
purchaser. Each Grantor further agrees that the Agent has no obligation
to delay sale of any Collateral for the period of time necessary to
permit the issuer of such Collateral to qualify or register such
Collateral for public sale under the Securities Act, applicable Blue
Sky laws and other applicable state and federal securities laws, even
if said issuer would agree to do so. Without limiting the generality of
the foregoing, the provisions of this Section would apply if, for
example, the Agent were to place all or any portion of the Collateral
for private placement by an investment banking firm, or if such
investment banking firm purchased all or any portion of the Collateral
for its own account, or if the Agent placed all or any portion of the
Collateral privately with a purchaser or purchasers.
Section 7. APPLICATION OF PROCEEDS. The Agent shall apply the proceeds
of any collection, sale or other disposition of the Collateral as
follows:
FIRST, ratably to the payment of the costs and expenses of the
Agent and the Lenders in connection with the enforcement of this
Agreement (including, without limitation, the sale or other disposition
of the Collateral) and the reasonable fees and out of pocket expenses
of counsel employed in connection therewith, to the payment of all
costs and expenses incurred by the Agent in connection with the
administration of this Agreement and to the payment of all advances
made by the Agent and the Lenders for the account of the Company
hereunder, to the extent that such costs, expenses and advances have
not been reimbursed to the Agent and the Lenders, as the case may be;
SECOND, to the payment in full of the principal of and any
Balances Deficiency Fees, Usage Fees, facility fees and interest on the
Notes;
13
<PAGE>
THIRD, to the payment of all other Obligations, as provided in
the Credit Agreement or otherwise, as the Agent or the Lenders may
determine;
FOURTH, to the payment in full of the Lease Obligations, as
provided in the Lease Agreements, or otherwise, as the Lessor may
determine
FIFTH, to the payment in full of the Subordinated Note
Obligations until all of the Subordinated Note Obligations have been
paid in full;
SIXTH, the balance (if any) of such proceeds shall be paid to
the Grantors, their successors or assigns, or as a court of competent
jurisdiction may direct; PROVIDED, that if such proceeds are not
sufficient to satisfy the Obligations, the Lease Obligations and the
Subordinated Note Obligations in full, the Company shall remain liable
to the Agent, the Lenders, the Lessor and the holder(s) of the
Subordinated Note, as applicable, for any deficiency.
The Agent shall apply any such proceeds, moneys or balances in accordance with
this Security Agreement as promptly as is reasonably practicable. Upon any sale
of the Collateral by the Agent (including, pursuant to a power of sale granted
by statute or under a judicial proceeding), the receipt of the Agent or of the
officer making the sale shall be a sufficient discharge to the purchaser or
purchasers of the Collateral so sold and such purchaser or purchasers shall not
be obligated to see to the application of any part of the purchase money paid
over to the Agent or such officer or be answerable in any way for the
misapplication thereof.
Section 8. MISCELLANEOUS.
(a) BENEFIT OF AGREEMENT. This Agreement shall be binding upon
and inure to the benefit of each Grantor and the Agent and their
respective successors and assigns, and shall inure to the benefit of
the Lenders, the Lessor, USBNA and their respective successors and
assigns, except that neither Grantor may assign or transfer any of its
rights or obligations under this Agreement without the prior written
consent of the Lenders.
(b) NO COMMITMENT BY LESSOR OR USBNA. Nothing in this
agreement shall be construed as a commitment on the part of the Lessor
to lease any equipment or make any loan, or on the part of USBNA to
extend any loan pursuant to the Subordinated Note, under any existing
agreement or otherwise, to or for the account of the Company or NCFC.
14
<PAGE>
(c) SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. All
representations, warranties and covenants made by either Grantor to the
Agent, the Lenders, the Lessor or USBNA in connection with this
Agreement shall survive the execution and delivery of this Agreement.
All statements contained in any certificate or other instrument
delivered to the Agent, the Lenders, the Lessor or USBNA pursuant to
this Agreement shall be deemed representations, warranties and
covenants hereunder of such Grantor.
(d) HEADINGS. Section headings in this Agreement are for
convenience of reference only, and shall not govern the interpretation
of any of the provisions of this Agreement.
(e) EXECUTION IN COUNTERPARTS. This Agreement may be executed
in any number of counterparts, all of which taken together shall
constitute one and the same instrument and either of the parties hereto
may execute this Agreement by signing any such counterpart.
15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Security Agreement as of the day and year first above written.
<TABLE>
<S><C>
NC CAPITAL CORPORATION
By: /s/ Brad A. Morrice
--------------------------------------------------
Name: Brad A. Morrice
------------------------------------------------
Title: CHIEF EXECUTIVE OFFICER
-----------------------------------------------
NC RESIDUAL II CORPORATION
By: /s/ Brad A. Morrice
--------------------------------------------------
Name: Brad A. Morrice
------------------------------------------------
Title: CHIEF EXECUTIVE OFFICER
-----------------------------------------------
U.S. BANK NATIONAL ASSOCIATION, as Agent
By: /s/ Edwin D. Jenkins
--------------------------------------------------
Name: Edwin D. Jenkins
------------------------------------------------
Title: Senior Vice President
-----------------------------------------------
</TABLE>
[Signature Page to Security Agreement]
<PAGE>
SCHEDULES
1. GCFPI Junior Securitization Interests
2. SBI Junior Securitization Interests
<PAGE>
SCHEDULE 1
GCFPI Junior Securitization Interests
<PAGE>
SCHEDULE 1
GCFPI has a Lien on the following Junior Securitization Interest:
<TABLE>
<CAPTION>
OWNER SECURITY CERTIFICATE NAME
- ----- -------- ----------------
<S> <C> <C>
NCCC 1999-NCA New Century Home Equity Loan Trust, Series 1999-NCA Asset Backed Pass-
Through Certificates Series 1999-NCA, Class A-810
NCRC 1999-NCD New Century Home Equity Loan Trust, Series 1999-NCD Asset Backed Pass-
Through Certificates Series 1999-D, Class R
</TABLE>
[Schedule 1 to the Security Agreement]
<PAGE>
SCHEDULE 2
SBI Junior Securitization Interests
<PAGE>
SCHEDULE 2
SBI has a Lien on the following Junior Securitization Interest:
<TABLE>
<CAPTION>
OWNER SECURITY CERTIFICATE NAME
- ----- -------- ----------------
<S> <C> <C>
NCCC NCFT 1998-I NC Finance Trust 1998-1 NC Finance CE Bonds, Series 1998-I
NCRC NCFT 1998-II NC Finance Trust 1998-2 NC Finance CE Bonds, Series 1998-II
NCRC NCFT 1999-I NC Finance Trust 1999-1 Class D Bonds, Series 1999-I
NCRC 1999-NC1 Salomon Brothers Mortgage Securities VII, Inc. Mortgage Pass-Through
Certificates Series 1999-NC1, Class CE, Class P
NCRC 1999-NC2 Salomon Brothers Mortgage Securities VII, Inc. Floating Rate Mortgage Pass-
Through Certificates Series 1999-NC2, Class CE, Class P
NCRC 1999-NC3 Salomon Brothers Mortgage Securities VII, Inc. Floating Rate Mortgage Pass-
Through Certificates Series 1999-NC3, Class CE, Class P
NCRC 1999-NC4 Salomon Brothers Mortgage Securities VII, Inc. Floating Rate Mortgage Pass-
Through Certificates Series 1999-NC4, Class CE, Class P
NCRC 1999-NC5 Salomon Brothers Mortgage Securities VII, Inc. Floating Rate Mortgage Pass-
Through Certificates Series 1999-NC5, Class CE, Class P
</TABLE>
[Schedule 2 to the Security Agreement]
<PAGE>
EXHIBIT 10.48
Salomon Brothers Realty Corp.
390 Greenwich Street
New York, New York 10013
March 7, 2000
New Century Mortgage Corporation/NC Capital Corporation
18400 Von Karman
Irvine, California 92612
Ladies and Gentlemen:
Reference is made to the Letter Agreement, dated September 1, 1999 (the
"Letter Agreement"), among New Century Mortgage Corporation ("New Century"), NC
Capital Corporation ("NC Capital"), Salomon Brothers Realty Corp. ("SBRC") and
Salomon Smith Barney ("Salomon"), pursuant to which SBRC and Salomon have made
available to NC Capital an aggregation line with a limit of $750,000,000 in
amount of mortgage loans. SBRC and Salomon hereby acknowledge that the amount of
mortgage loans on the aggregation line in March 2000 will exceed the limit set
forth in the Letter Agreement; provided, however, that each of the mortgage
loans placed on the aggregation line which cause the aggregation line to be in
excess of the $750,000,000 limit shall be securitized in a public securitization
to be underwritten by Salomon which shall close no later than March 31, 2000.
SALOMON BROTHERS REALTY CORP.
By:
---------------------------------
Name:
Title:
SALOMON SMITH BARNEY INC.
By:
---------------------------------
Name:
Title:
Agreed and acknowledged:
NEW CENTURY MORTGAGE CORPORATION
By: /s/ John Kontoulis
------------------------
Name: John Kontoulis
Title: Vice President
NC CAPITAL CORPORATION
By: /s/ Patrick Flanagan
------------------------
Name: Patrick Flanagan
Title: President
<PAGE>
Exhibit 21.1
NEW CENTURY FINANCIAL CORPORATION
SUBSIDIARIES OF REGISTRANT
<TABLE>
<CAPTION>
STATE OR OTHER JURISDICTION
NAME OF INCORPORATION
- ---- ----------------
<S> <C>
New Century Mortgage Corporation California
(also doing business as NCMC
Mortgage Corporation
NC Capital Corporation California
NC Residual II Corporation Delaware
New Century Mortgage
Securities, Inc. Delaware
New Century R.E.O. Corp California
NC Residual Corporation Delaware
Worth Funding Incorporated California
PWF Corporation California
(also doing business as Primewest Funding
and Western Capital Mortgage)
Anyloan Financial Corporation Delaware
anyloan.com California
</TABLE>
<PAGE>
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 February 2, 2000, relating to the
consolidated balance sheets of New Century Financial Corporation and
Subsidiaries as of December 31, 1999 and 1998 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, 1999, which
report appears in the December 31, 1999 annual report on Form 10-K of New
Century Financial Corporation.
KPMG LLP
Orange County, California
March 30, 2000
<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 TWELVE MONTHS ENDED DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,496,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 442,653,000
<CURRENT-ASSETS> 0
<PP&E> 8,198,000
<DEPRECIATION> 4,418,000
<TOTAL-ASSETS> 863,709,000
<CURRENT-LIABILITIES> 26,484,000
<BONDS> 629,270,000
0
0
<COMMON> 147,000
<OTHER-SE> 172,816,000
<TOTAL-LIABILITY-AND-EQUITY> 863,709,000
<SALES> 121,672,000
<TOTAL-REVENUES> 233,942,000
<CGS> 0
<TOTAL-COSTS> 113,863,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 53,193,000
<INCOME-PRETAX> 66,886,000
<INCOME-TAX> 27,377,000
<INCOME-CONTINUING> 39,509,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,509,000
<EPS-BASIC> 2.59
<EPS-DILUTED> 2.11
</TABLE>
